Circuit City bankruptcy roils U.S. property investors

NEW YORK (Reuters) - U.S. shopping center and mall property owners took a thumping on Monday as investors feared Circuit City Stores Inc's CC.N bankruptcy filing would usher in more failures and take property owners down with them.

“What a lot of landlords should be worried about is if these guys do not succeed, they’re going to have a lot of vacant space, so the best alternative for them is to consider a renegotiation where Circuit City would get better leases,” Frank Conrad, a retired bankruptcy judge who is now a partner in the restructuring group at Weiser LLP in New York.

Fears that the drastic cutback by U.S. consumers will drive more stores out of business sent the benchmark MSCI U.S. REIT Index .RMZ down 9.3 percent. The Dow Jones industrial average .DJI fell less than 1 percent.

“I am at the point where I’m lost as to what sort of statement the market is making,” said RBC Capital Markets analyst Rich Moore, noting that Circuit City’s bankruptcy wasn’t a surprise to many investors.

Circuit City, the No. 2 U.S. consumer electronics retailer, arranged $1.1 billion of debtor-in-possession financing from existing lenders led by Bank of America that will allow it to continue operating under bankruptcy. But it requires the retailer to bring that down to $900 million by December 29 and use proceeds from its holiday sales to repay other loans outstanding prior to the filing.

“They’re giving them enough liquidity to carry them through the retail season, and it remains to be seen if they will get through the next year,” Conrad said.

Shares of Developers Diversified Realty Corp DDR.N, which has 50 Circuit City stores in its 720 shopping centers, saw its stock slide 24.6 percent to $61.01 on the New York Stock Exchange. The Cleveland, Ohio-based company derives about 1.7 percent of its annual revenue from Richmond, Virginia-based Circuit City.

“They are taking the stock down 25 percent because they have exposure to 1.7 percent,” Moore said. “If they have four tenants each with only 1.7 percent of base rent (investors) would take the stock to zero.”

Kimco Realty Corp KIM.N, which has 19 Circuit City store tenants in its more than 1,900 properties, saw its shares lose 9.6 percent. Shares of Simon Property Group Inc SPG.N, the largest U.S. mall operator, fell 10.2 percent. It has 17 Circuit City stores in its malls and outlet centers, according to a U.S. Securities and Exchange Commission filing at the end of last year.

“Traffic is down in malls throughout the United States and as a result, the landlords, depending upon how leveraged they are, may have to file bankruptcy themselves,” Conrad said.

Before Circuit City sought Chapter 11 bankruptcy protection, retailers announced about 6,000 store closings so far this year. Under bankruptcy protection a retailer can break a lease with court consent; otherwise, rent is still due on a closed store.


Many landlords may not be free to renegotiate leases because of constraints under their own covenants with lenders. The process is even more complicated because many of the mortgages obtained within the past three years have been sold off and are part of a pool of mortgages supporting commercial mortgage-backed securities (CMBS).

Borrowers are not able to ask the original lender to allow them to change the terms of a lease because the original lender no longer holds the mortgage.

Instead, borrowers must deal with another layer of decision makers: a master servicer or asset manager who oversees the pool on behalf of bond investors and special servicers who handle problem loans.

“It’s not like they were dealing with a bank that they had done 10 to 20 different transactions with, and they go back and say, ‘Look, I don’t want to default on my loan,’” Frank Innaurato, managing director of analytical services for credit-ratings agency Realpoint LLC, said.

“There are more T’s to cross and I’s to dot,” he said. “It is more complicated. The special servicer would do this if it’s in best interest at the trust.”

CMBS delinquencies remained low at 0.45 percent last month, according to Fitch Ratings. Retailers accounted for 17.7 percent of delinquent loans in September.

Realpoint said 278 Circuit City properties secure 281 CMBS loans with more than a $4 billion left on the property loan balance, across 181 CMBS transactions.

Reporting by Ilaina Jonas, editing by Richard Chang