Inside The £360M Bet On Empty Toys R Us Property That Went Wrong For Everybody
Even at the time, it seemed like a bold move.
In 2019, a Lancashire-based property company took on £363M of debt and other liabilities relating to a portfolio of big-box retail properties once occupied by Toys R Us. The fallen giant of a retailer had been in administration for a year, the properties were empty and the retail market was a bloodbath.
Nevertheless, the company bet that it could sell the assets for more than the debt it had taken on.
But a set of financial accounts filed recently show that the bet is unlikely to pay off, with Covid-19 making the already-marked-down assets even tougher to sell. The investor, a company called Acepark, said that sales from the assets mean it is unlikely to make a profit. And the accounts show that the lenders on the portfolio, including giant U.S. fund manager PIMCO, could be left nursing a loss, too.
Acepark is controlled by Tim Knowles, the Lancashire-based investor, and, as well as investing, it also provides property management and loan workout services.
In 2019, it took on £363M of liabilities, including £252M of property loans and £111M of other loans and liabilities, secured against a portfolio of 25 properties, including 24 stores and a distribution centre, previously leased to Toys R Us.
The portfolio was previously owned by a consortium of KKR, Vornado and Bain Capital, which bought Toys R Us’ U.S. and UK business in a $6.6B leveraged buyout in 2005.
In 2013 the consortium refinanced a 31-property portfolio with a £263M loan which was then securitised, with PIMCO buying the largest chunk of the bonds secured against the portfolio.
But as the years progressed, Toys R Us sales continually declined, as online platforms took a big bite out of the toy retail market. In February 2018, the retailer went into administration, and the special purpose vehicle that owned the securitised portfolio, Toys R Us Properties (UK) went into receivership.
At that point, the portfolio was being managed by Solutus, a subsidiary of Acepark, on behalf of bondholders. Six of the 31 properties were sold for £31M in June 2018. But Acepark took full control of the portfolio in 2019, buying the shares of the Toys R US Properties (UK) SPV that owned the assets and taking on the £363M liabilities.
At that point, the portfolio had a vacant possession value of £177M, and with cash in the bank taken into account the company’s assets were valued at £140M less than its liabilities. But describing its rationale for the deal in its 2019 annual report, Acepark said it thought it could lease up vacant assets and sell properties or refinance them at such a level that the lenders would be paid back and it would turn a profit.
But it has not turned out that way. In its 2020 annual report, filed in February, it said that 17 of the original 31 properties had now been sold for total proceeds of £109M.
“It now looks unlikely that sufficient funds will be realised to make an overall profit for the group,” the report said.
In fact, as it currently stands, the lenders including PIMCO also stand to lose out. According to the annual report of Toys R Us Properties (UK), also filed in February, the value of the portfolio was £125M before the coronavirus pandemic began, and it has likely fallen further since then. It had about £40M of cash in the bank and total liabilities of £344M as of the 2020 annual report, meaning its assets were worth £177M less than its liabilities.
There remains £207M of senior debt outstanding against the properties, owed to PIMCO and its fellow bondholders, meaning the level of senior debt is significantly higher than the value of the properties. The loan was due to be repaid in 2019, and the interest of 7% is still running.
Acepark could not be reached directly for comment and enquiries put to FI Real Estate Management and Solutus, both owned by Acepark, did not receive a response.
