Bloomberg News

Macy's decision to shutter another 100 of its department stores could impair some $3.64 billion of securitized commercial mortgages, according to Morningstar Credit Ratings.

These loans are tied to 28 locations that the ratings agency considers to be at the highest risk of closure.

The iconic chain has yet to announce which stores its will be shuttering in an attempt to boost productivity. In January, the retailer announced it was closing 36 of its estimated 770 locations and laying off 4,500 workers. Last week it boosted that figure by 100 stores. All of the closings will be completed by early 2017.

There are a total of $7.13 billion in securitized mortgages on properties with direct exposure to Macy's as a tenant, according to Morningstar. An even larger sum, $28.49 billion of loans, are collateralized by regional malls that include Macy's as an anchor or as a spillover "shadow anchor" tenant in a neighboring property.

Morningstar looked at sales per square foot to determine the most likely candidates for closure. The stores it identified have figures ranging from $76 to $166 per square foot, below Macy's average sales figure of $169 per square foot in 2014 — the latest figure available.

While single-store closures would not directly impact a securitization, they could produce problems for individual loans backed by regional malls with Macy's as a tenant. And these individual loans may be used as collateral for more than one transaction.

"Losing a Macy's may not be an immediate death knell for a loan, as cash flow could absorb the vacancy," Morningstar stated in a report published Wednesday. "However, if a mall is hit by two or more anchor closures, that's typically the beginning of a downward spiral."

Regional malls face an uphill climb replacing a primary store such as Macy's. Besides the challenge of finding a suitable replacement for a featured anchor space, many malls grant lease termination rights to fellow anchor and non-anchor tenants in the event of an anchor-store departure under co-tenancy provisions.

The low-performing Macy's stores are included in commercial mortgage-backed securities transactions dating back to 2011, and most are anchor or shadow-anchor stores in regional malls that will likely have difficulty replacing such a large retail tenant. Morningstar only identified locations with available store-level sales figures, which only includes loans issued after 2010.

Some malls have already run into problems due to a Macy's exit. The Hudson Valley Mall in upstate New York, for example, is in foreclosure after losing Macy's and other anchor tenant within the past year. Morningstar expects that $49.2 million loan to register a $32.4 million loss.

Not all of the problems are confined to post-2010 loans. A GE Commercial Mortgage Corp. corporate mortgage bond issue (2005-C1) had one series of notes downgraded Wednesday by Fitch Ratings because of a special servicing transfer and imminent default of an underlying loan from a Detroit mall (Lakeside Mall) with a Macy's anchor store. That Macy's location was not included in Morningstar’s watch list, being part of a pre-2010 securitization.

Morningstar's "greatest concern" is a $101.3 million loan backed by the Cottonwood Mall in Albuquerque, N.M., which has a Macy's store with the weakest sales ($76 per square foot) among the chain's stores reporting nationwide. That Macy's location is not (yet) on the chopping block, but is located from another Macy's store 13 miles away in the rival Coronado Center Mall.

The Cottonwood Mall has other issues as well: its other retail anchors Sears and JCPenney have also been closing stores in recent years.

Should the mall flounder amidst the exit of its second-largest tenant in Macy's or other stores (30% of its tenants have expiring leases in the next 24 months), the impact to the umbrella securitization portfolio could be significant. Cottonwood contributes a healthy cash flow and 2.05x debt-service coverage ratio, and comprises 8.6% of the $1.1 billion collateral pool of Comm 2014-CRRE17, a CMBS of loans originated by Cantor Commercial Real Estate Lending, GE Capital, German American Capital and Jefferies LoanCore.

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