Toys 'R' Us Shows Real Estate Can't Save Retailers

There's a common belief that retailers that own real estate are in a better position than those that don't.

This makes sense from a theoretical perspective. Property holds value that's independent of a specific brand and is less prone to the notoriously fickle world of clothing and accessory trends.

But Toys "R" Us, which just filed for bankruptcy despite owning a significant amount of land, proves that the reality can be quite different. It has relied on its land to serve as collateral for an unwise amount of debt. The company has sought to prop up its failing business model for years by shuffling debt around and adding leverage to less-encumbered assets. This has undermined the extra safety and value that the real estate should have provided.

As analysts dug through the various slices of Toys "R" Us debt ahead of the company's bankruptcy filing on Monday, one thing has become abundantly clear: It has an incredibly complicated capital structure. It has an operating company subsidiary, which is thought to pay above-market rates to lease land from a property company subsidiary. The property company has sold debt. So has the operating unit. So has the parent company, which has pledged its real estate to back other debt separate from the property unit under certain circumstances.

None of these arrangements or the current worth of the property have been spelled out clearly by the company in recent months. It's likely that the land is worth considerably less than estimates from even last year because the company will need to close stores, can't afford to pay expensive leases, and retail spaces in general are under pressure. As Bloomberg Intelligence's Noel Hebert pointed out, these leases will quite possibly be renegotiated in any reorganization.