Store Closings
Concern Mall REITs
NEW YORK -- A decision in January by Best Buy Co. to close 110 stores has left market watchers wondering if other music retailers are poised to make similar moves. If they do, certain mall real estate investment trusts could take a hit.
Best Buy, the country's largest consumer-electronics retailer, shuttered 110 Musicland stores, which included 90 Sam Goody music stores and 20 Suncoast video stores, bringing its total Musicland closures in fiscal 2003 ending in February to 160. The retailer cited sharp declines in music sales and a drop-off in mall traffic.
The news has made analysts wonder who's next.
"The announcement serves to highlight our concern with music and video retailer credit, including Trans World Entertainment, which is a very large mall tenant," said Morgan Stanley analyst Matt Ostrower.
Trans World operates stores under the For Your Entertainment, Coconuts and Strawberries names. Ostrower said Trans World is on the firm's "Watch-list" of retailers that face a potential credit risk.
Other large mall-based music retailers include Record Town and Wherehouse Music.
People burning - rather than buying - CDs and people buying CDs over the Internet have cut into music sales. Also, a move by discount retailers, such as Wal-Mart Stores Inc., to sell DVDs and videos at cut-rate prices has affected traffic to specialty retailers, said Ostrower.
"We expect further store closing announcements from this sector of specialty retailers going forward," he said.
A number of REITs could be affected by these store closures. Macerich Co., General Growth Properties Inc., Crown American Realty Trust, Simon Property Group Inc., CBL & Associates Properties Inc. and Rouse Co. all appear to have the biggest exposure to Musicland stores, according to Ostrower.
Simon has the greatest number of Musicland store leases at 157. The stores, however, account for only 1.15% of the company's annual revenue and 1.5% of its annual funds from operations, Ostrower estimates.
Macerich, with 57 stores, has the biggest financial exposure, with Musicland stores making up 2.7% of the company's annual FFO, Ostrower said. General Growth, with 100 stores, gets 1.9% of its FFO from Musicland stores. Crown, with 8 stores, gets 1.8% of its FFO from Musicland. CBL, with 36 stores, receives 1.5% of its FFO from Musicland while Rouse, with 36 stores, gets 1.4% of FFO from these stores, Ostrower estimates.
As for Trans World Entertainment - Crown, CBL, Simon and Macerich appear to have the biggest exposure to this company's stores. Crown, with 20 stores, relies on Trans World for 6.2% of its FFO, CBL gets 2.1%, Simon 1.6% and Macerich 1.3% of its FFO, according to Ostrower.
REIT executives were not immediately available for comment.
Mall REITs have been among the best performers in the REIT world over the past few years. They posted total returns, which include dividends, of 31.9% in 2001 and 24.6% in 2002, according to the National Association of Real Estate Investment Trusts. By contrast, equity REITs in general posted returns of 13.9% in 2001 and 3.8% in 2002.
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