Tuesday, February 21, 2017

"Hedge Funds’ Next Big Short: US Malls"

Following on Jan. 25's "Real Estate: 'Mall Owners Rush to Get Out of the Mall Business'".
From ValueWalk:
Hedge funds are always on the lookout for the next big short a phrase coined by Michael Lewis in his book, The Big Short, which details the exploits of a group of funds that made billions betting against the US sub-prime housing market in 2008/2009.
Last year, the favorite big short among funds was the Chinese yuan, a trade that has produced results but not the career making profits many managers were hoping for.
Now the industry has moved on to a different target, which once again focuses on overpriced debt.

According to some the next big short trade among major hedge funds is shorting the debt of B and C class malls.
Hedge Funds’ Next Big Short: US Malls
The thesis behind this trade is based on retailers store closures and consumers’ shift from traditional brick and mortar retailing, towards online sales. Enclosed malls are the most exposed to these challenges as their largest tenants are retailers where e-commerce competition is most acute, and store closures are already well underway. Also, retail properties – mainly malls – often have limited alternative uses, and thus face steep drops in value if the assets “go dark.” However, Class A+ malls, which have multiple anchor stores, entertainment options and dominate the retail industry in their area are more protected than the B and C class malls that lack entertainment options and a sufficient number of anchor stores.

According to Deutsche Bank, retail property has missed the post-crisis commercial property rebound in the bleak outlook for malls is only adding to the pain for property/debt holders. Traditionally, commercial mortgage-backed securities have been a critical source of financing for retail properties. $142 billion of such securities are outstanding in conduit.

Deutsche Bank’s equity retail analysts believe up to 15% of the retail stores they cover (more than 6000 properties) are at risk of closure and based on this analysis, as retailers improve their online penetration, more store closures are likely. Fewer retail stores, particularly anchor stores such as Sears, Macy’s and JC Penney should translate into an overall decline in mall foot traffic as well as other tenants thanks to “co-tenancy” clauses in lease agreements that can allow other tenants to break or renegotiate their leases after a loss of an anchor tenant. These developments could push malls into a death spiral:


HT: FT Alphaville's Further Reading post.

Possibly also of interest:
Dec. 25
"Malls Are Dead. Long Live Online Shopping"
Nov. 14
"Amazon’s Next Big Move: Take Over the Mall" (AMZN)