Fitch: Penney Stress Could Pressure U.S. Malls But Not CMBS

Summary:  A J.C. Penney default could mean more to malls than it does to CMBS holders because J.C. Penney makes up such a small part of these CMBS deals.  Malls, however, that do not have other anchor tenants, are likely to suffer substantially.  J.C. Penney was downgraded to CCC earlier this month.

New York --(Fitch Ratings)--
If J.C. Penney's financial challenges result in the closure of a portion of its stores, some malls would likely struggle to replace the retailer, Fitch Ratings says. We do not expect the potential closure of the company's stores to impact rated CMBS deals because they represent relatively small amounts of those transactions.

One mall that could struggle if its J.C. Penney anchor were to close is Riverbirch Corner Shopping Center in Sanford NC. The mall's other anchor tenants are Belk and Goody's. Riverbirch could have difficulty finding find another retailer to take over the large space currently held by J.C. Penney. Riverbirch is approximately 20 miles from Raleigh, NC and 30 miles from Fayetteville and Fort Bragg. The loan on that shopping center is just $12 million, 0.3% of CGCMT 2007-C6.

Other malls would have less difficulty in replacing a J.C. Penney store. Fitch believes for example, that Aventura Mall in Miami, Florida could manage a closure of its J.C. Penney anchor promptly. The mall has several stronger anchor tenants including Nordstrom and Bloomingdales and a favorable location in the northern Miami suburb. Should the J.C. Penney store in that mall close, we believe it would be possible for the mall to find another tenant. The loan on that mall is in LBUBS 2007-C7.

Loans on many properties with J.C. Penney stores are in conduit deals with vintages back to 2001. Two large single borrower mall transactions also contain JC Penney as an anchor, the QCMT 2013-QC at $600 million and JPMCC 2011-PLSD. Both of these malls are located in strong locations at or above 95% occupancy.

J.C. Penney's real estate portfolio has been appraised at over $4 billion and includes properties it owns and leases. According to the company's most recent corporate filings, it owns 306 stores, operates 123 ground leased stores, and leases 675 stores. It also owns nine distribution centers and leases another six. Earlier this month, Fitch downgraded J.C. Penney's Issuer Default Rating to 'CCC' from 'B-'.