Sears, Roebuck & Co. continues to close stores and sell off assets, creating significant risk for commercial mortgage bonds backed by properties leased by the retailer.
The greatest concern is properties where a Sears' lease has already expired or will expire within the next two years. These stores “are most likely to be closed,” according to research published this week by Bank of America Merrill Lynch.
Sears, a subsidiary of the Sears Holding Company, represents the third largest tenant exposure in commercial mortgage backed securities. There are more than 1,320 Sears-branded and affiliated stores in the U.S. and Canada, which includes more than 790 full-line and more than 50 specialty stores in the U.S., according to the company's website.
In a Feb. 27 announcement accompying its financial results, Sears Holding indicated that it was likely to close additional stores in the coming months. “We also continue to reduce unprofitable stores as leases expire and in some cases accelerate closings when circumstances dictate,” Rob Schriesheim, the company's chief financial officer, said on the earnings conference call.
According to Trepp, a total of 186 deals have direct exposure to the Sears name. The largest deal exposure is in the GSMS 2013-KING conduit.
BofAML stated in its report that 423 non-performing loans in CMBS had tenant exposure to both Sears and Kmart (also a subsidiary of Sears Holding) stores were listed as the top five tenant in the conduit pool. The bank said that a total of 276 legacy CMBS performing loans had listed Sears or Kmart as a top-five tenant. Performing loans are equally exposed to the risk that the retailer may choose not to renew leases ad could be subject to store closures, said BofAML.
The impact of store closings could reach beyond the deals that have direct exposure to the brand as a tenant. According to Trepp, there might be other exposure from “Sears stores that are part of CMBS malls but for which Sears owns its own parcel.”
In other words, the retailer could occupy the mall securing a CMBS even if the store itself is not part of the CMBS loan collateral, or it could serve as a shadow-anchor (a store is located next to or across the street from the property collateralized in a CMBS deal).
“While these types of exposures are not as obvious or quantifiable, they are still important since anchors such as Sears often increase the number of visitors and overall performance of the mall or shopping center in which they are located,” said BofAML.