Sears` plans to close 150 stores and Macy`s to close 100 could have a dramatic effect on the billions in CMBS loans backed by regional malls. More than one-third of all securitized mall loans have exposure to Macy’s, JCPenney and Sears, while another third are exposed to two of the three anchors. With data from Morningstar Credit Ratings, we look at how the evolving retail landscape in regional malls will buoy some loans while sinking others.
Since 2010, liquidations amounting to $3.89B led to $2.88B in CMBS losses, a 74% loss severity. Despite the landscape, the picture is complex. Properties in secondary and tertiary markets, anchored by department-store chains that have shuttered locations, such as Macy’s, Sears and JCPenney, are particularly susceptible to dramatic devaluation. The closure of an anchor tenant often triggers co-tenancy clauses that allow other mall tenants to exercise the right to terminate their leases or renegotiate the terms, typically with a period of lower rents, until the co-tenancy issue is resolved.
Morningstar predicts about $1.88B in losses on 53 specially serviced mall-backed loans with an unpaid principal balance of $3.4B, suggesting a 55.3% loss severity. Many of these properties are lesser quality Class-B or C malls in markets lacking a sufficient customer base to support ongoing operations. Other loans are backed by properties underwritten at the peak of the market with high debt leverage and little to no amortization. Morningstar forecasts that three of these loans will incur losses of more than $100M.
$2.8B of mall loans were made between 2006 and 2007, many of which are aggressively leveraged and hampered by lax underwriting and lackluster cash flow. They`ll likely struggle to refinance when they mature this year and next.
Since May, six mall loans with a combined balance of $652.8M were transferred to special servicing, and Morningstar projects losses on four of them. In total, there are 24 master serviced mall-backed loans totaling $1.38B on the Morningstar Watchlist. The list, which evaluates loan and property-level credit risk, assesses cash flow, occupancy, tenant-related concerns and other issues. Many of these properties generate enough cash flow to cover their debt payments; however, high leverage and previous modifications could lead to a transfer to special servicing, especially as these loans approach maturity.
The top five mall-backed CMBS loans Morningstar is watching:
Franklin Mills in Philadelphia
Wolfchase Galleria in Memphis
Montehiedra Town Center in San Juan, Puerto Rico
Central Mall Portfolio, various locations
Rushmoore Mall, Rapid City, SD
In the Houston area, Morningstar is keeping an eye on the Killen Mall, which is sitting at an LTV of 144%.