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FAO flameout won't burn landlords

FAO Inc. could be gone by the new year, but Wall Street analysts say landlords aren't fretting. In total, the chain's existing in-line stores only amount to about 10,000 square feet of space that shouldn't be difficult to re-lease if it goes dark, and FAO pays less than 1 percent of most REITs' base rental revenues.

Don't count on a white knight to ride in and buy up FAO's leases. "The company's lack of owned real estate and below-market leases make FAO an unlikely candidate for an opportunistic distressed tenant transaction," says Morgan Stanley analyst Matthew Ostrower. "Given the small number of stores in each REIT's portfolio, the risk of store closure would not have a material impact to fourth quarter 2003 earnings and beyond."

Federal Realty Investment Trust and Simon Property Group would be the most impacted. Indianapolis-based Simon counts 16 FAO stores among its tenants, adding up to only .07 percent of its total portfolio. Federal only leases space to two FAO stores, but those stores make up .10 percent of its portfolio. Kimco Realty Trust and General Growth Properties each have only five stores in their portfolios, and The Rouse Co., Westfield America, Developers Diversified Realty, The Macerich Co. and Weingarten Realty Investors all have three or less.

FAO Inc., announced Monday that its lenders have delivered a notice of default under its loan agreement. Media reports have speculated that the storied toy conglomerate will not survive the upcoming holiday season without a cash infusion. Owner of FAO Schwarz, The Right Start and Zany Brainy, the chain has experienced financial failings during the past several years. It closed 111 stores and emerged from bankruptcy in April after filing for Chapter 11 protection in January.

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