Shopping Malls Continue Losing Anchor Tenants



Shopping malls are highly dependent on anchor tenants such as Macy’s, Sears, and JCPenney. This dependency is so critical that the closure of an anchor tenant often triggers co-tenancy clauses that allow other mall tenants to exercise the right to terminate their leases or renegotiate the terms, typically with a period of lower rents, until the co-tenancy issue is resolved.

Following the holiday season morningstarcreditratings.com issued the report “Mall Monitor—Examining the State of U.S. Malls With Attention to Retail” highlighting that all is not well with mall retail anchors and malls in general.

Two Traditional Mall Anchor Tenants Announced Store Closings

Lea Overby, managing director, research at Morningstar Credit Ratings, complied these facts.

Sears

  • Sears recently announced plans to shutter 150 stores. Immediately after Christmas, on 27 Dec., employees at 30 Kmart and 16 Sears’s locations were notified of store closure plans, and recently released a statement that 150 stores consisting of 108 Kmart and 42 Sears’s locations will be shuttered.
  • In addition, it has agreed to sell the Craftsman business to Black and Decker.
  • These 150 stores represent 10% of their total portfolio (as of 3Q 2016).
  • The firm has been actively trimming its portfolio for several years. Since year-end 2015, the firm’s portfolio of Sears’s stores has decreased by 10%, while the Kmart portfolio has decreased by a whopping 26% (inclusive of this latest announcement).
  • We expect to see more store closures from Sears as it looks to shift to a different retail model. As stated on its 3Q call, the firm expects to continue closing unprofitable stores as the leases come due and as other opportunities present themselves to eliminate the losses.

Macy’s

  • In August, the retailer announced that it would close around 100 of its 888 stores (11%), and on Jan 4th, it announced 68 of these closures.
  • Of the 68, three have already closed, and the rest will close in the next few months.
  • We expect that Macy’s is likely to announce another round of approximately 30 store closures over the next few months, to meet the initial target of 100 stores.  We do not expect additional store closure announcements from the firm in the short term, although they are likely to continue to pursue additional real estate activities. However, weaker than expected holiday sales may result in another examination of the firm’s business strategy.

Effect on Malls

  • These closures will have varying effects, depending on the performance and management of the affected malls.
  • Importantly, there is no overlap between Sears and Macy’s anchor box closings, which might be particularly tough for a mall operator to manage.
  • For weaker malls, these closures may be particularly damaging, while for stronger malls, the vacancy may provide the owner with an opportunity to create additional value.
  • In many cases, the loss of an anchor likely has minimal immediate impact on rental revenue. However, co-tenancy clauses and the loss of inline tenants over time can be very detrimental.
  • We expect to see more announcements of store closings over the next few weeks as weaker than expected holiday sales at many retailers may result in an examination of the portfolio.

The four-part Morningstar credit report examines troubled and potentially troubled mall-backed loans with special servicers, those on the Morningstar Watchlist, and liquidated loans that have suffered the largest losses. Second, Morningstar examined the factors affecting the performance of loans securitized after the market’s low point in 2009. The third part outlines the factors believed to characterize a top-tier mall, and finally, Morningstar explores the macroeconomic factors affecting malls and the creative steps mall owners are taking to stay relevant amid changing consumer preferences. The full report is viewed at “Mall Monitor—Examining the State of U.S. Malls With Attention to Retail”.

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Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 10 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.