Carl Icahn is Betting Against Another Mall To Fail
Corporate Raiders the likes of Icahn will make money off anyones misery. His heart is like all those on Wall Street “Damn The Bodies, Make Money”. When is there enough money for any one individual or family?? Bezo, the richest man in the world has so much money he could afford several third countries and still afford to live comfortably until he draws his last breath on this earth. What’s enough?? We can ponder that question for our lifetimes and never have a correct answer.”
With the big Joliet shopping mall closed due to the coronavirus, its owner just missed its April payment on the property’s $85 million mortgage. JCPenney, which runs a store there, is preparing to file for bankruptcy protection, less than two years after the bankrupt Carson’s chain shut down its department store there. A Sears store closed there in early 2019.
But the struggles of the mall and dozens of other retail properties across the county are delivering riches to Icahn and other investors who have placed big bets on the demise of the U.S. shopping mall. They’ve executed trades that pay off when a well-known mortgage derivatives index, CMBX 6, declines in value.
Series 6 of the index, linked to debt issued in 2012, has outsize exposure to shopping malls, making it appealing to traders who want to short the retail sector. In addition to Louis Joliet, the index is linked to debt on several other Chicago retail properties, including the Chicago Ridge Mall, the Bricktown Square Shopping Center on Chicago’s West Side and a building leased to luxury boutiques at 25 E. Oak St. in downtown Chicago.
A lot of money is riding on the index. As of March 20, traders had wagered a net $9.4 billion on the BBB- slice of CMBX 6, and an additional $2.3 billion on the junk-rated portion of the index, according to the International Swaps & Derivatives Association. Icahn became a vocal short seller, and a well-timed bet helped Apollo Global Management’s flagship credit hedge fund to a 6 percent gain through early April. Mutual fund giants Putnam Investments and AllianceBernstein Holding have taken the other side of the trade, wagering that malls will withstand the changing retail environment. Both declined to comment.
“We have billions and billions of dollars on the short side of this,” Icahn said last week in an interview with Bloomberg Television. “It really is a beautiful trade on a risk-reward basis.”
The performance of the index has been mixed in recent years. While one-time retail powerhouses like J.C. Penney and Sears shuttered stores, bruising the CMBX 6 in 2017 and 2018, it rebounded the following year as the U.S. economy remained strong, with the unemployment rate touching a 50-year low. The commercial mortgage bonds that underpin the index also are exposed to office and hotel loans, which had been more resilient and mitigated some of the retail pain before the pandemic.
Hedge fund Alder Hill, which had been short the CMBX 6 since at least early 2017, shuttered last year as losses on the trade piled up.
But the forced shutdown of businesses has caused investors to flee mortgage securities, with worries about overdue rent mounting. Mortgage servicers cited Covid-19 in commentaries on more than 600 commercial real estate deals that were delinquent in April, according to data tracked by Bloomberg.
As for those who managed to stick with their shorts, the stampede has brought redemption.
McNamara’s MP Securitzed Credit Fund, which lost 37 percent in 2019, surged 53 percent in the first quarter.
The longer the shutdown lasts, the better that bet will look.
“There’s about $1 trillion of mortgage debt that underlies the shopping-center industry,” said Tom McGee, chief executive officer of the International Council of Shopping Centers. “If it somehow becomes unserviceable, it’s going to create an enormous strain on capital markets and communities.” Even as other parts of the commercial mortgage market struggle, there are signs that a retail recovery might be particularly prolonged. Just one-third of American adults said they’ll feel safe shopping in a mall after stores reopen, according to an April 20 survey by First Insight, a retail analytics firm.
Still, shares of mall operators climbed this week after reports that Simon Property Group plans to reopen dozens of malls in states that are easing stay-at-home restrictions.
Deutsche Bank analyst Ed Reardon, citing the limited ability of mall owners to reposition their properties for other uses, said lenders could lose 80 to 90 cents on the dollar. Such catastrophic losses “will basically wipe out” the subordinate, or riskiest portions, of CMBS deals with exposure to large retail loans.
The missed payment on the Louis Joliet loan suggests trouble ahead for the 980,000-square-foot mall, which opened in 1978. A venture led by Starwood Capital Group, the big Connecticut-based private-equity firm led by Barry Sternlicht, acquired the Joliet mall and the Chicago Ridge Mall as part of a larger acquisition in 2012.
After the loss of the Carson’s and Sears stores, two department stores remain at Louis Joliet: the J.C. Penney and a Macy’s. Though J.C. Penney and Macy’s don’t lease their space from Starwood, department stores historically have played a critical role at malls by drawing shoppers that visit other stores in the properties. Foot traffic drops when department stores shut down, inflicting collateral damage on neighboring retailers.
Louis Joliet was 89 percent occupied at the end of 2019, according to Bloomberg data on the mall’s loan. It’s unclear if the property is generating enough cash flow to cover its monthly debt payments; recent financial data is not publicly available.
But the mall near Interstate 55 and U.S. 30 almost certainly has lost value since 2012, when it was appraised at $131.8 million, according to Bloomberg data. That could make it difficult for Starwood to refinance when the $85 million mortgage comes due in July 2022. Bloomberg data show that Starwood made its April payment on an $80 million mortgage secured by the Chicago Ridge Mall, which opened in 1981. Though the 890,000-square-foot mall lost a Carson’s store in 2018, it generated more than enough cash flow to cover its loan payments last year, according to Bloomberg data. Yet many retailers have just stopped paying rent during the crisis, leaving many mall owners unable to make mortgage payments. Some landlords have managed to tap other sources of cash to make their payments, but that will be increasingly difficult the longer the shutdown persists.
“Landlords can probably cover some lost revenue,” Lindsay Dutch, a Bloomberg Intelligence analyst. But “having excess cash and liquidity to lean on is going to be key.” More landlords will almost certainly fail to make mortgage payments next month. If the shutdown ends soon and stores open, Louis Joliet and other malls that have missed payments could still recover. But some investors with short positions said they believe the crisis is already fundamentally changing Wall Street’s view of brick-and-mortar retail.
“I don’t think that Covid did anything besides speed up what was inevitable,” McNamara said. “If the storm in 2008 was the residential mortgage market, the storm in 2020 is certainly going to be in the commercial mortgage market.”
The BBB- tranche of the CMBX index tumbled 29% this year through Tuesday, not far from a record low of 65 on March 23.
“We’re still trying to figure out how far this thing could drop,” McNamara said.