CBL & Associates is going to have to get busy, and unfortunately, there’s not much time to waste.
Ultimately, success and/or failure boils down to the quality of the market and fundamentals driving the real estate.
So I cashed in my Washington Prime Group chips and began planting seeds in more stable ground, hoping that one day the higher-quality retail REITs would blossom.
It’s hard to believe the day has finally arrived that my local Sears (NASDAQ:SHLD) store is shutting down. According to CNBC, “Sears plans to shutter 72 more stores, with closing sales starting in the near future”. The company provided the names of 63 of its locations set to close (with the additional nine forthcoming).
As I scanned the store closure list, it was really not a big surprise that my local Sears store was closing, I even wrote a detailed history on the mall around a year ago, where I explained:
“Westgate Mall was built in 1975…at the time, Interstate-26 had just opened and Spartanburg, South Carolina, was ripe for retail expansion… But now, the big 1,000-pound gorilla, Sears, is getting restless, and more precisely, the market is getting restless.”
Keep in mind, I wrote that article before the mall’s landlord, CBL Properties (NYSE:CBL), whacked the dividend. I should have been more defensive perhaps, but I had a feeling that Sears was ultimately going to close down the store:
“This Mall is almost a “ghost town” and I can’t imagine how CBL intends to “transform”.
Guess what? CBL is going to have to get busy, and unfortunately, there’s not much time to waste. There’s a $35 million loan that matures in 4 years (July 2022), and occupancy is 83% (was 81% in my last article).
The 954,000-square foot mall is considered a “Tier 2” mall by CBL, and sales for the property are $342 (average sales for Tier 2 are $343 per square foot). CBL has a third bucket, Tier 3, in which sales are $300 per square foot.
But wait, also close to home, there is yet another Sears store set to close, in Anderson, South Carolina. This mall is not owned by CBL but its direct peer, Washington Prime Group (NYSE:WPG).
I know this property well – I actually purchased an outpad from the previous owner, Simon Property Group (NYSE:SPG), around twenty years ago to build a store for Hollywood Video and Lifeway Christian Books.
Anderson Mall is around 670,000 square feet and includes anchors Belk (OTCPK:BLKIB), Books-A-Million, Dillard’s (NYSE:DDS), J.C. Penney (NYSE:JCP), and Sears. The mall was constructed in 1972 and is 78.3% occupied (as of 12-31-17).
The winner, at least for now, is not CBL or WPG, but actually, SPG. As you can see below, SPG owns the dominant mall in Greenville, SC, Haywood Mall, that is anchored by Macy’s (NYSE:M), Dillard’s, J.C. Penney, Sears, and Belk. The 1.2 million-square foot property is 97.1% leased and includes Apple (NASDAQ:AAPL) and The Cheesecake Factory (NASDAQ:CAKE). Sears is not on the closing list at Haywood Mall.
With Sears closing down these two South Carolina stores, it suggests that CBL and WPG are going to have to work fast and furious to find replacement tenants. The list of creditworthy Big Box tenants is getting smaller and smaller, and soon the Toys-R-Us stores will be dark (in Spartanburg and Anderson), making it increasingly difficult for the mall landlords to lure in new tenants.
Also, both troubled malls are anchored by J.C. Penney, and that could be the nail in the coffin, the so-called “double-whammy”. For the bears who want to argue that dark malls are great redevelopment sites, I’m happy to debate the topic, especially these malls in my backyard.
Remember, I live in South Carolina, not Manhattan, where the highest and best use for these malls may include flea markets, used car lots, or bingo. Besides, co-tenancy is the wild card, and many of the older malls have clauses that make it more problematic to demolish and redevelop. If two anchors go dark, the small shop tenants generally have much more control, and since REITs must pay out dividends, it’s a game of time and money.
Many of you know that I pivoted within the retail REIT sector in February 2017, and in an article I explained:
“Class B and C Malls are in a secular decline and I’m not sure the cycle is at the bottom yet. While WPG is doing an excellent job with recycling and deleveraging, I believe that 2017 will be a year of the "haves" and "have nots", and I believe it could get worse before it gets better. In short, I’m sticking with the higher quality REITs!”
So, I cashed in my WPG chips and began planting seeds in more stable ground, hoping that one day the higher-quality retail REITs would blossom.
It’s now becoming increasingly clear that the bifurcation is more than a line in the sand. These lower-quality malls are looking more and more like “ugly ducklings” and the highest-quality names are looking more like SWANs.
Another way to put it, I believe that the “retail apocalypse” story is absolutely true in many towns across the country. As I drive around my town and others like it, I am reminded that developers (like me) built way too many shopping centers from 1990 to 2007.
Conversely, many towns, like my hometown of Greenville, SC, are witnessing a “retail renaissance”. Many new retailers, restaurants, and entertainment venues are sprouting up (i.e., Top Golf is under construction, Dave & Buster’s (NASDAQ:PLAY) open, etc.), and the Simon-owned mall is going to benefit as the patrons at the Anderson Mall and Westgate Mall will flock to the Haywood Mall – it’s only 20 minutes away.
More Dominoes To Drop
I reviewed the latest list of Sears closures (for WPG and CBL), and they include 7 stores in WPG-owned malls and 3 stores in CBL-owned malls. The WPG sites include Tampa, FL; Sanford, FL; Muncie, IN; Topeka, KS; Albuquerque, NM; Lima, OH; and Anderson, SC. The CBL sites include St. Louis, MO; Hattiesburg, MS; and Spartanburg, SC. Just a few days ago I wrote on the WPG-owned mall in Topeka, KS, and I explained:
“… the Topeka mall was acquired/built in 1988 and was 82.8% occupied… Burlington was dark, and the mall contains a Sears and a J.C. Penny… the Topeka mall has high leverage ($40.7 million)”.
Given the latest Sears news, it’s seems highly likely that the lender will soon be getting the keys back in Topeka.
I then decided to cross-check the occupancy for each of the WPG locations, and it appears that the weakest malls include Anderson (78.3% occupancy), Lima, OH (80.6% occupancy), and Topeka, KS (82.8% occupancy). The good news is that none of these 7 Sears stores include Bon-Ton (OTCPK:BONTQ).
The real question, however, boils down to whether or not CBL and WPG have adequate capital to redevelop and pay out dividends. The game is all about balancing the rental income (or NOI) with operating expenses, capital expenditures, and dividends.
CBL and WPG have multiple battles they are fighting: they must determine where to best allocate capital for redevelopment, while optimizing performance by finding the highest and best uses to enhance value. In some markets, like Tampa, it is much easier to find a replacement for Sears, since there are other strong anchors and attractive demographics.
However, the battle is tougher in markets like Topeka, KS; Spartanburg, SC; or Anderson, SC, and ultimately, success and/or failure boils down to the quality of the market and fundamentals driving the real estate.
To be perfectly clear, I consider WPG and CBL highly speculative, and these Sears closures validate the fact they are dangerous stocks to own. I will continue to pound the table about their “sucker yield” status regardless of their “cheapness”. The fundamentals are continuing to deteriorate, as viewed below:
WPG and CBL both posted negative SS NOI growth in Q1-18 with an average decline of ~5.0% (CBL was -6.8% and WPG was -4.0%). This deterioration is expected to continue through 2018: CBL guided -6.0% and WPG guided -.50%. In addition, CBL guided 2018 FFO (mid-point) at $1.75 (-15.9%) and WPG guided $1.52 (-6.7%).
As I have argued for quite some time, Sears is the big 1,000-pound gorilla in the room, and while the latest stores closure list hit by surprise, the reality is setting in vividly before my eyes (and hopefully, yours too). Holy Cow, My Local Sears Store Is Closing!
Note: I will be away from the computer most of today visiting a Federal Realty (NYSE:FRT) site, Pike & Rose, in Bethesda, MD. I look forward to your comments.
All Strong Buy picks can be viewed in my Marketplace service (The Intelligent REIT Investor).
Note: Brad Thomas is a Wall Street writer, and that means he is not always right with his predictions or recommendations. That also applies to his grammar. Please excuse any typos, and be assured that he will do his best to correct any errors, if they are overlooked.
Finally, this article is free, and the sole purpose for writing it is to assist with research, while also providing a forum for second-level thinking. If you have not followed him, please take five seconds and click his name above (top of the page).
Source: Google Earth, CNBC, Filings for WPG/CBL.
Disclosure: I am/we are long ACC, AVB, BHR, BRX, BXMT, CCI, CHCT, CIO, CLDT, CONE, CORR, CTRE, CUBE, DEA, DLR, DOC, EPR, EXR, FRT, GEO, GMRE, GPT, HASI, HT, HTA, INN, IRET, IRM, JCAP, KIM, KRG, LADR, LAND, LMRK, LTC, MNR, NNN, NXRT, O, OFC, OHI, OUT, PEB, PEI, PK, PSB, PTTTS, QTS, REG, RHP, ROIC, SBRA, SKT, SPG, STAG, STOR, TCO, TRTX, UBA, UMH, UNIT, VER, VNO, VNQ, VTR, WPC.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.