Sears and Kmart: A One-Two Punch for CMBX Investors

Christmas is a time to hope for redemption in the New Year. Not this time perhaps for mall owners with Sears as anchor or tenant. Still grimacing from the gut blow of Bon-Ton’s closure of all its 260 stores this year, retail REITs and certain investors might be taking it on the chin next as four malls with total debt of $300 million come up for refinancing amid Sears’ plans to take down 142 stores.

We have two ring-side views to this match. Whatever the outcome for the four malls – Greenwood, Louis Joliet and Jefferson, all in Kentucky, and Cystal in Connecticut – the psychology of the retail business might be the one taking the real beating here, given the closeness between the Sears and Bon-Ton bankruptcies.

The first intimidating view we have is of the foot-traffic at these four properties that have Sears either as tenant or anchor. With the exception of Greenwood, traffic at the other three malls has been tottering since the start of the year. The loss of Sears might bring them closer to hitting the canvas.

The second view we have is of the commercial mortgage-backed securities of these malls. All four are financed under CMBS loans that originated in 2012, and together are constituents in the retail heavyweight derivative known as the CMBX Series 6. With 10-year maturities, their loans will require refinancing in 2022. That makes them the immediate riskiest of mall loans.

While three years might seem some way off, the so-called Retail Apocalypse has been merciless in its drubbing of REIT sentiment and there’s no telling what could happen by 2022. For instance, the Sears bankruptcy itself is a long-anticipated event that’s playing out like a slow-motion horror movie. From a 3,500-store behemoth that comprised of both Sears and K-Mart back in 2005, the group has less than 690 stores now and plans to reduce that footprint to just 400 in coming years.

In total, there are 12 malls with debt exposure of $983 million that will be affected by closures already announced by Sears. Their loans are in the CMBX 6-10 series, with maturities running from 2022 to 2026. There are another 8 malls that have K-Marts that will also close and their gross debt is $125 million. Twenty malls in all, with $1.1 billion to service.

The most worrisome of course is the $300 million debt under CMBX 6. If the financials of the four aforementioned malls get any weaker, the Sears closures on their premises could land them even heavier on the ropes. And they may have to just throw in the towel when the bell sounds for them to come out for a new round of financing.

Before we get into that detail, however, here’s a brief synopsis of our role and interest with the retail industry.

Orbital’s Role

Orbital Insights’ coverage of 3,300 U.S. malls allows us to build a comprehensive picture of mall grading, location and REIT history for clients tracking the sector for investments and other business decisions. By creating a geo-fenced area of interest (AOI), say of a mall with Sears as anchor, we give them a peek of vehicle movements and foot-traffic there, pulled together by geospatial analytics, satellite imagery and location pings from cellphones and other devices emitting signals in the zone. While this stakeout of Sears was for stakeholders in retail, we’re just as apt in creating such tradable signals across industry. Our previous work includes tracking roof tank oil storage in 67 countries for the energy sector and keeping tabs on newly-assembled Teslas at a Californian field for the auto industry.

Now, to our foot-traffic counts at Sears-embedded malls:

At Orbital, our device count indices for foot-traffic rationalizes numbers to show relative changes in traffic, rather than absolute measurements. They start at a 100-count and divide each day’s progress at a location with the first day's traffic there.

Foot traffic at Sears-embedded malls

The foot traffic at the four malls in focus show volatile patterns that aren’t assuring, to say the least.

After the year-end holiday traffic spike of 2017, most of their device count indices fell promptly and struggled to return to baseline traffic. In some cases, they never did.

Of the four, Greenwood Mall in Bowling Green, Kentucky, was the outlier. Owned by Brookfield Properties Retail Group, it saw traffic surges to above 300% of baseline during last year’s holidays. While the reading did plunge after that, it remained well above the baseline through the third quarter of this year, reaching above 200% at last count. Greenwood has a $62 million obligation under CMBX 6.

The worst in the sample was the Jefferson Mall in Louisville, Kentucky. Foot-traffic at this CBL-owned property has steadily remained below baseline for more than two years now, device count readings going back as far as August 2016 show. Jefferson has a $64 million loan under CMBX 6.

For comparison’s sake, we included the average CMBX 6 device count indices of malls with risky loans that need to be refinanced in 2022, with or without Sears in them. The result? Their joint traffic wasn't that much better than the Jefferson, Louis Joliet and Crystal malls.

Next, Sears And The Full CMBX Series:

While the CMBX 6 Series is high on our watchlist, we also urge that attention be paid to the 7 Series, where the next series of conduit loans mature in 2023. Under the CMBX 7 Series to be affected by Sears’ closure, there’s only mall so far -- Carolina Place, in North Carolina, which has loans of $168 million. Another CMBX 7 issue exposed to a KMart closure is held by Maryland’s Rivertowne Commons Mall, which owes nearly $45 million.

While the DuBois Mall in Pennsylvania is the only foreclosed one on our watchlist, weak foot traffic is a leading indicator of delinquency and we'll continue monitoring device count trends across the industry as loans for each mall near maturity.


Our device count indices are clear indicators of a mall’s health.

If some of the CMBX 6 malls on this list can barely attract enough crowds now, the Sears closures will likely hurt them even more later.

Commercial real estate giant CBRE says that in the current toxic retail environment, department store boxes can take 18-36 months to backfill. Backfilling space of up to 50,000 sq ft – the kind typically vacated by a large departmental store like Sears – will be a lot more difficult for C- and D-grade malls such as Jefferson.

Partially-empty malls will face tougher conditions from lenders when loans need to be rolled over. If they're underwritten, without good cash flows and with poor net offering income projections, they'll lose much needed leverage for competitive financing terms. Or fail to refinance at all - in either CMBS or the private markets.

Stay tuned for that $300 million prize fight!