AMHERST CAPITAL MARKET COMMENTARY MARCH 2018 ‘Retail Apocalypse’ wreaking havoc on shopping malls across U.S. – but which malls fail is no surprise • Retail malls have seen significant distress from store closures as part of the ‘Retail Apocalypse,’ leading some malls to be foreclosed or shutdown entirely • However, which malls fail is not random. The purchasing power of the surrounding community, along with other mall competition, can be a strong predictor of a mall’s ability to avoid distress • When evaluating U.S. cities with more than 10 retail malls, we found that San Francisco, Chicago, New York City, Seattle and Dallas to be the “strongest” cities for malls. The weakest cities for malls include: Orlando, Las Vegas, Charlotte, Tampa and San Bernardino. • We use demographic and mall location data to rank which malls are geographically advantaged/disadvantaged – we analyze 18 Atlanta-area malls as a case study to determine the strongest and weakest malls AMHERST CAPITAL MARKET COMMENTARY | March 2018 1 STRUGGLESAMHERST CAPITAL OF BRICKMARKET & COMMENTARY MORTAR RETAILERS WIDELY KNOWN, MARCH 2018 OUTPACED BY E-COMMERCE SALES GROWTH Brick and mortar retailers have faced store growing only 25% from 2011. Furthermore, closures and declining sales with the rise of the rise in e-commerce sales has been e-commerce and a shift away from spending pronounced in apparel, with the e-commerce on higher-end and mid-tier apparel. This has market share reaching 18% in 2015 and led to distress in the retail commercial real growing at an 11% annual rate in 2015 vs. estate (“CRE”) market, particularly in enclosed 2% annual rate for physical stores, according malls. While retailers have posted positive to the Census Bureau, and has likely growth during the current economic cycle, continued to climb since then. Additionally, almost all of that growth has come from e- of the little growth in brick and mortar commerce sales (Figure 1), which has grown apparel, most has come from discount/off- 164% cumulatively since 2011. On the other brand retailers who are generally not in hand, brick and mortar sales have languished, enclosed mall locations (Figure 2). F I GURE 1. E-COMMERCE SALES HAVE GROWN DRAMATICALLY MORE THAN BRICK AND MORTAR IN 2010s 300 10 250 8 200 6 150 4 100 50 2 SHARE (%) COMMERCE COMMERCE MARKET 0 0 - Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 E (100=DEC (100=DEC 2010 SALES) CUMULATIVE CUMULATIVE SALES GROWTH E-commerce market share (Right Hand Side, %) E-commerce cumulative sales growth Brick and Mortar /other cumulative sales growth Source: U.S. Census Bureau data as of February 2018. F I GURE 2. APPAREL IS STILL HOT – JUST NOT AT DEPARTMENT STORES COMPARABLE SAME STORE SALES ANALYSIS: OFF-PRICE BRANDS PRESENT JUST AS BIG, 6 IF NOT BIGGER, A CHALLENGE TO MID-PRICED APPAREL 4 2 0 -2 -4 -6 -8 2012 2013 2014 2015 2016 2017 Traditional Department Stores Off Price Department Stores Source: CreditNtell, Cushman & Wakefield Research as of February 2018. AMHERST CAPITAL MARKET COMMENTARY | March 2018 2 STOREAMHERST CLOSURES CAPITAL MARKET ARE EXPECTEDCOMMENTARY TO CONTINUE MARCH 2018 TO TAKE A TOLL ON MALL PERFORMANCE Many mall store operators have already These store closures and subsequent rental shown distress from the decline in sales, and income reductions have caused many malls we expect this trend to continue. Buying to face financial distress, often leading to online or at discount/off price apparel stores mortgage defaults with large losses and even (such as Burlington, Saks Off Fifth, Macy’s entire closures in some cases. From 2010- Backstage, etc.) has taken away sales from Jan 2017, just in commercial mortgage large mall-anchor department stores such as backed securities (CMBS), 93 malls have JCPenney, Sears, Bon-Ton, Macy’s and many defaulted on their mortgages or have been mall specialty retailers such as Rue21, Radio modified, and we expect this number to Shack, Aeropostale, Payless and The Limited. continue growing (Deutsche Bank, Intex). As a result, retailers have closed thousands of However, while some malls have faced these stores in 2017 and this trend is expected to difficulties, many malls, even within the same continue in 2018 (Figure 3). metro area, have continued to perform In 2018, this has already been confirmed by successfully. Which malls in a metro will the bankruptcy of Toys R Us, which succeed or fail can at times seem random; announced it will close all stores on March however, we feel that using robust 15, 2018 (Bloomberg). Department store demographic and geolocation data helps us operator Bon-Ton is also bankrupt and faces rank malls overall and in a particularly metro a significant chance of closing all U.S. stores to highlight which malls are most at risk of as well (Bloomberg). financial distress. F I GURE 3. MAJOR CHAIN STORE CLOSURES – 2017 SURPASSED GREAT RECESSION LEVELS 12,000 RadioShack PayLess Gymboree 10,000 Hancock Fabrics Teavana Sears/Kmart 8,000 Sports Authority RadioShack Walmart Office Depot Aeropostale 6,000 Dots Sears/Kmart Wet Seal Teavana A&P 4,000 2,000 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Major Chain Closures Forecast Major Chain Closures Source: Cushman & Wakefield Research as of February 2018. AMHERST CAPITAL MARKET COMMENTARY | March 2018 3 AREAAMHERST PURCHASING CAPITAL MARKET POWER COMMENTARY AND COMPETITION MARCH 2018 CAN BE USED TO WEIGHT MALLS To determine a ranking system for each mall, is because many malls in secondary and we use a Costar dataset of mall properties tertiary locations may not have sufficient combined with demographic data for each population and disposable income to support mall. Malls depend on having sufficient a mall even if competition is minimal, as even purchasing power, taking into account the a modest switch to e-commerce can size of the population and the amount of jeopardize a mall. For example, the Rushmore disposable income that population has to Mall in Rapid City, South Dakota has a support sales and traffic at the mall. Malls ranking of just the 4th percentile due to the surrounded by fewer people with lower relatively small population and income incomes are most exposed to a decline in served. Unsurprisingly, the mall has already demand from ecommerce and discount seen distress through a hope-note (principal retailers, particularly if there are better forgiveness) modification of its existing positioned malls nearby. To analyze malls mortgage (Trepp). While the percentile across these metrics, we use census ranking cannot capture all features about population and income data to estimate the performance for aspecific mall, it can provide disposable income within 20 miles of each a quick relative ranking – however, it does mall, and then divide this by the number of not on its own, indicate that a specific mall Costar malls within 20 miles to take into will fail. account competition. From this data, we When evaluating ranking of U.S. cities with arrive to a score for each mall, and then greater than 10 malls, we found that San percentile rank the entire mall dataset. Francisco, Chicago, New York City, Seattle As illustrated in Figure 4, scoring the nation’s and Dallas are best-positioned. On the other malls provides a quick relative ranking of hand, we believe that the weakest cities for malls across the country. The mall score malls are Orlando, Las Vegas, Charlotte, ranking generally favors malls in dense, high Tampa and San Bernardino, Calif. income cities versus those in rural areas. This F I GURE 4. LOCATION SCORING FOR U.S. RETAIL MALLS Source: Costar, US Census Bureau, Amherst Insightlabs, Amherst Capital Management as of Q4 2017. AMHERST CAPITAL MARKET COMMENTARY | March 2018 4 CASEAMHERST STUDY: CAPITALATLANTA'S MARKET COMMENTARY WORST PERFORMING MALLS MARCH 2018 HAVE ONE THING IN COMMON – THEY’RE POORLY LOCATED The mall rankings by demographics are A map highlighting the size, location and particularly useful to compare malls within a percentile ranking of each Atlanta mall can be metro area. Beyond the national percentile seen in Figure 5. Blue malls indicate a higher ranking, it is a negative sign if a mall is the ranking, while orange-red malls indicate a weakest mall within its Metropolitan lower ranking and higher risk malls based on Statistical Area (“MSA”). To take a closer look location. at this, we analyze the Atlanta metro area, which has 18 malls according to Costar, with a wide variation in mall percentile rankings based on our system. F I GURE 5. ATLANTA HAS A WIDE VARIATION OF MALL LOCATION QUALITY Note: Map based on Longitude (generated). Color shows 2017 Household Effective sum of Score Rank Count Percentile. Size shows sum of Buying Income (median) GLA. Details are shown for various dimensions. Source: Costar, US Census Bureau, Amherst Insightlabs, Amherst Capital Management as of Q4 2017. AMHERST CAPITAL MARKET COMMENTARY | March 2018 5 AMHERST CAPITAL MARKET COMMENTARY TheMARCHpercentile 2018 ranking for malls in Atlanta 2018). These percentile rankings are range from 23% to 87% on a national scale, somewhat limited by other factors which may but it is even more valuable to compare the have an impact on mall performance. For malls within the metro area. Of the 18 malls example, the Cumberland Mall is a lower in Atlanta, seven have experienced distress ranked mall (45th percentile) in our model, from either CMBS defaults/modifications or but its location is well-positioned at a reported sales at distressed valuations. These highway intersection, owned by a higher-end seven malls all fall within the bottom half of mall operator (GGP), and current CMBS data our percentile rankings, highlighting the indicate this particular mall is performing well.