Courtesy of Almost Daily Grant's
19 HERBS AND SPICES
Who said American ingenuity is a thing of the past? Fast food player Jack in the Box is taking orders on its website for a chicken-scented facemask. Free on a first-come, first-serve basis through Oct. 23, the offering comes with the descriptive tagline: “Smells Like Chicken, Wears Like Mask!”
Rejected taglines include: “Looks Like Chicken, Tastes Like Mask.”
MAUL OF AMERICA
It’s gone from bad to worse for commercial landlords. According to data from the CBRE Group, third quarter asking prices for ground-floor retail rents in Manhattan dropped 12.8% from a year ago, marking the 12th consecutive sequential decline. Concurrently, new leases and renewals plunged 30.8% over the 12 months through September, while ground-floor availabilities rose 8.1% sequentially to 254 units, the highest on record going back to the 1990s.
"The recent influx of closed storefronts along the main shopping corridors and the introduction of new, heavily discounted offerings will continue to put downward pressure on average asking rents in the coming months," CBRE concluded.
Are the Big Apple’s woes representative of broader pain for mall operators and their investors? The spring cessation of commerce is having a lasting impact on malls and other retail outlets, which were already flagging as the bug bit thanks to intense online competition from the likes of Amazon.com. Let’s review:
An investor group is trying to block Paris-based commercial real estate operator Unibail-Rodamco-Westfield (owner of the Westfield malls in London and San Francisco) from undertaking a dilutive rights offering, instead advocating for an effective divestiture of the Westfield portfolio, for which the parent company coughed up $22 billion in June 2018.
Mr. Market has given that deal the side-eye, with Unibail’s market cap having since been cut to $6.7 billion from $30.5 billion over that two-plus-year period. The company also toted a leverage ratio of more than 10 times trailing Ebitda coming into the coronavirus crisis.
Meanwhile, a stateside operator looks set for the restructuring chopping-block. CBL & Associates Properties, Inc. announced yesterday that it will not make a scheduled interest payment on its $300 million in outstanding senior unsecured 4.6% notes due 2024, starting the clock on a 30-day grace period that would be followed by an event of default.
CBL, which owns and operates a portfolio of malls and other retail properties across the Southeast and Midwest, also pushed back the deadline for its planned Chapter 11 bankruptcy filing to Nov. 2 from today, as it continue to haggle with lenders under a restructuring support agreement signed in August. The company said that it "is continuing collaborative negotiations with its senior, secured lenders and noteholders to attempt to reach a consensual arrangement with both parties."
Then there’s Brookfield Property REIT, the mall-focused subsidiary of Brookfield Property Partners. On Sept. 22, CNBC reported that Brookfield’s retail division will lay off some 20% of its workforce. In an email to staff, CEO Jared Chupaila explained that the move wasn’t made lightly: “While many companies were quick to implement furloughs and layoffs at the onset of the pandemic, we made the conscious decision to keep all our team employed while we gained a better understanding of its longer-term impact on our company.”
Anecdotal evidence suggests more drastic measures are underway. Trepp reporter Daniel McNamara noted on Twitter the next day that “Brookfield is handing the keys back” on a $90 million loan backed by a 384,111 square foot mall in Florence, Ky. Shares in BPY are down about 25% after accounting for dividend reinvestment since a bearish analysis in the Nov. 29, 2019 edition of Grant’s.
Operators will soon have some tough choices to make. Barclays analyst Ryan Preclaw tells CNBC today that he expects some 16% of U.S. mall space will need to be repurposed for residential use, fulfillment centers or other purposes, an endeavor which leads to valuation write-downs of between 60% to 90% on the recycled properties. Financial bloodletting is well underway: The Barclays team relays that some 30% of the mall loans within commercial mortgage-backed securities they cover are already in delinquency or default.
The calendar is no friend either. A report from Morgan Stanley earlier this week finds that roughly half of all mall-based specialty retailer leases are up for renewal within the next four years, bad news for landlords as the raft of vacancies will ensure that tenants enjoy a far stronger negotiating position. “The good news for malls is that they should emerge much stronger post rationalization, but the bad news is every mall REIT needs to rationalize a portion of their portfolio,” Morgan Stanley concludes.
QE PROGRESS REPORT
Reserve Bank credit (i.e. the sum total of interest bearing assets at the Fed) jumped $26 billion to $7.045 trillion, a four-month high. That pushed the three-month annualized growth rate to 4.9% compared to 1.1% last week, though the year-over-year comparison continues to dwindle, with growth now at 81.1% compared to 82.7% a week ago.
RECAP OCT. 15
Stocks erased most of their early losses with the S&P 500 climbing back to the cusp of unchanged, leaving the broad index within 3% of its early-September highs. Treasurys stayed put with the 30-year yield finishing at 1.51%, while WTI crude held near $41 a barrel and gold edged higher to $1,911. The VIX ticked to a one-week high near 27.
– Philip Grant
Almost Daily Grant's will resume on Monday.
