Tuesday, March 14, 2017

"Is Mall-Related Debt the Next Big Short?"

The trade is already feeling crowded.

From Barron's Read This, Spike That:

Some hedge funds expect a wave of shopping-center defaults. But there’s a bullish case for railroads.
The flip side to the rise of Amazon.com (ticker: AMZN) and other online retailers is the decline of all those bricks-and-mortar operators. 

And the misery of all those declining stores is shared by their landlords, a fact not lost on a number of hedge funds that see a short-selling opportunity in the making. 

While mall and shopping center operators have been struggling for years, there’s a feeling among many professional investors, Bloomberg reports, that things will get worse and that many real-estate investment trusts and other operators may soon “buckle under their debts, much the way many homeowners did nearly a decade ago.”

Bloomberg’s Rachel Evans and Matt Scully write that “with bad news piling up for anchor chains like Macy’s (M) and J.C. Penney (JCP), bearish bets against commercial mortgage-backed securities are growing.”

In recent weeks, they continue, firms such as Alder Hill Management — an outfit started by protégés of hedge-fund billionaire David Tepper — have ramped up wagers against the bonds, “which have held up far better than the shares of beaten-down retailers.”

By one measure, short positions on two of the riskiest slices of commercial mortgage-backed securities, or CMBS, surged to $5.3 billion last month — a 50% jump from a year ago. One common way to short CMBS is by buying derivatives, which amounts to a form of credit protection in the event that they default. 

The article however takes pains to put this budding credit crisis in perspective. “Nobody is suggesting there’s a bubble brewing in retail-backed mortgages that is anywhere as big as subprime home loans, or that the scope of the potential fallout is comparable,” the article states. “After all, the bearish bets are just a tiny fraction of the $365 billion CMBS market. And there’s also no guarantee the positions, which can be costly to maintain, will pay off any time soon. Many malls may continue to limp along, earning just enough from tenants to pay their loans.

“But more and more, bears are convinced the inevitable death of retail will lead to big losses as defaults start piling up,” the article adds. 

It’s worth noting that these hedge funds are focusing their short bets on the credit rather than the stocks of these mall operators. That shouldn’t be a surprise, given that many of the shares of the largest REIT operators have been falling steadily in recent weeks. In other words, the decline in these stocks is already old news....MORE
March 9
"Short Sellers Target Mall REITs" (SPG; GGP)
March 8
Short 'Em All: "A Third Of All Shopping Malls Are Projected To Close As 'Space Available' Signs Go Up All Over America"
Feb 21 
"Hedge Funds’ Next Big Short: US Malls"
Jan. 25
Real Estate: "Mall Owners Rush to Get Out of the Mall Business"
Dec. 25
"Malls Are Dead. Long Live Online Shopping"
Nov. 14
"Amazon’s Next Big Move: Take Over the Mall" (AMZN)