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Shopping Centers Today -> December 2002
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MORE KMART CLOSURES PREDICTED
By Ian Ritter
Though Kmart Corp. has not announced any store closings for 2003, landlords and analysts are bracing for another round, saying that it’s bound to happen some time during the coming year.
Kmart, which filed for Chapter 11 bankruptcy protection in January, closed 283 stores over the summer. Observers say the discount retailer lost focus by buying too many nondiscount retail enterprises and that its inventory control was slack. Competition from more-efficient discount retailers Wal-Mart and Target have made Kmart’s shortcomings even more apparent and critical.
Kmart says it will file a plan of reorganization from Chapter 11 by February, and that it intends to emerge from bankruptcy by the first half of the coming year. Some of this will inevitably involve further store closings, but how many the discounter was not saying yet, at least at press deadline.
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Salomon Smith Barney predicts 500 of the remaining 1,800 Kmart stores will close; Morgan Stanley says the company will liquidate 300 to 500 units in the first quarter of 2003.
Landlords, too, are trying to anticipate what will happen. In a third-quarter report released in October, Glimcher Realty Trust said it believes that lease income from about half of its nine remaining Kmart stores will be at risk early next year. Glimcher, which owns 85 shopping centers in 24 states, 70 percent of them regional malls, receives annual minimum rents of $3.7 million from Kmart, accounting for 1.7 percent of its annualized base rent. Glimcher CFO William Cornely told SCT that he expects Kmart will announce more store closings at the beginning of next year.
“It’s pretty clear that their results have not been very good so far this year,” he said.
The REITs with the most exposure to Kmart are New Hyde Park, N.Y.-based Kimco Realty Corp., which has 47 Kmarts, followed by New York City-based New Plan Excel Realty Trust, with 35, according to a Salomon report released last month.
In Kimco’s third-quarter report, also released in October, the company estimates that 10 to 12 Kmart stores could close in 2003. “It’s just the best guess at this point,” said company spokesman Scott Onufrey.
It could take a while for landlords to fill empty Kmart spaces. In its report Glimcher said it expects a downtime of 12 to 24 months before such vacated spaces are filled. But Ross Nussbaum, a Salomon REIT analyst, said it all depends on location. He predicts that spaces in the Northeast and the West Coast, where retailers are trying to expand and where space is scarce, will fill up more easily than those elsewhere. “It’s an obstacle that can be overcome,” he said.
Kimco has made some progress filling gaps from the last round of Kmart closings. Of the 31 units that have closed, 11 have been filled or are about to be; 11 were sold or otherwise disposed of; and nine were still on the market as of November. Tenants occupying former Kmart spaces include The Home Depot, Kohl’s and Linens ’n Things. The remaining Kmart properties in Kimco’s portfolio that have not already closed account for about 5 percent of annualized base rent, Onufrey said.
A Morgan Stanley report released in October said that though some Kmart vacancies will be attractive to retailers, it could still take a year to fill them, causing a “revenue pause.” At other locations, the report says, landlords may have to break up the average Kmart space (about 85,000 square feet) to accommodate smaller tenants.
While there are plenty of expanding big-box tenants that would like a Kmart space, another large Kmart liquidation could bring an oversupply to the market that REITs would have trouble dealing with, said Matthew Ostrower, a Morgan Stanley REIT analyst.
“My feeling is that they’re doing very well under difficult circumstances,” Ostrower said of Kmart-exposed REITs.
For its part, Kmart isn’t saying how many stores it plans to close, or even that it intends to shut any.
“It’s speculation,” said Laura Mahle, a Kmart spokeswoman. “That number has not circulated out of Kmart, nor has any number. As far as we’re concerned, they’re rumors.”
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