As the first-quarter earnings season rolls on and Kohl’s is finding itself embroiled in concerns around a potential sale, capital markets observers say declining comparable store sales poses a much greater risk to some $3.6 billion in allocated property balances.
At stake, at least in the near term, are 10 properties underpinning loans that have subsequently been securitized, representing $382.2 million in allocated property balances where Kohl’s leases will expire before yearend 2023. Those property count amounts to less than 10% by loan balance, which would give borrowers time to backfill any space that the retailer might be forced to vacate.
In the next 10 years, 2024 represents the highest concentration of lease rollovers, when some 23 leases are set to expire.
“We believe there is risk for stores in underperforming locations, such as malls, or those with upcoming lease expirations,” Morningstar | DBRS opined in a recent commentary, “Kohl’s Slowing Sales May Foreshadow Store Closure.”
Adding to analysts’ concerns is the retailer’s relatively large selling space. Kohl’s stores are larger than competitor’s spaces, relatively, at around 70,000 square feet. Competitor Ross Stores, for instance, averaged more than $400 in sales per square foot, compared with $219 for Kohl’s. Ross operates with less than 30,000 square feet of selling space, DBRS said.
One loan of concern is the $38.5 million financing on the Nashua Mall, a 311,313-square-foot power center in Nashua, New Hampshire. The loan is included in COMM 2013-CCRE12’s collateral pool.
The Nashua Mall loan remained current throughout the pandemic, but net cash flow was more than 20% less than the issuer’s underwritten net cash flow. This translated to a 1.06x debt service coverage radio for yearend 2021 on an occupancy rate of 85.0%, for a lease that runs through January 2023. Kohl’s is the largest tenant, occupying 27.8% of the shopping center.
DBRS did highlight at least one advantage to the way Kohl’s approached leasing. Other department stores with large footprints had been closing hundreds of stores over the last few years. Kohl’s was at least able to stay in place because its network of stores is located away from malls, which have experienced declining foot traffic as Americans changed their shopping patterns, among other industry pressures.
