How Much Pain Will the Bon-Ton Bankruptcy Cause for the Mall Sector?

Retail landlords and CMBS investors could be in for more pain ahead if Bon-Ton continues to consolidate and close stores.

Department store chain Bon-Ton Stores is currently working through a plan to close about 42 of its stores, totaling $435.8 million in CMBS exposure. While those are already sobering numbers in this environment, industry analysts say that the picture could be much worse.

Companywide, Bon-Ton store properties are behind about $2 billion in CMBS debt, says Steve Jellinek, a vice president of CMBS research at Morningstar Credit Ratings. The company estimates that about $170.6 million in CMBS debt is tied to properties that will see a significant drop in occupancy and net cash flow as a result of the store closures. That number, however, might rise.

Retail landlords and CMBS investors could be in for more pain ahead if Bon-Ton continues to consolidate and close stores, Jellinek says. He adds that he believes the retailer, with dual headquarters in Milwaukee and York, Pa., might shutter more properties in the future.

“Cash flow is contracting,” he says. “They don’t have the money to invest in their stores or in their business to make it profitable.”

As for who might feel that pain the most, REITs are largely out of the line of fire in the latest round of closings, according to a review of properties slated for closure. Chicago-based General Growth Properties does own at least one property on the closure list, however, at the Fox River Mall in Appleton, Wisc. Otherwise, privately-held firms will bear the brunt of store closures. Mason Asset Management, based in Great Neck, N.Y., for example, owns at least four of the properties on the closure list.

The store closings could cause a ripple effect through the affected retail centers, as empty anchor spaces trigger co-tenancy provisions. Under those agreements, if an anchor space remains empty for a certain period of time it gives neighboring tenants the right to pay a reduced amount of rent, say industry sources.

If in-line tenants have the option to pay reduced rents or pay rent as a percentage of sales, the situation could reduce the mall’s cash flow and the debt servicing on the mortgage.

“What really matters is how big the loan is, and how strong the property is to begin with,” says Manus Clancy, senior managing director at New York-based data firm Trepp. Sometimes, for instance, a Bon-Ton store might be the biggest tenant in a center that secures a $40 million loan. If the store occupies 30 percent of the space and the loan is only covering the debt service by 1.5x, then “that is a real problem.”

As a result, a combination of factors, including the footprint of the store, the debt service coverage ratio and the quality of the mall, will determine whether the landlord can manage through the situation, Clancy notes.

Situations such as Bon-Ton’s usually have one of two outcomes, he says.

“One is that their creditors say, ‘Yes, this is the best way to monetize our investment to date.’ That involves probably transferring the debt to equity, closing the 42 stores and [living] to fight another day. The other is that creditors say best pathway is to liquidation.”

At press time, it appeared that Bon-Ton, which operates stores under the Bon-Ton, Boston Store, Carson’s, Elder-Beerman, Herberger’s and Younkers banners, was positioned to try to emerge from the bankruptcy as a going concern. Even if the department store chain goes out of operation, Clancy does not expect a big shakeout.

“I don’t think there will be a reckoning, like it was for subprime mortgages in 2008,” Clancy says. “It will be a slow-moving process, as we’ve seen in the last couple of years. Sears and Macy’s will close 50 stores at a time, and a lot of these guys can keep their malls going until their loans are due.”

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