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Mall Operator CBL & Associates May Be Affected If Sears Seeks Protection From Creditors, Analyst Says

Company Hosts 39 Sears Stores in US Malls
October 11, 2018
While retail real estate investment trust CBL & Associates Inc. said it already plans to replace vacated Sears stores at its malls across the country, a new report by Wells Fargo Senior Analyst Jeffrey Donnelly says CBL is still the "most at-risk" property manager after a news report said Sears Holdings Group Inc. is considering filing for protection from creditors.

Donnelly wrote in a note to investors Wednesday that CBL malls could struggle to replace Sears stores because of "low productivity and demographics" in its mall portfolio. CBL’s portfolio includes many B and C level malls, which are roughly defined as having fewer sales per square footage of retail space than so-called Class A malls.

That "could make releasing challenging and extended vacancies could trigger cotenancy," he wrote.

CBL, a publicly traded REIT based in Chattanooga, Tennessee, operates 114 properties, including 85 malls and shopping centers. In a Securities and Exchange Commission filing in August, the company said the vacancy rate at its malls was rising. Sears operates 39 stores in CBL malls across the country. CBL didn't immediately respond to a request for comment.

In an earnings call in August, CBL Executive Vice President and Chief Information Officer Kathryn Reinsmidt said the company was working to reduce its Sears exposure, and is in the midst of redevelopment plans on several Sears stores it purchased last year, "as well as lease locations that are at risk or slated to close in the near term."

"Sears is marketing the majority of their own stores to third parties and we are monitoring this process closely," she said.

Sears Holdings, which was once the largest retailer in the world, said in August it would close 46 Sears and Kmart stores in November. It already announced closings for 200 stores this year, most of which were scheduled to be shut by the end of this month. At the beginning of May, the company said it had 894 stores, compared with 1,275 in the year-ago period.

The Wall Street Journal said on Tuesday that Sears Holdings, which is based in Hoffman Estates, Illinois, is taking steps that could allow it to file for protection from creditors.

Naveen Jaggi, president of retail advisory services at commercial brokerage Jones Lang LaSalle, said mall operators across the country have been preparing to replace anchor stores, including Sears, for years.

He predicted it could be especially "problematic" in small, secondary markets around the country.

"To fill an 80,000 to 100,000 square-foot user, you may have to split it up into three or four spaces," which could become cost-prohibitive, he said.

Other mall operators with a large number of Sears stores include Washington Prime Group, which has 42, or 9.8 percent of its portfolio, and Simon Property Group Inc., which has 59.

Simon -- the nation’s largest mall operator -- isn’t a concern because of its deep pockets and massive redevelopment happening at malls across the country, Donnelly wrote.

Mall operator Macerich is "arguably best positioned" to weather a potential Sears bankruptcy because of its "negligible exposure" and strong portfolio, he wrote.

Simon declined to comment. Sears, Macerich and Washington Prime did not immediately return requests for comment.
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