NEW YORK, March 8 (IFR) - The woes of struggling retailers like JC Penney could prove to be a ticking time bomb for the commercial mortgage-backed securities (CMBS) market, if the chains end up closing mall anchor locations.
Junk-rated companies such as JCP and Sears are some of the largest tenants in the US commercial mortgage-bond market, and experts warn that as they go, so could go the CMBS market.
Even if anchor tenants are not part of a CMBS collateral pool, the closing of their stores affects the foot traffic - and ultimately the revenue - of others stores that are.
“There is a risk that if enough of these retailers close up, in some properties, this could create a domino effect,” said Richard Hill, a CMBS strategist at Royal Bank of Scotland.
“In the case of some big-box retailers such as JC Penney, which often anchor smaller malls or strip centers, there’s a broader impact than just the rent they’re paying.”
Of course, retail properties are just one component underpinning deals such as CMBS conduits that securitize multiple loans or borrowers.
But others are linked to just one mall property - and a number of these have struggled over the past year.
In some cases, the closing of a mall anchor store may trigger so-called co-tenancy clauses that allow other stores at the property to terminate their leases without penalty.
“Depending upon where it’s located in the mall, and the local market that it’s in, the loss of foot traffic can affect other stores, and co-tenancy issues become a concern,” said Mary MacNeill, a managing director of CMBS at Fitch rating agency.
Last week, JC Penney announced absolutely disastrous earnings, reporting a fiscal fourth-quarter loss of $2.51 a share, compared to what bond rating agency Morningstar said was the 24 cents per share loss that the market had been expecting.
Moreover, same-store sales were down nearly 32% while online sales - up across almost all of the retail sector - fell 34.4%.
S&P downgraded the company’s credit rating to CCC+ from B- on the weak results, while Fitch downgraded it to B- from B.
Yet CMBS linked to the retailer continue to come to market.
Next week, Deutsche Bank will market a US$325m single-borrower CMBS being tied to the Green Acres Mall in Valley Stream, NY. The mall has seven anchor stores, one of which is JC Penney.
“Although (JCP‘s) continued financial troubles have yet to prompt the company to announce a new round of store closures, we do have concerns about the ongoing viability of the business operations,” Morningstar said on Thursday.
JC Penney has the largest tenant exposure overall in legacy CMBS, with 250 loans totaling US$15bn in various transactions, according to RBS.
Sears, also rated deep in junk territory, has the second largest exposure in CMBS: 240 loans totaling US$11.3bn.
Morningstar said that there are 258 commercial properties securing 262 CMBS loans - with an unpaid principal balance of about US$18bn - at which JC Penney is one of the three largest tenants.
Perhaps more troubling, Morningstar said that 98 of the loans, or 28% of the total loan balance, have previously been flagged on a watchlist by the agency. Among them are 38 loans (12% of loan balance) that are specially-serviced, with projected losses of more than US$1bn on 34 loans.
Additionally, thirteen mall properties with a JCP outlet are less than 80% occupied, and 26 properties have 2013 JCP lease expirations.
“While successful retailers from 2012 may hope to add new store locations this year, those that struggled may have to continue to cut locations in 2013 to improve margins or reverse losses,” wrote a team of Morningstar analysts led by Steve Jellinek.
Morningstar said one particular concern was a recent report suggesting that a Penney store at the Palm Beach Mall in Florida is set to close on May 1.
The mall secures a specially-serviced loan in a JP Morgan CMBS deal called JPMCC 2003-PM1.
The US$44.1m loan has been in special servicing since April 2009, when occupancy declined to 69% and former owner Simon Properties walked away from the loan.
A loss of up to US$20m is expected, Morningstar said.