In unorthodox moves, two major retail real estate developers are helping keep Reading, Pa.-based regional department store chain Boscov’s afloat. Cafaro Co. and Pennsylvania REIT, both of which have holdings in the state, gave $30 million to former chairman and CEO Albert Boscov –10 percent of the $300 million he has lined up from a consortium of banks and private and public sources that will enable the chain to continue operations.
Boscov’s rescue package was originally approved Nov. 21, but the unusual details of the financing only emerged last week. The privately held, Youngstown, Ohio-based, Cafaro Co., which owns more than 34 million square feet of retail space, invested $20 million in the retailer through Cathco Diversified Fund, LP, owned by members of the Cafaro family. Meanwhile, PREIT, a Philadelphia-based REIT with a 26.1-million-square-foot portfolio, provided a $10 million unsecured loan.
The Cafaro family, whose 51 centers have no Boscov’s stores as tenants, owns six retail properties in Erie, Pa. The Cafaros chose to invest in the struggling retailer out of respect for Al Boscov and their trust in his ability to turn around the chain, according to a Cafaro spokesman. PREIT has as many as eight Boscov’s locations within its portfolio of 38 regional malls. And, until the chain’s bankruptcy announcement this summer, it had planned to open two new Boscov’s at its redeveloped malls in North Hanover, Pa. and Willow Grove, Pa. Officials from PREIT declined to comment on the motivation for its involvement.
The two real estate owners could be seeking to keep Boscov’s afloat to deter a deterioration of retail real estate fundamentals in the region, according to analysts. Howard Davidowitz, chairman of Davidowitz & Associates, Inc., a New York City-based retail consulting and investment banking firm, says Cafaro might be trying to prevent Boscov’s failure from bringing down rental rates throughout the state.
According to the Federal Reserve Board’s Beige Book released in early December, in the Third District, which includes Pennsylvania, most retailers reported November sales results that were below last year's levels. Many of the retailers contacted in November said they expected sales to remain sluggish in the first half of 2009, and they have cut back on expansion plans and capital spending.
“Cafaro may be concerned about the indirect fallout,” Davidowitz says. “Boscov’s needs divine intervention to survive. But if you are Cafaro and Boscov’s-anchored malls start cutting their rents in half in Pennsylvania, a pretty beaten up state, I think there will be fallout for all developers.”
If Boscov’s liquidates, landlords at Boscov’s-anchored properties might end up having to resort to low-end retailers to take the chain’s spaces, says Davidowitz. Boscov’s currently operates 39 stores, including 24 in Pennsylvania, six in New Jersey and three in New York, Maryland and Delaware. Boscov’s, a privately-owned company, does not report operating results so it’s not clear how many of its locations are leased or owned and how much its real estate is worth. PREIT experienced a 90 basis point drop in the occupancy level at its mall portfolio during the third quarter, to 86.5 percent, a figure that could get worse if Boscov’s liquidates.
The 97-year-old chain filed for Chapter 11 bankruptcy on Aug. 4. The firm cited tightening consumer spending on discretionary items and the ongoing credit crisis as primary causes of its financial distress. At the time, Boscov’s operated 49 stores, but it has since closed 10 under-performing locations.
Boscov’s operated under the control of the descendants of its founder Solomon Boscov until it signed a letter of intent to sell virtually all of its assets to Versa Capital Management, a Philadelphia-based private equity firm on Sept. 18. In exchange, Versa would assume Boscov’s debt in a deal valued at $288 million. The buyout by Al Boscov will allow the firm to remain in the Boscov family’s hands. Boscov’s did not return calls seeking comment.
The chain’s troubles have coincided with a general decline in department store fortunes. In November, the U.S. department store sector registered a 13.3 percent decline in same-store sales, compared to a decline of 2.7 percent for all chain retailers, according to ICSC. Boscov’s does not report its same-store sales figures.
REITs, as a group, have a history of buying debt securities that are tied to property ownership, but direct loans to tenants are rare and tend to be viewed negatively because they don’t qualify as REIT income, according to Joel Bloomer, an analyst with Morningstar.
“It makes sense to consider it if it is a large tenant, but there will probably be a lot of retailers in Boscov’s position over the next year or two and you can’t save them all,” Bloomer adds. “Extending an unsecured loan to a shaky retailer just sounds very aggressive.”
--Elaine Misonzhnik