Sears, Malls & Shorting the "End of the #Retailapocalypse" Narrative (Short Karl)
|Oct 15||Public post|
October 14, 2018
It’s official: the media apparently cares more about Sears Holding Corp. ($SHLD) than consumers do. Sure, it’s a public company and so “investors” may also care but, no offense, if you’re still holding SHLD stock than you probably shouldn’t be investing in anything other than passive index funds. If anything at all (not investment advice).
Anyway, the internet is replete with commentary about what went wrong, what the bigbox retailer did and didn’t do right, what plans may not have ever existed, what could have happened and what’s going to happen (video). It didn’t build an online brand OR invest in stores! It was mismanaged! Choice bit:
Ted Nelson, CEO and strategy director at Mechanica, agreed that financial management played a big role. He believes the story of Sears and its downfall isn’t a brand story at all. “[It’s one of] financial engineering and hedge-fund manager hubris gone awry,” he said. “There are a lot of places that brand [and collection of owned brands] could have evolved to. But that would have required a savvy, cross-functional and empowered leadership team, which isn’t what Sears got.”
Oh my! It’s such a shame that Sears may liquidate!
Jonathan Maze@jonathanmazeLiquidate. Damn. And just before the holidays. https://t.co/dawLyxHohA
Meetings with lenders only lasted one hour!
Maybe it will get itself a DIP credit facility and last through Christmas! Either way, it is likely to immediately shutter up to 150 locations! This is all such a shame! Look at what it used to be!
“The handwriting has been on the wall for years,” said Allen Adamson, co-founder of Metaforce, a marketing consultancy. “It’s been like watching an accident. You can’t look away, but you know it’s coming.”
Right. We’re over it. We honestly could not care less about Sears at this point. Bankruptcy professionals will make money and this thing finally…FINALLY…may get the burial it deserves. Like we previously said, “This thing is like ‘Karl’ in Die Hard.” Even Karl did, eventually, die.
That all said, we do care about how Sears’ demise affects malls.
First, a bit about malls generally…
On October 7, Axios’ Felix Salmon wrote “Retailpocalypse Not,” and highlighted a Q2 2018 retail report from CBRE, concluding “The death of shopping malls is exaggerated: They are currently 94% occupied, according to CBRE.” Yet, he missed key parts of CBRE’s report:
Indeed, the #retailapocalypse continues to affect the lifestyle and mall segment. Vacancy rates are on the rise.
And mall rents are on the decline:
It's still not a pretty picture on the ground, however. Second quarter mall rents fell 4.6% from the first quarter and 7.1% year over year, hit by major store closures from Toys R Us, Sears and J.C. Penney, according to a trend report from commercial real estate firm JLL. Mall vacancy rates hit 4% during the period, JLL said. The retail sector suffered its worst quarter in nine years with net absorption of negative 3.8 million square feet, which pushed the regional mall vacancy rate up by 0.2% to 8.6% as the average mall rent increased 0.3%, according to another report from commercial real estate firm Reis emailed to Retail Dive.
And things have gotten worse since then. On October 3, four days before the Axios piece, The Wall Street Journal reported on Q3 numbers:
Mall vacancy rates rose to 9.1% in the third quarter, their highest level in seven years. Many of the older shopping centers that lack trendy retailers, lively restaurants, or other forms of popular entertainment continue to lose tenants, or even close down.
But many lower-end malls are still struggling to benefit from the economic revival, especially in some of the more economically depressed areas in Pennsylvania, Ohio and Michigan. They suffer from a glut of shopping centers but not enough consumers.
The average rent for malls fell 0.3% to $43.25 a square foot in the third quarter, down from $43.36 in the second quarter, according to data from real-estate research firm Reis Inc. The last time rents slid on a quarter-over-quarter basis was in 2011.
What sparked the vacancy jump? Bankrupted Bon-Ton Stores closing and, gulp, Sears closures too. Which, obviously, could get a hell of a lot worse. Indeed, Cowen and Companyrecently concluded that “we are only in the ‘early innings’ of mass store closures.” As noted in Business Insider:
"Retail square footage per capita in the United States has been widely sourced and cited as being far above most developed countries — more than double Australia and over four times that of the United Kingdom," Cowen analysts wrote in a 50-page report on the state of the retail industry. The data "suggests that the sector remains in the early innings of reduction in unproductive physical retail."
On point, one category that had largely remained (relatively) unscathed in the last 2 years of retail carnage is the home goods space. But, now, companies like Pier 1 Imports Inc.($PIR) and Bed Bath & Beyond Inc. ($BBBY) appear to be in horrific shape. Bloomberg’s Sarah Halzack writes:
Two major companies in this category, Bed Bath & Beyond Inc. and Pier 1 Imports Inc., are mired in problems that look increasingly unsolvable. Bed Bath & Beyond saw its shares tumble 21 percent on Thursday after it reported declining comparable sales for the ninth time in 10 quarters. And Pier 1’s stock fell nearly 20 percent in a single day last week after it saw an even ghastlier plunge in same-store sales and discontinued its full-year guidance.
The struggles of those two retailers ought to compound problems in the overall retail environment. Pier 1 has 1000 stores. Bed Bath & Beyond has 1024 stores.
Still, not all malls are created equal.
Sears’ poor performance has long been an issue for owners, but landlords are split between those that are probably cheering the possibility of reclaiming its locations for more profitable tenants and those that see its potential bankruptcy as a negative tipping point.
Wells Fargo’s Jeffrey Donnelly compiled a list of REIT exposure to Sears, ranking various REITs by how much revenue exposure there is to Sears.
Seritage Growth Properties (SRG) is at the top of the list, with 167 properties, or 72% of its space and 43% percent of its revenue. Urban Edge (UE) has four properties for 3.5% of space and 4.2% of revenue. Next comes Washington Prime Group (WPG) with 42 locations, or 9.8% of space and 0.9% of revenue, followed by CBL & Associates(CBL) with 40 properties, a negligible amount of its space and 0.8% of revenue. Brixmor (BRX) has 11 locations for 1.4% of its space and 0.6% of revenue, Kimco (KIM) has 14 locations, 1.9% of its space and 0.6% of revenue. Simon Property Group (SPG) is at the bottom of the list with 59 locations, 5.3% of its space, and 0.3% of revenue.
Among the companies he covers, he says, CBL & Associates is the most at risk because the “low productivity and demographics of its mall portfolio could make re-leasing challenging and extended vacancies could trigger co-tenancy.” By contrast, Macerich (MAC) is the best positioned, Donnelly argues, due to its “negligible exposure and industry-leading productivity of [its] portfolio.”
Here (video) is Starwood Capital Group ($STWD) CEO Barry Sternlicht opining on the demise of Sears. He says about Sears filing:
“Probably a net positive. So, in our malls that we own…the income that comes near the Sears store is 3% of the mall’s income. Nobody wants to be in front of the Sears because there’s nobody in the Sears. So, we take it back and make it an apartment building or a Dave & Busters or a Kidzania or…a theater…so honestly its good for the owners to get on with this…and we’ll see what happens with Penney’s too….”
In “Sears Exit Would Leave Big Holes in Malls. Some Landlords Welcome That,” The Wall Street Journal noted:
Mall owners with trendy retailers, lively restaurants and other forms of popular entertainment have continued to prosper. Many of these landlords would welcome Sears’ departure, mall owners and analysts said. The department store’s exit would allow them to take over a big-box space and lease it to a more profitable tenant.
In malls where leases were signed decades ago, Sears rents could be as low as $4 a square foot. New tenants in the same space could bring as much as six times that amount.
J.C. Penney ($JCP) and Best Buy ($BBBY) are other theoretical beneficiaries (though that would STILL require people to go to malls).
Who is not benefiting? Apparently those hedge funds that famously shorted malls.
Looks like Sears won’t be the last loser playing in the mall space.
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