Mattress Firm Issues Ultimatum To Landlords As Battle Over Bankruptcy Closures Begins

The largest mattress retailer in the U.S. is closing hundreds of stores as it attempts to restructure its business while going through bankruptcy. It has also now given many of its remaining landlords an ultimatum: significantly lower the rent or lose the location.

On a conference call earlier this month, a recording of which was obtained by Bisnow, CEO Steve Stagner told an audience of Mattress Firm's retail landlords that the retailer would ask them for lower rental rates without any negotiation, or face possible closures.

“I want to be clear that we are only asking for what we need and have no wiggle room for negotiations,” Stagner said on the call. “Unfortunately, without concessions, we will have to close more stores."

In several interviews with Mattress Firm store owners, some landlords have told Bisnow they will decline the option to lower the rent, confident they can get a better deal. Others expressed frustration over losing a tenant in the volatile retail environment. A few have already filed protests in court, asking a judge to compel Mattress Firm to pay its rent.

Two weeks before Chapter 11 bankruptcy filing Oct. 5, when Mattress Firm immediately shuttered 200 stores, Michelle Belinfante's family put the strip center it owns in Alpharetta, Georgia, up for sale, hoping to reap the rewards of a strong tenant roster that included the mattress retailer. 

“It was just shitty timing,” she said. Her family's location closed in the days after the bankruptcy filing. "We need to just find a tenant, like right away."

In the weeks since the filing, that closure list has swelled to more than 500 stores, according to the firm Mattress Firm hired to advise on its bankruptcy real estate strategy.

Mattress Firm operates more than 3,000 stores, a portfolio that has grown exponentially in recent years as part of an aggressive expansion strategy and several mergers. 

The retailer's bankruptcy is not an isolated incident. Its parent company, Steinhoff International, is reeling from an accounting scandal that has led to its chief executive's ouster and government hearings where it is headquartered in South Africa.

Its largest supplier, Tempur Sealy, pulled its products out of Mattress Firm's thousands of stores last year. Earlier this week, Tempur Sealy announced a plan to expand its own retail footprint that includes reaching out to landlords of closed Mattress Firms. 

“Our liquidity and ability to obtain new financing have been hampered by the issues affecting our parent company as well as existing restrictive financial conditions, including the $3.2B inner company debt on our balance sheet," Stagner said on the call. "We must overcome significant operational and financial challenges to succeed."

Neither Mattress Firm nor its attorneys have responded to multiple requests for comment.

Too Many Leases For Too Much Money

After years of buying up competitors like Sleepy's, Sleep Train and Mattress Giant — and rebranding each of its new stores as a Mattress Firm — the stores, while small compared to the footprints of supermarkets and movie theaters, felt ubiquitous in many parts of the country. In some cities, Mattress Firm had as many as four locations around a single intersection or within a mile of each other.

In some locations, Mattress Firm was paying top-of-the-market rental rates, an issue that was central to the retailer's lawsuit against two former in-house real estate executives and its retail broker, an executive at Colliers International Atlanta. In the suit, Mattress Firm claimed the trio steered Mattress Firm to high-priced locations in exchange for kickbacks and bribes from developers and landlords.

The retailer identified several stores in its lawsuit where it claims it is paying artificially inflated rents. Bisnow combed through public filings and uncovered several real estate transactions in Ohio, Utah, North Carolina and other states involving new Mattress Firm stores with rents approaching $40/SF, where the landlords made millions in profit within months by flipping the properties after the lease was signed. 

"It's very common for a developer to buy a lot, put their own partners in it, put leases in place and sell a property in a short time frame," said David Andes, a triple-net lease investor based in Atlanta. "But I always make sure there's no inflated rents on any property I buy. I would look at the rents for Mattress Firm and say, 'This is insane! How do they get these rents?'"  

Andes said he recently bought a free-standing Family Dollar where the lease rate was $13.50/SF, for instance, which he knew he could replace should the retailer vacate. But mid-$30s would be something he might see in the more tony parts of Atlanta, like Buckhead.

These rent prices could cause Mattress Firm's closures to have an outsized impact on its landlords, Quantum Real Estate Advisors President Chad Firsel said. Quantum is a real estate investment brokerage firm that has sold many free-standing Mattress Firms, as well as shopping centers with Mattress Firm as a tenant over the years.

Based on feedback from some of his clients who have received rent renegotiation letters from Mattress Firm, Firsel said he estimates in some instances the mattress retail giant is seeking anywhere from $10 to $15/SF reductions. That could represent in excess of $30M in lost rental revenue for affected landlords in one year alone, he said. Bisnow did speak to two landlords who were asked to reduce rents by less than $10/SF.

“If you really think about these numbers, it's some pretty staggering value that has evaporated,” Firsel said. “It's somewhat of an approach where [Mattress Firm is] letting the market sort of dictate which stores stay open and which don't. You either play chicken, and they're closing and terminating [the lease], or you're accepting a reduced rent.”

Owners May Have Day In Court

Already, Mattress Firm's bankruptcy will impact 629 properties tied up in CMBS loans across the country, according to Trepp. Together, those properties have outstanding loan balances that exceed $2.7B. Fourteen CMBS loans encompassing 18 properties totaling more than $105M in value have Mattress Firm locations that were slated to close, according to Trepp.

Stagner told landlords on the conference call earlier this month that the retailer had spent the past several months conducting store analysis to pick the right locations to close. Those factors included proximity between Mattress Firm locations, store sales, the rents, parking ratios and the ease of entering and exiting a property.

"This means we may be closing some profitable stores especially in markets where we have a cluster of locations," Stagner said. “We have thoughtfully evaluated individual store performance issues and how they impact our go-forward real estate plan.” 

Mattress Firm's strategy is not unusual in the world of retail bankruptcies, New York-based Wilk Auslander partner Eric Snyder said. Snyder is a bankruptcy attorney who has focused on real estate for 30 years and represents a number of landlords with Mattress Firm stores.

Mattress Firm is attempting to stave off an onslaught of claims by landlords of closed stores who could petition the bankruptcy court to claim at least some portion of the retailer's outstanding lease value.

According to bankruptcy law, affected landlords are able to petition the court to obtain 15% of the unused lease term so long as the amount does not exceed three years of rent payments, Snyder said. By pre-emptively offering to reduce store rents, Mattress Firm can not only try to keep its expansive retail footprint, but the retailer also gets a waiver against those claims.

“Because of [Mattress Firm's] size … the rejection damage claims could run into the hundreds of millions of dollars,” Snyder said.

Mattress Firm is betting that landlords would rather take less rent and keep their doors open than fish the market for a new tenant, one that likely would not pay the rents that Mattress Firm had paid.

“The landlords, [Mattress Firm knows], are stuck between a rock and a hard place,” Snyder said. "A lot of landlords would rather take them at a reduced rent than have another empty store."

The protest process has already begun. A group of retail landlords, including Phillips Edison & Co. and Ramco Properties Trust, has filed an objection to the closing of some 28 properties, seeking the court to force Mattress Firm to pay rents for October if the retailer closes their locations. Other landlords may follow suit.

“You do that for 100, or 200, or 400 landlords, then you're talking about enormous rejection damage claims,” Snyder said.

Maryland-based Fedder is not accepting Mattress Firm's offer of reduced rent, CEO Bob Pollokoff told Bisnow. The retailer sought reduced rent at a store located in Fedder's Catonsville, Maryland, shopping center.

“I didn't see an economic motivation to consent to their request,” Pollokoff said.

Southlake, Texas-based N3 Real Estate has nine Mattress Firm locations in its portfolio, of which the retailer has already shuttered four. Mattress Firm is asking for a rent reduction on the remaining five stores, N3 CEO Brenna Wadleigh said. 

She declined to reveal details of those recast lease offers.

"They are asking for rent reductions and kind of presented [them] as take it or leave it, with very little room for negotiation," Wadleigh said. 

She said she was unsure if N3 would accept Mattress Firm's offers, especially given the heightened demand among retailers and restaurants for small shop space in her part of Texas.

“We are evaluating it," she said. "I can tell you that we believe we can get higher rents than they are offering in most cases."

Other landlords were not given the opportunity to take lower rents. Houston-based Beeson Properties had two stores in its portfolio, both of which were shuttered without any communication from Mattress Firm, Beeson General Counsel Mike Fuqua said.

“We never received any offer for lower [rent],” Fuqua said. “At this point right now … we're trying to get an answer … on how this will proceed since this was a very fast motion to terminate these leases.”