CMBS Alert More Clicks, Less Bricks--J.C. Penney Company, Inc.’S Announced Store Closures Could Affect $7.29 Billion in CMBS
Total Page：16
File Type：pdf, Size：1020Kb
CMBS Alert More Clicks, Less Bricks--J.C. Penney Company, Inc.’s Announced Store Closures Could Affect $7.29 Billion in CMBS March 8, 2017 Download to Excel Morningstar Perspective About $7.29 billion in loans securitized in commercial mortgage-backed securities issued since 2010 could be impaired by J.C. Penney Company, Inc.’s recently announced round of store closures. While the company hasn’t released the list of store closures, Morningstar Credit Ratings, LLC identified 39 JCPenney locations that reported below-average tenant sales and are the most at risk of closing. In total, CMBS exposure to JCPenney as an anchor or as a shadow anchor tenant near the actual collateral totals $29.82 billion. In a Feb. 24 statement, the retailer said it plans to shutter 130 to 140 stores and two distribution facilities because of slowing traffic and muted sales, with most of the closures planned for second-quarter 2017. In the announcement, CEO Marvin Ellison said in a written statement, “We must take aggressive action to better align our retail operations for sustainable growth.” According to the company, the stores most at risk of closure either require a significant capital investment or have below-average sales. CMBS exposure to JCPenney as a collateral tenant totals about $16.43 billion. We also found an additional $13.39 billion in loans exposed to the store as a shadow anchor. We analyzed the most recent available store-level sales in postcrisis deals and identified 39 locations affecting $7.29 billion in loans that have an elevated risk of closure because the property’s sales fell below JCPenney’s average sales of $120 per square foot in 2015, the most recent available. Some of these locations are part of multiple CMBS transactions. The list does not include locations affecting postcrisis loans for which tenant sales figures were unavailable. Additionally, store-level sales are not available for loans issued before 2010. JCPenney Overlaps with Closing Macy’s and Sears JCPenney’s announcement comes just weeks after Macy’s and Sears’ recently announced store closures, which we reported in our Jan. 19 CMBS Alert. While losing one anchor may not be drastic if cash flow can absorb the loss, two or more anchors leaving can be the beginning of a downward spiral. For example, the Hudson Valley Mall in upstate New York lost anchor stores JCPenney and Macy's within a 12-month period. The January disposition of the 765,465-square-foot mall in Kingston, New York, resulted in $9.4 CMBS Alert: More Clicks, Less Bricks--J.C. Penney Company, Inc.’s Announced Store Closures Could Affect $7.29 Billion in CMBS | March 8, 2017 | www.morningstarcreditratings.com | +1 800 299-1665 million of proceeds, representing an 89.2% discount to the original appraised value and resulting in an 86.1% loss severity. The $48.9 million loan was at one time 17.7% of CFCRE 2011-C1. Out of the 15 Macy's store closings we identified in our January Alert, 11 properties also have a JCPenney. But only one, the property backing the $91.6 million Great Northern Mall allocated loan in SCGT 2013-SRP1, has exposure to a ground-leased JCPenney store that falls below the retailer’s average 2015 sales. We believe default risk is low, however, because risk is spread among five loans that make up the Starwood Mall Portfolio. Similarly, out of the 23 Sears store closings, nine of the malls have a JCPenney, all of which have posted better-than-average sales. Furthermore, no properties that have a Sears and Macy’s closing also have a JCPenney. Loans at Highest Risk There were 39 JCPenney stores that reported sales that were less than the company’s 2015 national average, displayed in Appendix 1. Our biggest concern is the Wyoming Valley Mall loan. With a balance of $76.0 million, the loan is the fifth-largest loan in GSMS 2014-GC18, making up 7.2% of the deal, and reported a debt service coverage ratio of 1.29x for the first nine months of 2016. JCPenney occupies 172,860 square feet and reported sales of $89 per square foot in 2013, the most recent figure available, which were weak compared with JCPenney’s 2015 average sales of $120 per square foot, the most recent available. The property, which is in Wilkes-Barre, Pennsylvania, about 20 miles south of Scranton, was 97% occupied in September and has nearly 910,000 square feet. In addition to JCPenney, whose lease expires in April, the property’s anchors include Macy’s, Bon-Ton, and Sears, all of which are part of the collateral. Additionally, hhgregg announced March 2 that it was closing 88 stores, including the Wilkes-Barre location, which is collateral for the loan. Separately, the JCPenney at the Muncie Mall in Muncie, Indiana, has one of the weakest sales among stores reporting, at $71 per square foot for the 12-month-period ended Jan. 31, 2014, the most recent reported. The $35.2 million loan amounts to 2.6% of JPMBB 2014-C19. In 2016, we placed the loan on the Morningstar Watchlist because the mall’s owner, Washington Prime Group Inc., categorized the 515,970-square-foot regional mall as a Tier 2 asset, which it defines as malls with lower productivity and modest growth profiles, further heightening our concern. JCPenney occupies 20.5% of the collateral, but contributes just 5.4% of underwritten base rent. The retailer, whose lease expired in January, is still listed on the mall’s website and is one of four 2 © 2017 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc. and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar and the Morningstar logo are either trademarks or service marks of Morningstar, Inc. CMBS Alert: More Clicks, Less Bricks--J.C. Penney Company, Inc.’s Announced Store Closures Could Affect $7.29 Billion in CMBS | March 8, 2017 | www.morningstarcreditratings.com | +1 800 299-1665 department store anchors including Sears, Macy’s, and Carson’s. The property generated a healthy 2.13x debt service coverage ratio on 98% occupancy as of September 2016. Another property at risk is the 457,199-square-foot regional mall in Indiana, Pennsylvania, about 50 miles east of Pittsburgh, which backs the $15.3 million Indiana Mall loan. JCPenney, occupying 13.7% of the space, reported sales of $102 per square foot for 2012. Since issuance, the property has experienced a drop in both cash flow and occupancy. The mall, which is in a rural area of western Pennsylvania, may continue to struggle with Sears and Kmart as the largest tenants at the property. The two tenants occupy 40.3% of the space and account for about 14% of the rent. While both tenants renewed their leases in 2015, Sears Holdings Corp. has accelerated closures over the past year, and with below-average sales of $90 per square foot for Sears and $120 per square foot for Kmart, both stores are in danger of closing. Bon-Ton rounds out the anchor tenants, and collectively, the four anchors account for 67.1% of the space, making the property much more sensitive to the anchor tenants compared with other malls. The loan, 1.3% of GSMS 2013-GC14, is current and posted a 0.95x debt service coverage ratio for the first nine months of 2016 on 86% occupancy. Near-Term Lease Expirations In recent years, we have seen a trend of retailers closing poorer performing stores with near-term lease expirations. Ten JCPenney- leased stores with low sales, including the previously noted Wyoming Valley Mall and Muncie Mall, backing $111.2 million in loans, have a lease that expires before year-end 2018. The JCPenney at the Palisades Center in West Nyack, New York, where the retailer’s lease expires in March 2018, may be a potential closure candidate because of low sales and high occupancy costs. The store averaged sales of $79 per square foot as of year-end 2015, the most recent reported, and JCPenney pays occupancy costs of 13.3%, which we consider high for a department store anchor. Although the mall posted sales per square foot of $479 in 2015, the most recent available, it underperformed its competition, which averaged $540 per square foot for 2015, and may lead to trouble filling a potential vacancy. The loan, which backs two pari passu loans with a $388.5 million piece in PCT 2016-PLSD and a $30.0 million piece in JPMDB 2016-C2, reported a 2.61x debt service coverage ratio on 94% occupancy for the first nine months of 2016. Bifurcated Market and Shifting Landscape We continue to observe a bifurcation in the market where lower-quality, Class B assets, particularly those in secondary and tertiary markets, continue to lose tenants and cash flow, while higher-quality, Class A malls receive ongoing investments from their owners in an effort to broaden their appeal to consumers. Class B properties may not be able to produce a sufficient return on capital to justify continued investment from their owners. Those properties may have more trouble filling anchor spaces, which may stay vacant for an extended period of time. This can lead to further deterioration of sales performance and increased vacancy. 3 © 2017 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc. and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO).