Fitch: CBL Proactive Stance Positive In Face of Penney Closings

J.C. Penney's ('CCC' IDR) announcement to close 33 stores and cut 2,000 jobs on Wednesday will impact two Fitch-rated retail REITs: CBL & Associates Properties Inc. (four malls) ('BBB-' IDR/Stable Outlook) and Simon Property Group, Inc. (two malls) ('A-' IDR/Stable Outlook). CBL's subsequently announced redevelopment plans for its affected properties, which aggregate 499,000 square feet and $1.4 million in gross annual rent, are a positive for credit quality. The impact to Simon is de minimis as the two affected malls are slated to be spun-off into a newly created entity later this year.

CBL's proactive stance to re-tenant the properties follows CBL's acquisition of two Sears ('CCC' IDR/Negative Outlook) locations during 2013 in Lexington, KY and Nashville, TN, which the company will redevelop and look to re-lease to smaller shop tenants paying higher rents. Unlike the Penney opportunity, the Sears stores were located in some of CBL's most productive malls while the Penney closures are in four of CBL's lower-productivity assets. The redevelopments face execution risk given potentially lackluster retailer demand at these locations, as well as upfront capital expenditures and related downtime in redeveloping the assets, which can ultimately weigh on credit metrics.

Fitch continues to have a cautious view on lower quality malls with exposure to Penney and Sears given the potential for further tenant real estate rationalization. In Fitch's view, the risks arising from continued downsizing remain idiosyncratic to the respective malls. Certain landlords may benefit from re-tenanting the space with stronger tenants generating higher rental rates (e.g., CBL's two stronger performing malls in Lexington and Nashville). Alternatively, weaker performing assets may struggle to attract demand from replacement retailers, ultimately pressuring operating performance and cash flows to service fixed charges at both the property and corporate level.

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