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Taking Stock of Landlords Following JCPenney’s Plan To Close 33 Stores

Not Surprised, Landlords Have Already Planned for Redevelopment of Affected Properties
January 17, 2014
As part of its turnaround efforts, J. C. Penney Company Inc. will be closing 33 underperforming stores across the country this spring. The closings will result in the elimination of approximately 2,000 positions.

These actions are expected to result in an annual cost savings of $65 million, beginning in 2014.

Remaining inventory in the affected stores will be sold over the next several months, with final closings expected to be complete by early May.

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“As we continue to progress toward long-term profitable growth, it is necessary to reexamine the financial performance of our store portfolio and adjust our national footprint accordingly,” said Myron E. (Mike) Ullman, III, CEO of Plano, TX-based JCPenney.

Meanwhile, the company is continuing its plans to open a new store location later this year at the Gateway II development in Brooklyn, NY.

One landlord affected by the closures, CBL & Associates Properties Inc. had obviously prepped for the news and already has announced future redevelopment/replacement plans for the four JCPenney anchor locations in its portfolio that are part of the planned closures.

“One of our most attractive investments coming out of the recession has been to improve the performance of our properties through redeveloping underperforming anchor locations. The opportunities created by the four JCPenney closures announced today fit perfectly with that objective,” said Stephen Lebovitz, president and CEO of CBL & Associates. “While we have been encouraged by JCPenney’s recent improvements in sales and traffic, we have been anticipating certain store closures to occur.”

“We have been proactively engaging in discussions and gauging retail demand with this in mind and are pleased to announce strong interest for the locations expected to close in 2014,” Lebovitz said. “Our next steps will be to move forward with negotiations with retailers and finalize redevelopment plans.”

“The list of retailers interested in these specific locations includes sporting goods, arts and crafts and other box retailers, as well as a traditional department store for one location, all of which will enhance the performance of the malls overall,” he added.

JCPenney locations in the CBL portfolio slated for closure are at Hickory Point Mall in Forsyth, IL; Janesville Mall in Janesville, WI; Wausau Center in Wausau, WI; and Northgate Mall in Chattanooga, TN. The stores aggregate approximately 499,000 square feet and $1.4 million in gross annual rent. JCPenney will continue to pay rent until lease expiration.

The Northgate Mall store is leased from a third party and CBL will work with the building owner to facilitate its redevelopment.

CBL”s proactive stance in the face of JCPenney closings is a positive for the REIT, according Fitch Ratings. However, the closures are in four of CBL's lower-productivity assets. The redevelopments face execution risk given potentially lackluster retailer demand at these locations, as well as upfront capital expenditures and related downtime in redeveloping the assets, which can ultimately weigh on credit metrics.

Simon Property Group has two malls impacted by the closings, but Fitch said the impact will be minimal as the two affected malls are slated to be spun-off into a newly created entity later this year.

JCPenney is also closing an 118,000-square-foot JCPenney store at PREIT’s Exton Square Mall in Exton PA. PREIT said it is looking forward to incorporating the JCPenney building into its planned redevelopment of the mall which is also expected to follow the recapture of an existing Kmart location.

"This is a tremendous opportunity for PREIT. Having control over the JCPenney and Kmart locations will allow us to reposition Exton Square Mall by capitalizing on the stellar demographic profile of the area, which is the best in our portfolio," said PREIT CEO Joseph Coradino. "PREIT has a strong track record of replacing department stores, having successfully replaced nine in the past nine years. We look forward to sharing the details of our plans for Exton Square Mall in the near future and demonstrating the value creation proposition this presents."

Still, the closings are not a good thing for the other affected centers. Lea Overby, CMBS strategist at Nomura Securities, said 11 stores included on the closure list have either direct or indirect exposure to CMBS collateral, of which nine are included in legacy CMBS and two are included within CMBS 2.0/3.0.

“Of the 11 stores with exposure to CMBS, JCPenney serves as collateral for seven loans, and non-collateral for four loans,” Overby reported. “We believe that the closure of the JCPenneys at each of these locations is likely to significantly increase the likelihood of default. With the exception of the two malls owned by CBL, the properties are generally owned by smaller mall operators that may be less able to provide the capital necessary to reposition these boxes.”

“In addition, the locations are primarily in tertiary markets, decreasing the likelihood that the sponsor will be able to find a replacement tenant,” she said.

Marielle Jan de Beur, Managing Director and Head of CMBS and Real Estate Research at Wells Fargo Securities, said JCPenneys store closure list is relatively short in the context of its portfolio of 1,100 stores.

“One reasonable inference is that more closings are likely to follow,” Jan de Beur said. “The closings focus on leased properties. Only two of the 33 properties are owned. We believe the Bristol Mall and Lincoln Plaza Center locations are owned by J.C. Penney, based on CoStar data and Loopnet data.”

Planned Store Closures
Shopping Center, City, State

* Selma Mall, Selma, AL
* Arrow Plaza, Rancho Cucamonga, CA
* Chapel Hills Mall, Colorado Springs, CO
* Meriden Square, Meriden, CT
* Lake Square Mall, Leesburg, FL
* Gulf View Square, Port Richey, FL
* Muscatine Mall, Muscatine, IA
* Stratford Square Mall, Bloomingdale, IL
* Hickory Point Mall, Forsyth, IL
* Five Points Mall, Marion, IN
* Marketplace Shopping Center, Warsaw, IN
* The Centre at Salisbury, Salisbury, MD
* Westwood Plaza, Marquette, MI
* Northland Mall, Worthington, MN
* Singing River Mall, Gautier, MS
* Natchez Mall, Natchez, MS
* Butte Plaza Shopping Center, Butte, MT
* N/A, Cut Bank, MT
* Vernon Park Mall, Kinston, NC
* Burlington Center, Burlington, NJ
* Phillipsburg Mall, Phillipsburg, NJ
* Wayne Towne Plaza, Wooster, OH
* Exton Square Mall, Exton, PA
* Laurel Mall, Hazleton, PA
* Washington Mall, Washington, PA
* Northgate Mall, Chattanooga, TN
* Bristol Mall, Bristol, VA
* Military Circle Mall, Norfolk, VA
* Forest Mall, Fond Du Lac, WI
* Janesville Mall, Janesville, WI
* Lincoln Plaza Center, Rhinelander, WI
* Cedar Mall, Rice Lake, WI
* Wausau Mall, Wausau, WI

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