Store closures as part of J.C. Penney’s turnaround plan will keep the pressure on US real estate investment trusts (REITs) and commercial mortgage-backed securities (CMBS) to mitigate their exposure to associated risks, Moody’s Investors Service said in a new report. These risks will vary according to a variety of factors, including the quality of the malls in which the stores are located.
“We anticipate J.C. Penney will continue to rationalize its store base as it works to improve store productivity,” said Christina Boni, a Moody’s VP-senior credit officer. “Even after announced store closings, the company will have a larger footprint than many of its competitors, while sales per square foot are well below those of peers.”
J.C. Penney remains vulnerable to losing more market share, Boni says. Leverage remains elevated, with debt/EBITDA at 6.8x, while the company has had multiple challenges connecting with its traditional customer base and continues to be hobbled by chronic inventory problems. Nevertheless, with revolver availability and cash totaling about $2 billion, the company has more than sufficient liquidity to pursue its turnaround plans.
CMBS risk appears manageable, Moody’s says. Although J.C. Penney represents one of the largest exposures to an individual tenant in US CMBS, risk varies depending on the health of the properties where it is a tenant. Malls with multiple vacant anchor stores and a J.C. Penney account for just 0.5 percent of Moody’s-rated CMBS, while more than half of rated malls that include a J.C. Penney have no vacant anchors.
Moody’s-rated mall REITS have much larger exposure to J.C. Penney. Although the company accounts for an average of only 0.81 percent of rated mall REITs’ minimum base rent, this exposure represents an average of 8.40 percent of their total leasable area. Mall REITs have however gradually reduced their exposure to stressed anchors as they redevelop the shopping complexes, which should enable mall operators to absorb additional J.C. Penney store closings.
