The Harbinger Of Mall REIT Relevancy by Brad Thomas
Summary
- J.C. Penney's is set to report earnings before the bell on Friday, and – with history as our guide – that report could include more announced store closures.
- Right-sizing its portfolio could be a good strategy for the longer-term health of the business.
- We think that the low-productivity mall REITs will continue to teeter on the edge of relevancy and that a sizable chunk of their malls is a recession away from extinction.
- This idea was discussed in more depth with members of my private investing community, iREIT on Alpha. Get started today »
There could be more turbulence for the mall REITs this week with J.C. Penney’s (NYSE:JCP) quarterly earnings on deck.
The struggling department store operator is set to report earnings before the bell on Friday, and – with history as our guide – that report could include more announced store closures. But, to be fair, it might not. We’ll just have to wait and see.
That news, however, would be a double-barreled blow following what Sears said last week… that it would be closing nearly 100 additional store closures, including Kmart locations.
Some of you were no doubt shocked to know Sears still had that many stores to close. But even after closing 96 locations by early next year as the bankrupted business says it plans to do, it will be left with 182 locations nationwide.
Now, one can fairly assume that mall REITs were well aware of – or had some idea of – these closures. They’ve been working on backfilling Sears and Kmart boxes for years, after all. And many industry CEOs like David Simon say they welcome the chance to repurpose old Sears boxes into more productive offerings.
Besides, the closures are coming at a slow drip of a pace. What could be more damning news for the industry are more closures by J.C. Penney.
A JCP View of Things
Bad news from J.C. Penney would add to the dozens of Forever 21 stores – some of which can be more than 100,000 square feet – now expected to shut across the U.S.
There’s also the Barneys New York bankruptcy (though it only has about a dozen stores), and the Dressbarn liquidation – just to name a few other somewhat catastrophic events for retail-oriented REITs.
Photo Source
Earlier in 2019, J.C. Penney said it only planned to close 18 department store locations and nine of its home and furniture stores this year. At the time, that guidance seemed unrealistic, or at least shortsighted…
The company does still have more than 800 stores up and running – more than Macy’s and Nordstrom. More closures are inevitable. It’s more a matter of timing.
We think they could be coming sooner rather than later. That’s due to the turnaround plan JCP clearly has in place, based on recent reports. And right sizing its portfolio could be a good strategy for the longer-term health of the business.
A recent Wall Street Journal article highlighted the department store chain’s efforts in Texas – where the company is headquartered – to put a fitness studio, a video game lounge, and style classes in one remodeled store.
Previously, JCP was strapped for cash. And, to be sure, it still is. So it hasn’t been able to make major investments in its shops.
However, with CEO Jill Soltau taking over about a year ago, it’s trying to manage those aspects little by little.
Soltau told the Journal that she doesn’t have any “immediate plans for major closings.” Why bother when the “vast majority of stores are profitable.” She’s instead aiming “to fix the mistakes of past management that pushed Penney off course.”
That could be. But we’re not convinced quite yet.
Harbingers and Happenings
A recent UBS note highlighted a survey that showed more people are going to the mall to eat at the food court, not to shop. Obviously, that’s not good news.
Neither is the approximately $4 billion in debt J.C. Penney has on its balance sheet. Though it admittedly doesn’t have any significant repayments due until 2023.
Even so, mall REITs should recognize by now that U.S. department stores’ value propositions aren’t what they once were. That’s why we like operators like Simon Property Group (SPG) in particular. They’ve been ahead of the curve in bringing in new tenants to fill the gaps.
Others not so much.
Let’s take a closer look at how much exposure these companies have to J.C. Penney and Forever 21.
Source: iREIT
There’s little doubt that the mall REITs are one of the “more economically-sensitive sectors” out there. According to Hoya Real Estate Capital, their “performance has historically correlated closely with retail sales growth and consumer confidence.”
...Originally Posted On Seeking Alpha
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