Sears

For every action there is reaction. Sears Holding Corp.’s decision to close 68 Kmart stores and 10 Sears stores this summer could hurt several commercial mortgage-backed securities that depend on those Sears rent payments.

Morningstar Credit Rating agency has identified 9 CMBS that are exposed to risk as a result of the store closures. The $32.2 million Midland Mall loan looks to be facing the greatest risk. The loan is tied to the 354,762-square-foot mall in Midland, Mich., where Sears is the second-largest tenant. The store occupies 62,700 square feet, or 17.7 percent of the mall’s total space.

The center is owned by CBL & Associates, but the loan was already transferred to special servicing, which is often what happens when the center isn’t making enough money to cover the loan and the owner is considering other alternatives. Morningstar said that the mall has just barely been producing enough cash to service the loan so the loss of Sears could make repaying the loan difficult. Edward Dittmer, vice president at Morningstar said, “The owner may want to try to restructure the loan on this news of Sears leaving.”

Morningstar also noted that the Mariposa Shopping Center in Nogales, Ariz., is losing a Kmart. The center is 70 miles south of Tucson Arizona and Kmart occupies 35.7 percent of the mall’s space. The concern for this center is that a Ross Dress for Less store has the right to terminate if Kmart isn’t open.

Morningstar wrote, “Should Ross exercise its co-tenancy clause, the debt service coverage ratio would fall below break even.”

The $32.4 million Champlain Centre loan has the largest exposure to Sears, but because of the strong net cash flow, it should be able to weather the loss. “With a lot of these malls, the anchor stores generally don’t make up a large percentage of the rent,” said Dittmer. “With the Champlain Centre, the Sears store pays $2.75 a square foot or $235,000 annually. The American Eagle store actually pays more than Sears does and it’s smaller.”

Dittmer said in terms of straight cash flow, it’s not the same level of risk, although The stores near the Sears may feel some pain.

The other centers singled out by Morningstar include the Fort Roc Portfolio in Reading, Pa.; the Slate Portfolio in Springboro, Ohio; The Pines in Pineville, La.; The Kmart in Paintsville, Ky., and the Kmart Montwood Point in El Paso, Tex.