Alternative Retail Real Estate Risk Analytics for Alternative Capital

Benchmarking Risk and Opportunity of Structural Change in the Retail Credit and Spatial Markets

Global 400 Retail
Watch List


Retail MAXIM


MAX-SI Spatial


G-400 Store



G-400 Ratings Action [Upgrades-Downgrades for 477 US Credits & Divisions Based on Gains-Losses in Fundamental Values]

G-400 Distribution of Credit Quality:

Management Fiscal Guidance for Bs. Performance of G-400 Credits Independent of G-400 Ratings


Retail MAXIM June 2014
Theme: “The Clouds of Competition. Optimizing the B&M Productivity Advantage in Retail’s Endless Aisle”  

Issues: Overt and covert competitive forces impacting B&M sales productivity under a borderless channel agnostic landscape from B&M operators, e-commerce, m-commerce & social media, Fed & capital markets intervention, privatization in M&A private equity boom and shifting US land use policy rezoning America for higher-end uses and consumers to sustain asset inflation    

Metrics:  20Th MAXIM Annual Store Productivity Survey 700 Formats & 110 Subsectors. Sales per square foot by format & sales volumes 2005-2014  
Metrics:  Real Estate Footprint Rightsized for Optimal Productivity: Format size of credits in productivity survey [average & range, annual change 2005-2014]. Base supply, openings and closings 2008 to 2015-projections]  

Retail MAXIM May 2015
Theme: Insurgent IPOs. Why Status Quo Newbies Are Not the True Disruptors of the B&M Space. [Performance of G-400 Credits Engaging in Private-Public Capital IPO-LBO Dance]

Issues: The retail IPO boom since 2013 brought public a surfeit of status quo companies formerly under management of private equity buyout firms. MAXIM assesses the post-IPO performance through the Global 400 Watch List ratings given the weakness of fundamentals that is unlikely to be corrected by the infusion of fresh equity.  The recapitalization of banal companies in the public private dance is proving more disruptive than Amazon in the current transition that requires more innovation than cheap credit and equity.

Metrics: Breakout of productivity, real estate and investment metrics of 2013-15 IPOs  

Retail MAXIM April 2015
Theme: Barbarians at the Board. Will the New Corporate Hegemony of Activists Board Sustain B&M Retailing?

Issues: All power corrupts but some must govern.  As the power base shifts within retail companies on the Global 400 Watch List, many CEOs are losing control to a new world of activists found in-house under reconstituted Boards seated by private equity and on the outside among hedge funds, mutual funds and venture capital.  Each group is very determined to reset policies and execute revised plans for growth and value creation all in the name of greater change.  In the process, the activist Board has been undermining managerial precedents while over-mining the balance sheet to take control of real estate assets and dismantling businesses all at the expense of minding the store under the guise of “stronger stewardship.” MAXIM looks at which companies are targets of such rent seeking practices.   

Metrics:  Debuts of “Corporate Governance Ratings System” for G-400 Retailers. Caliber and DNA of Management & Board of Directors rated for value creation

Retail MAXIM March 2015
Theme: “American Idle. Sacking of Seventy CEOs 2013-14. Who’s Minding the Store in 2015+? And…Who’s Minding the Board as Private Equity & Investor Activists Take Control?”

Issues: The March issue updates the Global 400 competitive value ratings for 250 credits that reported earnings for the first quarter of 2015.  Performance fell short of investors’ expectations for the majority of chains who failed to grasp that the sector hit an inflection point in 2013 as MAXIM had warned of in its 2014 fiscal outlook.  The bigger surprise was the wave of CEO departures among 70 retail companies between 2013 and 2014. And another 22 CEOs who announced their departure by yearend during the first quarter of 2015.  Their exit is accompanied by other top talent among the ranks of COOs, CFOs, CMOs [chiefs of merchandising], CIOs [presidents of logistics, supply chain and E-Commerce].  The mass exodus of management beggars the question “who’s minding the store?”  Many new CEOs are short-lived because minding the store appears perfunctory when the goal is mining the balance sheet.  How many more CEOs will be sacked at the urging of investor activists to create the next great American retailing idol?

Metrics: Profile of executive and members of Board for each Global 400 credit [tenure & prior retail companies]

Retail MAXIM February 2015
Theme: Rollback-Retention Risk. Testing Productivity Potential of a Bigger B&M Footprint.  Part II: G-400 Retail Real Estate Rationalization.

Issues: With nearly every G-400 retailer in pursuit of “optimizing store fleets” to generate higher four-wall productivity, purging portfolios of underperforming and non-integral assets has stepped up but not without sustaining the residual ballast.  In the rollover and rollback of B&M space retention is running high.  The rollback of B&M space is not producing risk-free store portfolios. Nor is marginal supply being significantly eliminated.  Measures being taken by retailers to keep the lights on for their core merchandising businesses is exhaustive, which speaks to the perceived if not intrinsic value of real estate in the age of the “endless aisle.” In the current rationalization cycle, the unintended consequences of value creation is the higher retention of marginal supply as closing pipelines are being pushed to historic lows along with new capacity.  The recent ramp up in closings (still below the norm) has barely chipped away at the persistent obsolescence in portfolios much of which will not be made whole by the above initiatives. Even with the addition of 142,000 stores since 2007 that expanded the footprint of G-400 retailers by 45% with fresh productive organic capacity rather than the costly cap ex-laden acquisitions driving the top line since 2014, new supply levels are well below prior expansions and insufficient to correct any imbalance of marginal assets let alone mitigate against the ongoing erosion in four-wall productivity, or offset rising occupancy costs.   The impetus to hold onto existing capacity however beleaguered is being driven in part by the tapering off of new capacity, particularly among stronger G-400 credits frustrated over the shortage of suitable sites.  In fact it can be said that the incessant recycling of marginal supply has gotten more extreme under the increasing intervention of the private equity and real estate capital markets contributing to its higher retention, guided in part by the playbooks of ESL hedge fund manager Eddie Lampert (also the chairman of Sears) and highly-accommodating Fed Regime dating as far back to Greenspan where real estate assets are treated as the new fiat currency. The recapitalization by this group has injected an abundance of liquidity into marginal real estate transforming it into a fungible asset class rather than a high functioning store. 

Metrics: Working list of new and old store formats and retail chains ripe for store closings.

Retail MAXIM January 2015
Theme: Rollover-Rollback Risk. New Supply-Demand Dynamics of the 2014-15 Cycle of Real Estate Rationalization. [Mapping Five Cycles of Openings & Closings of G-400 Retail Credits]

Issues: Just as all the lights came fully on at the mall with occupancies rising beyond pre-recession levels, retailers decided to turn them off.  In 2014, the pipeline of store closings for the MAX-SI Spatial Index spiked by 20% while opening levels were reduced by 10%.  In 2015, closings will swell by another 30% while new capacity be further scaled backed by 28%.  This month, MAXIM takes stock of the current store cycle of G-400 credits that by all accounts is a break from the past four cycles dating back to the 1990s, periods of significant structural changes in the retail industry including the evolution of real estate from a channel of distribution to fungible asset to be monetized and traded with the increasing intervention of the private and public real estate capital markets. The latter trend not only changed the valuation model but investor demand, providing unprecedented liquidity for junk assets while keeping the lights on through endless recycling & retention of marginal formats & locations.  The backstory of the current Radio Shack liquidation that is also a portrait of the rollover-rollback risk inherent in the rationalization of retail real estate.  Rollover Risk is discussed in the January issue [Part I] and Rollback Risk [Part II] in the February issue.  The five distinct cycles that frame each period of rationalization between 1998 and 2015 are defined in Part II on the retention of store asset that is part of the continuum that sustains the B&M space. The issue of which path to take in rationalizing square footage is complicated by the current industry transition that is proving more disruptive than the value retail paradigm of the 1970s led by Price Club and Costco that inverted the retail hierarchy long dominated by full price department stores.  But unlike value retail that expanded the U.S. store footprint by an extra 60% between 1975 and 2000 [gross capacity added], the current retail paradigm that is a confluence of long-tail retailing models--next generation specialty concepts trading up to premium products and experiences, extreme value and digitized platforms [the nascent Omni-channel model], gross national store supply stands to expand at the margin between 2010 and 2020, a quarter of that added in the 20th C surpassed by the step up in closings. Moreover, at some point the portfolios of private equity owners will need to be purged.

Metrics:  Store opening and closing pipelines over arc of 2010-14 recovery compared against prior cycles. 2015 forecasts of openings & closings for Global Watch List credits

Retail MAXIM Nov-Dec 2014
Theme: Breakin’ Out the 1% Cap Rate to Reprice Severe Spatial Shortages within America’s Great Shopping Center Complex. [MAXIM Responds to the Landlord’s Dilemma (or Delusion) Of Tenant Demand Allegedly Exceeding Current Center Capacity]

Issues: The American mall is thriving. The “thriving mall” premise rests on the observations of shopping centers REIT CEOs and sell side and buy side REIT analysts, retail analysts, private equity buyout firms and REIT shareholders, all of whom have profited beyond expectations from the stratospheric rise in equity values over the arc of the 2010-14 recovery.   Thriving is not a term that comes to mind for MAXIM nor retailers on the Global 400 Watch List whose metrics have been moving opposite to REIT mall portfolios since 2012.  A slowdown that grew deeper and more widespread in 2014 met with consistent downgrading of fiscal guidance that’s been extended out to 2015.  Diminished growth not limited to the bottom line but top line as well. New store pipelines for the year were trimmed by 10% relative to annual capacity added on average the past two years with another reduction of 13% planned for 2015, according to the MAX-SI Spatial Index that tracks the supply of G-400 credits and two-thousand competing formats.  In contrast, REIT analysts estimate 2015 store pipelines to be above 2014, sustaining for demand in excess of supply.  In the yearend issue, MAXIM speaks to the schism developing over the state of the mall sector, between landlord and tenant, equity and fixed-income analysts, private and public equity, capital advisers and MAXIM.  “Thriving malls” has been largely a story of repositioning portfolios and financial reengineering over the arc of the 2010-14 recovery.  MAXIM explores the sources of value creation by financial measures taking into account decades of shopping center securitization and monetary policy that has rewarded asset-backed businesses like mall REITs.  Are thriving malls today those of tomorrow? Not without a radical reinvention of shopping dynamics from tenants who can take the landlord to realms of competiveness to rebuild the moat.

Metrics: Mall tenant listings of REITs: Retailers stated growth & credit quality rated

Retail MAXIM October 2014
Theme: Suburban Channel Blowback. Solidifying Market Share thru Premium Factory Outlets. The Next Disruptive Format. [New Cycle of Suburbanization: 2014 Update of 2010 Factory Outlet Report]

Issues:  The suburbanization of the factory outlet center (FOC) marks the next stage of this derivative channel’s evolution.  As the current development cycle enters its fifth year, solidifying market share has become the new endgame with the final collapse of all barriers to entry, opening up the coveted locations within the highly trafficked ring roads of suburban corridors and major metro areas. Developers converging on these population centers who already dominate regional trade areas though diverse portfolios of highly productive formats ranging from malls to town centers and value malls (like The Mills) present potential blowback risk to marginal centers no longer competitive.  The dislocation does not lie with legacy factory outlets in more remote locations that will only keep expanding the footprint and leverage the resurgence in Exurban migration.  Strategically located, this next generation FOC could prove more disruptive than Amazon’s incursion as it sets out to redefine trade areas by leveraging existing highly productive formats of the developer that would penetrate not saturate by establishing new shopping destinations redirecting traffic within the region while ultimately resetting asset values.  In the 2014 update on the FOC sector, MAXIM looks at the format’s suburbanization through the strategies of retailers on the Global 400 Retail Watch List expanding into the value channel as well as those downsizing and developers, in particular, the premium outlet portfolio of Simon Property Group, America’s quintessential suburban developer and landlord who built the Great Mall complex in the 20th C only to circle back to fortify its share of fashion retailing with strategically-located value outlets integral to the 21st C shopping landscape, providing greater convenience in formats relatively smaller than its behemoth 2.0 million square foot Mills projects. To provide greater context, MAXIM addresses what’s changed in the FOC space since its 2010 update and implications for project and leasing risk as well as asset values not just factory outlet centers but marginal malls and strips within the region.  MAXIM also challenges much of the conventional wisdom being spewed by the analyst community and media that distorts the risks and deflects the opportunities. 

Metrics: Ratings of tenant mix and locations pf 67 Simon Property Outlets