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?

It all points to physical gold

Now that all asset classes including:

  • property
  • equities, mutual funds
  • bonds
  • cash/currencies/money market funds
  • commodities

have gotten hammered, and the US dollar has rallied due to mass redemptions of foreign investments, an optimal position is in physical gold and silver. The paper market of gold is 2.5 times the size of the physical market, and with the IMF and others selling off positions gold is getting hammered. This should only be for the short term, and the current US$745/ounce won’t last for too long. As the US dollar and Euro get hammered in the medium term, precious metals will very likely shine.

IndyMac Chief Complains of ‘Panicked’ Market

Michael Perry [CEO of IndyMac] called the markets for mortgage securities “panicked and illiquid” in a letter to employees Thursday.

He said the lender has “very strong liquidity, a good amount of excess capital,” and added that “there are no realistic scenarios that I can foresee that would impair IndyMac’s viability.”

He goes on to say that IndyMac, a large Alt-A lender, will continue to “widen its pricing and tighten product and underwriting guidelines to ensure that a much greater percentage of our production qualifies for sale.”

Quote above from August 2, 2007, TheStreet.com (IndyMac stock closed at $21.05 on August 2, 2007).

Update on July 14, 2008: IndyMac was shut down by federal regulators over the weekend.

Foreign central banks own 60% of Fannie & Freddie Debt

I think that this will collapse the bond market regardless of whether they actually put it on the books. The implied guarantee is too well understood by the financial community. The government can always change its obligations on SS and Medicare. Those are not contractual.  They are legislative, and more importantly, they are not owed to Wall Street, its friends, and even more, to foreign central banks. FCBs hold 60% of the debt of Fannie and Freddie.  Wall Street expects the government to stand behind Fannie and Freddie, and it is beginning to believe, rightly I think, that this will break the finances of the US government. In fact they are already broken, and the point of recognition is here and now. I look for interest rates on US government securities to be much higher a year from now, perhaps unimaginably so.

Jetlag, Jul 12 2008, 05:35 AM

Mortgage delinquencies up 62%

Interesting article by Amy McAlister of HousingWire today:

Borrowers more than 60 days in arrears on their mortgages hit a record high 3.23 percent for the first three months of 2008, TransUnion said — that’s up 8 percent over the previous quarter’s 2.99 percent average, and is a staggering 61.5 percent higher than the first quarter 2007.