Retail Malls Buying Tenants?

AéropostaleVaughanMills

Image source: Raysonho

Late last year, the largest retail mall owners, Simon Property Group and GGP invested alongside Authentic Brands Group to buy out the assets of troubled teen retailer, Aéropostale. As part of the restructuring, Aeropostale cut the number of stores to 240 from 800, and Simon believes that this is a good investment that can double the number of stores to 500 locations. While this is a good move by Authentic Brands to bring in the two largest retail mall landlords, it is a questionable use of capital given the retail implosion happening to traditional retailers. Some speculate that Simon and GGP invested to maintain their occupancy levels which seems more likely given that maintaining face with the equity market is much more important than any IRR on a relatively small investment for these large owners. It will be interesting to see how the traditional retail mall implosion plays out. Since the announcement of this investment in October, both Simon and GGP stocks are down ~15% and down approximately 40% since their recent highs in July.

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Retail Death Spiral with 5,000+ Store Closures

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It is clear that the American consumer is tapped out, losing interest in big brands and moving towards shopping online. According to Cushman & Wakefield, mall traffic declined by 50% from 2010 to 2013!  Over the last 18 months, the following department store retailers and mall stores have announced (or in the case of Payless Shoes soon to be announced) the closure of over 5,000 stores!  How is that going to help Trump’s employment plan?  Thousands of low-skilled jobs will be lost in this wreck not to mention the shuttering of more retail malls as anchor tenants fail.  Smaller retailers at malls sometimes have co-tenancy clauses that allow them to leave or pay a reduced rent if the mall’s anchor tenant leaves.  It’s a vicious cycle that has started and is only going to benefit Amazon and other online retailers.

Department Stores

  • JCPenney: 138 of 1,000 stores
  • Macy’s: 168 of 730 stores
  • Sears & Kmart: 150 stores
  • Kohl’s: 650 of 1,150 stores
  • Target: 13 stores
  • hhgreg: 88 of 210 stores (Ch. 11)

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Short Physical Retail

pexels-photo.jpgLast summer, we took a short position on GGP, one of the largest retail mall owners in the U.S. The rationale was American consumers are (i) tapped out, (ii) shifting to online purchases and (iii) looking for more niche, high-quality products and experiences (decline of big brands). GGP does have some well located malls in areas that won’t get hit so hard (i.e., Ala Moana in Honolulu); however, it also has broad exposure to big box retailers including Sears, JC Penney, and Macy’s, that no doubt will affect its portfolio and relatively high levels of debt. GGP went so far as to invest in one of its tenants, Aeropostale, to save the company from shutting down. How many tenants can it save?

Airlines just starting to take a beating

Early in 2007, we bought long-term puts on Southwest Airlines (Ticker: LUV).  See previous articles by searching under Southwest.  Our rationale:

  • LUV was trading at nearly $17.00 a share, with a market cap of $12 billion and the highest PE ratio in the sector of 20x
  • The sector was riding on good times back in early 2007, but a recession was obviously not that far ahead, with overcapacity and higher fuel prices
  • While LUV has done a good job of hedging fuel prices, jet fuel has tracked oil prices upwards; every 1 cent increase in fuel prices creates an additional expense of $195 million for the industry.  According to Bloomberg, jet fuel has increased 62% in the last year alone
  • LUV is a relatively unlikely acquisition target for other airlines given that most other players are on the verge of bankruptcy, though it may benefit from other airline failures

In the last week alone, three airlines have filed for bankruptcy including Aloha Airlines, ATA, and most recently, Skybus.  Read the full article on Bloomberg, Skybus Ends Service, Third Airline to Fold This Week.”