There is just no good way out. The only thing that is surprising is how long these retailers and malls, which have been spiraling down for years, were able to hold on.
By Wolf Richter for WOLF STREET.
The WOLF STREET market-cap-weighted stock index of 11 mall REITs made a heroic effort to bounce off the crisis low, and was able to double in three months, but has by now given up much of it and appears to be heading back to crisis lows. The index includes: Simon Property Group, Tanger Factory Outlet Centers, Taubman Centers, Cedar Realty Trust, Macerich, Seritage Growth Properties, Kimco Realty, RPT Realty, Washington Prime Group, Brixmore Property Group, and CBL, which is preparing to file for bankruptcy.
After Friday’s 2.2% drop, the index is down 74% from August 2016, when the Big Skid started. And from that heroic spike that topped out on June 8, it has now plunged 35% (market cap data via YCharts):
What will be left when the brick-and-mortar meltdown is over?
The process started years ago. Ecommerce, a structural shift in how Americans shop, has wiped out retailer after retailer, from big ones such as Sears Holdings and Toys ‘R’ Us, to smaller ones. It created a night-mare scenario for malls and landlords – including REITs – that own the malls, and for investors that hold the mortgages and the Commercial Mortgage-Backed Securities (CMBS) that these mortgages have been packaged into.
And now that the pandemic is compressing future years of brick-and-mortar meltdown into a few months, the whole schmear is coming apart.
Ascena, the latest in the Pandemic Series.
The latest mega-retailer that filed for bankruptcy and announced large-scale store closings was Ascena Group, which operated about 3,500 stores last year, but after closing all its 661 Dressbarn stores in December, it’s now down to 2,800 stores.
Its seven surviving brands are Ann Taylor, LOFT, Lou & Grey, Lane Bryant, Cacique, Catherines, and Justice. As part of its bankruptcy restructuring, it will close about 1,600 stores, beginning initially with 1,100 stores, including all its 264 Catherines stores, most Justice stores, plus some Ann Taylor, Loft, Lane Bryant, and Lou & Grey stores.
Ascena Group has hired a liquidator, SB360 Capital Partners, and the going-out-of-business sales are commencing at these stores.
In other words, Ascena had 3,500 stores a year ago, and plans to emerge from bankruptcy with 1,200 stores. The mall landlords end up holding the bag.
Bankruptcy fears have dogged Ascena for over a year. In June last year, as it was getting hammered by the regular run-of-the-mill brick-and-mortar meltdown in effect at the time, and with cash running low, it announced that it would close all its Dressbarn stores. In August last year, it emerged that its lenders, fearing a bankruptcy filing, began to prepare for it. Those fears were exacerbated last fall when Ascena tried to raise funds by selling two of its moribund brands, Catherines and Lane Bryant, but failed to find takers. The Pandemic just finalized the bankruptcy.
In May, when the company began reopening its stores after the lockdown, it became clear that it was over. Traffic to those stores was way down from the already miserably low levels last year, the company said in its update, and cash flow has been “significantly reduced.”
This is a pre-packaged bankruptcy filing where lenders have agreed to swap about $1 billion in debt for shares in the restructured company to emerge from bankruptcy.
In terms of liabilities, Ascena listed $3 billion, which makes it the third-largest bankruptcy in the Pandemic Series, behind J.C. Penney ($8 billion) and Neiman Marcus ($5.5 billion).
Among the biggest names that have also filed for bankruptcy during the Pandemic Series are: J.Crew, Stage Stores, GNC, RTW Retailwinds (New York & Co.), Brooks Brothers, Sur La Table, and Pier 1 Imports.
Jostling for position to be next in line is Tailored Brands, a holding company for Men’s Wearhouse, JoS. A. Bank, and other brands. On June 10, it confirmed in an SEC disclosure that it may have to file for bankruptcy.
Each one of these bankruptcy filings entails massive numbers of store closings, or the liquidation of the entire company or brand.
But ecommerce is booming.
Americans are spending their unemployment and stimulus money, and they’re buying lots of stuff, they’re just not buying it at the store. The ecommerce announcements by various retailers – those that have vibrant ecommerce businesses – have been stunning.
For example, Best Buy said in an update a few days ago that quarter-to-date through July 18, online sales have surged 255% (not a typo) compared to the same period last year. The Commerce Department will release second quarter ecommerce data in early August, and it will be stunning. But the business at malls is dead.
Mall mortgages collapse.
With thousands of stores being shuttered permanently, and with other stores that haven’t been shuttered yet unwilling or unable to pay rent, malls have been pushed to the brink.
Mall of America, the largest mall in the US, is now over 90 days past due on a $1.4 billion loan that has been packaged into a single CMBS (SASB CSMC 2014-USA). This is the largest mall-mortgage to be 90 days past due, according to Trepp, which tracks securitized mortgages for institutional clients.
Among the other large mall mortgages that are now 90 days past due is the $218 million loan backed by the 1.28-million-square-foot Crossgates Mall in Westmere, a suburb of Albany, NY. This loan has been cut into slices and spread over three CMBS.
Other mall mortgages that are 90 days past due include the $139 million loan backed by the 691,325-square-foot Poughkeepsie Galleria, in Poughkeepsie, NY, which is split across two CMBS.
The delinquency rate for retail property CMBS spiked to 18.07% in June, according to Trepp:
CBL Property Group, a mall REIT with over 100 malls in 26 states and over $3 billion in debt, already issued a “going concern” warning on June 5 after it failed to make an interest payment on June 1. It then entered into a forbearance agreement with its creditors, and into discussions to restructure this debt.
July 17, Bloomberg reported that CBL was preparing to file for bankruptcy, and that it was in negotiations with its lenders over a restructuring agreement with which to enter the Chapter 11 filing.
On July 22, when the forbearance agreement expired, and there was still no agreement, CBL disclosed that it was able to extend the forbearance period and that negotiations continued.
Mall creditors are not amused. Mall properties have taken a huge hit in value – down 33% over the past 12 months and down nearly 50% over the past three years, according to the Green Street Property Price Index.
And no lender wants to end up with a bunch of zombie malls on their books. So they’re motivated to talk. But there is just no good way out.
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