News from Sears Holdings Corp. threatened to jolt CMBS investors on Tuesday morning: Sears announced that it would be closing up to 120 stores — a mix of both K-Mart stores and Sears stores. The news sent Sears stock plunging 18%. According to a report by Bloomberg on Tuesday morning, this was the biggest decline in Sears stock in over eight years. On Wednesday, Sears Holdings Corp. identified 79 of the anticipated 100-120 stores it said it would close; the list is split almost evenly between the Sears and Kmart chains.
On Tuesday, the struggling retailer reported weak holiday sales and forecast earnings for the current quarter would fall by more than half from year-earlier results. It also said it tapped its credit line during the fourth quarter for inventory.
“There are quite a few Sears and Kmart locations within CMBS loans, with Sears or Kmart usually one of the top three tenants,” said Michael D. Sneden, Executive Vice President at ValueXpress. “I took a look at the full-sized Sears stores on the list and sure enough, the second one slated for closure, 150 South 69th Street in Upper Darby, PA, is secured by a $65-million CMBS conduit loan in which Sears represents 23% of the net rentable square footage. There are surely more locations with CMBS exposure.”
The Upper Darby shopping center is already struggling, with a reported occupancy of approximately 75% and a net cash flow debt-service coverage as of June 2011 of 1.03x. The Sears lease expired in August 2008 and likely has been renewed for short-term periods; once Sears ceases to pay rent, a potential default or loan restructuring is a distinct possibility.
“The problem with the large multi-story Sears buildings is that no one wants to lease those buildings in today’s market,” observed Sneden.