published on August 17, 2016 - 8:42 PM
Written by The Business Journal Staff
A report issued Wednesday by Morningstar Credit Ratings identifies the Visalia Macy’s as one of 28 locations nationwide that have “an elevated risk of being closed” because of below average annual sales revenues.

Visalia Macy’s announced plans last week to close 100 of its stores nationwide but the company has yet to release a list of specific locations that will be shuttered.

Morningstar analyzed the most recent available store-level sales at all Macy’s locations nationwide and the Visalia Macy’s, one of the anchor tenants at the Visalia Mall, had sales per square foot of $154 in 2014. That number is below the $169-per-square-foot average the company reported for its stores in 2014.

According to the Morningstar report, Macy’s Visalia location, which the retailer leases from the owners of the Visalia Mall, is secured by commercial mortgage-backed securities (CMBS) loans totaling $74 million.

Nationwide, Morningstar identified $3.64 billion in CMBS financing that could be impacted by the Visalia Macy’s store closures.

Analysts at Morningstar said some of the 28 malls on their list “could be vulnerable to the shifting retail landscape because of low average in-line sales of about $300 per square foot, which may limit resources enabling them to evolve in the face of competition with strip malls, big-box retailers, community shopping areas and outlet centers.”

“Macy’s has 690 full-line department stores (including Bloomingdale’s) as of second-quarter 2016, and REITs (real estate investment trusts) own about 400 stores,” the Morningstar report stated. “This means nearly 300 are in the hands of smaller operators who will find it more difficult to backfill any vacancy.”

Macy’s lease at the Visalia Mall extends through October 2024, according to Lea Overby, director of structured finance research at Morningstar. “While this provides some incentive for Macy’s to stay, the rent on these boxes is typically very low, so the incentive is limited,” Overby said.

If Visalia Macy’s does decide to close it, Overby said the firm would likely “continue to pay rents through the end of its lease, so bond holders may not be immediately affected.”

“However,” the analyst added, “as is typical in anchored retail centers, certain other tenants have co-tenancy clauses which usually grant them either an early termination option or a reduced rental rate. So over time, the mall would generate lower rental income for the owner, and if the owner could not re-tenant the location, a vacancy would certainly increase the risk of loan default.”

Richard Feder, the Visalia Mall’s manager, was out of town this week and unavailable to comment.

Chicago-based General Growth Properties owns the Visalia Mall, whose other anchor tenant is J.C. Penney.

In an Aug. 11 statement, which came several months after Macy’s closed 36 locations, the company cited slowing traffic and muted sales as the primary drivers behind the additional store closures.

In the statement, Macy’s said it will concentrate its focus on the best-performing locations. Jeff Gennette, Macy’s president, said that while some of the soon-to-be-closed stores may be cash-flow positive, the closing locations do not yield an adequate return on investment.

Morningstar identified the Macy’s located in the Cottonwood Mall in Albuquerque, New Mexico, as the store most in danger of closing. Sales per square foot at that location in 2014 came in at $76.

In addition to Visalia, several other California Macy’s locations are included in Morningstar’s list of highest-risk Macy’s loans: the Sunvalley Shopping Center in Concord and the Lakewood Center in Lakewood.

“Macy’s and other department stores are struggling to deal with a shifting retail landscape,” the Morningstar report said. “Coach, Michael Kors and Ralph Lauren all recently said they were pulling out of, or reducing inventory in, department stores. Although they represent just a small portion of overall department-store sales, these brands are often big traffic drivers for shoppers.”

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