Fitch: JC Penney Closings Will Weigh on CMBS Loans

JC Penney’s planned closure of up to 140 stores and two distribution centers will weigh on some commercial mortgage-backed securities loans, said Fitch Ratings, New York.

The Plano, Texas-based retailer said it will release its store closure list shortly, with closures slated for the second quarter. Fitch noted that while the closures represent less than 14 percent of the company’s current portfolio, the stores that close will generally be the poor performers that generate less than 5 percent of JC Penney’s total annual sales. “The company indicated these locations have comparable sales below the company national average and operate with higher margins,” Fitch said.

Fitch examined CMBS pools where JC Penney was listed as a top-five tenant and found 136 properties within 122 CMBS transactions. “The current outstanding balance of these identified loans with JC Penney exposure is approximately $11.4 billion,” Fitch said. “The majority of the properties are located within regional malls, with a smaller sampling of retail centers or mixed-use properties and generally concentrated in the eastern part of the United States.”

Fitch noted that the potential closures would have a “direct effect” on the respective loans regardless of whether the store itself is collateral for the loan. “This is due to declining rental income, reduced foot traffic and/or potential co-tenancy lease clauses affecting the overall property,” the report said. “Added pressure will occur if the malls already have a closed anchor, such as Macy’s or Sears, without re-leasing prospects.”

But this represents only part of the CMBS universe’s exposure to JC Penney because stores with smaller footprints and some ground-leased locations are not reported as top five tenants, Fitch noted. “Class B Malls, particularly those located in markets with dominant malls, or located in secondary/tertiary markets with demographics that cannot support multiple malls, are at the highest risk,” the report said.

Nevertheless, Fitch said its view of the overall retail sector remains “static” as it continues to feel the pressure of e-commerce. “Malls are clearly losing some sales volume to e-commerce sites,” Fitch said. “The proliferation of e-commerce will not lead to the end of traditional retail, rather a fundamental alteration of the sector will occur. To remain relevant, retailers could develop robust supply chains as part of an omni-channel platform that will use online sales as a compliment to in-store sales.” It noted that some retailers already have an omni-channel strategy–20 of the top-25 e-commerce sales companies have a significant store network.

Despite the recent store closings, Trepp, New York, reported that the CMBS retail loan delinquency rate fell 17 basis points in February to 5.93 percent. “In fact, delinquency readings for four of the five major property types fell [in February], but a large spike in the office sector more than offset those gains,” the company’s CMBS Delinquency Report said.

Trepp Analyst Sean Barrie noted that the largest CMBS loans to become delinquent in February were all on office property loans, including the $270 million TIAA RexCorp New Jersey Portfolio. The portfolio is backed by six northern New Jersey offices–three in Madison, two in Short Hills and one in Morristown–that total more than one million square feet. The $235.9 million TIAA RexCorp Long Island Portfolio backed by five New York office properties represented the second-largest loan that became delinquent.

“The third-largest loan to become delinquent in February almost shares the exact same name as the two larger notes,” Barrie said. “Though the $150 million A note for the TIAA RexCorp Plaza serves as debt for a different property, it is backed by a 1.06 million-square-foot office in Uniondale, N.Y. that isn’t far from the Uniondale office behind the TIAA RexCorp Long Island portfolio.”

Loking at the whole CMBS universe, DebtX, Boston, said prices of commercial real estate loans underlying CMBS decreased slightly in January. “The slight drop in CMBS prices was driven by a small increase in loans indicated to be non-performing,” said DebtX Managing Director Will Mercer.