Commercial mortgage bonds should take store closures announced by Walgreens in stride, despite widespread exposure to the drugstore chain, according to JP Morgan.

Walgreens, which announced plans last week to close 76 unprofitable stores this year, is the largest retail-oriented tenant in conduit CMBS on a balance-weighted basis, and exposure is widespread across deals, JP Morgan said in research published late Friday.

The company is listed as a top three tenant at securitization on more than 1,100 loans across 334 deals, with a total current balance of approximately $4.9 billion. Its CMBS exposure outpaces that of other prominent drugstore chains including CVS, which is listed as a top 3 tenant on $3.7 billion of conduit loans. And the vast majority of loans, nearly 85% by count, with exposure to Walgreens are on properties where the company is listed as the sole tenant.

Nevertheless, the average loan balance of loans on which it is listed as a top three tenant is just $4.3 million. Also, concentrated exposure to these loans is isolated to more seasoned deals that have largely paid down. The two most notable exceptions to this are WBCMT 2005-C17 and LBUBS 2008-C1, in which we estimate 9.8% and 9.7% by balance, respectively, of loans have exposure to Walgreens. In the case of WBCMT 2005-C17, however, more than 30% of this balance has already been defeased – the collateral has been replaced.

“Though Walgreens exposure in conduit CMBS is considerable, we reiterate that these planned store closings should have limited impact on the market,” the report stated. “In our view, the announcement more reiterates the sector-wide trend of retailers looking to right size their existing brick-and-mortar footprint, given both over-density of physical locations and growth in e-commerce platforms.”

CMBS spreads tightened last week across most of the new issue capital structure. The belly of the new issue curve significantly outperformed, with double-A and single-A rated bonds 26 basisi points and 17 basis points tighter, respectivley, at swaps plus 144 basis points and swaps plus 188 basis points.

 

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