A Bon-Ton liquidation jeopardizes US mall owners already in trouble

A Bon-Ton store in South Portland, Maine.
Derek Davis | Portland Press Herald | Getty Images
Key Points
  • Bon-Ton is heading to liquidate its more than 200 regional department stores.
  • Some retail REITs have a higher exposure to the chain than others.
  • The problem is finding replacements for bigger boxes, and redevelopments can be capital intensive.
A Bon-Ton store in South Portland, Maine.
Derek Davis | Portland Press Herald | Getty Images

As Bon-Ton heads to liquidation, the shuttering of more than 200 regional department stores jeopardizes U.S. mall owners already struggling to fill empty stores.

The winning bidder for the retailer's assets — a unit of bondholders, Great American Group and Tiger Capital Group — is scheduled to be approved on Wednesday by the U.S. Bankruptcy Court in Wilmington, Delaware, court documents show. The outcome will likely be a complete shutdown of Bon-Ton's business, including its other banners Carson's, Younkers and Elder-Beerman.

Washington Prime Group, a real estate investment trust with significant exposure to the bankrupt retailer, had joined forces with another mall owner to make a bid for Bon-Ton, which reportedly fell through after the court ruled Bon-Ton wouldn't be able to pay the group a $500,000 "work fee."

Bon-Ton's store leases and real estate assets are now expected to be sold off, bit by bit, to help repay what's owed to the retailer's creditors. The process threatens those landlords with a high exposure to the company, which already liquidated roughly 40 stores earlier this year when it was planning to restructure.

"The question is, 'Will this lead to other stores to close, and is it more indicative of a more serious problem at the mall?'" BTIG analyst James Sullivan told CNBC. "If that's the case, you risk a particular mall failing."

Industry experts agree that Washington Prime, with 15 Bon-Ton leases in its portfolio, was willing to bid for the department store chain in order to have control of the real estate, to keep some of Bon-Ton's stores open for longer, and to buy time to land deals with replacement tenants. If Bon-Ton suddenly closes its doors, co-tenancy provisions could allow other retailers within the mall to renegotiate rents (now than an anchor store is gone) or terminate a lease entirely.

In a recent investor presentation, Washington Prime said that nine of its malls with Bon-Ton locations also have Sears stores, two of which are owned by Seritage Growth Properties. That pairing could prove to be a twofold blow to the REIT, if the Sears locations also go dark.

Washington Prime declined CNBC's request for comment on this story.

Other publicly traded U.S. mall owners also have exposure to Bon-Ton, namely CBL Properties, which slashed its dividend earlier this year, faced with mounting capital expenses, and has created a cash reserve in case of abrupt tenant failure.

"We are certainly disappointed with the outcome, but this is an opportunity to continue to evolve our properties through transformative anchor redevelopments," CBL CEO Stephen Lebovitz said in a statement. "We have been monitoring this situation closely and we have been working on contingency plans for each center impacted."

*See notes about this chart below.

Only once have two mall owners successfully teamed up to save a failing retailer and ultimately stave off store closures. It was back in 2016, when Simon Property Group and GGP (both considered top-tier landlords) bought teen apparel retailer Aeropostale, preventing more than 200 locations from shuttering.

More often than not, retail REITs don't have enough capital to foot those bills. In the case of Bon-Ton, Washington Prime, CBL and others are looking to strike a deal with liquidators to win back control of their stores. And mall owners will be actively searching for new tenants to fill the gaps.

The issue with anchor boxes at malls, though, is their massive square footage — often more than 200,000 square feet in size, taking up multiple floors at the property.

The number of retailers still opening stores that large today is slim to zero, leaving developers forced to reconfigure the space for a handful of smaller tenants, or bring in mixed uses like offices or medical centers. To be sure, these projects also come with a hefty price tag and can take years to see from start to finish.

"I think we are all trying to figure out what the alternative uses for these bigger boxes are," Mizuho Securities analyst Haendel St. Juste told CNBC. "It took the strip centers two years to fill Sports Authority's boxes, and they are still suffering through some drag."

According to Jones Lang LaSalle, it can take a mall owner anywhere from nine to 24 months to start collecting rent again after a department store closes.

"We don't like this happening all at once," Greg Maloney, the head of JLL's Americas retail business, told CNBC. "This doesn't come at a good time for these developers already absorbing Sears, Macy's, J.C. Penney" and other boxes, he said. To be sure, so-called class-A mall owners like Simon, GGP and Macerich likely look at this as an opportunity to bring in more profitable tenants that can pay more rent per square foot.

With Bon-Ton, once the asset sale is approved, store closures are expected to be completed in up to 12 weeks. The news comes just weeks after Toys R Us began closing its more than 800 stores across the U.S., another headache for the industry.

*Notes on the chart above:
All "Total Mall" counts exclude community centers. Data as of 2Q17 except where noted below; CBL: Excludes Lender, Repositioning, and Minority Interest Malls. One mall has two exposures; GGP: Total includes some non-mall retail formats; MAC: Number of malls as of 2Q17. Bon-Ton exposure as of 10-K. MAC has an additional exposure at a community center; PEI: Excludes malls held for sale; SPG: Number of malls as of 2Q17. Bon-Ton exposure as of 10-K. SPG has an additional exposure at a community center.

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