THE DOMINOS HAVE STARTED TO FALL

Implications: Bay Harbour Management and York Capital Management, who acquired the 276 store Steve & Barry's operation presumably to take advantage of their "below market leases" and to show both Steve and Barry, the two young former owners, that they knew more about how to turn their company around than they did. They have now announced the closing of 103 unprofitable stores and the intent to operate the remaining stores. It is interesting to note that not one of the 103 stores were able to be subleased at "market rates" giving Bay Harbour and York a profit on the difference between market and below market rents. ----So much for the myth of intrinsic value in "below market leases". Even more important to GLG readers is the likely repercussions of wht these closings will do to the REIT industry.

Analysis:

As previously reported by this writer, Steve & Barry's are located almost entirely in "troubled" "B" & "C" level malls. It should come as no surprise then that after the initial multimillion dollar subsidy was used up in covering the startup losses, many of the hastily opened stores were in the red.

Much has been written about the Steve & Barry's story and now that they are in the hands of financial "geniuses" we can expect the same operating results that Eddie Lampert has been able to bring to SHLD. However, that is not the purpose of this analysis.

The real purpose is to wave a big red flag for the benefit of GLG News readers to pay attention to the repercussions this latest closing of anchor stores will have on the FFO of the owning REITs.  Each time an anchor store closes and is not replaced, the entire mall suffers. In particular the "Wing" that is dependent upon the anchor for generating traffic, is immediately impacted. 

If the mall has 3 anchors, 1/3rd of the entire rental income is at risk! It is my firm opinion that with the closing of 103 anchor stores,( and the likely closing of many more soon to follow---because I do not think Steve & Barry's will survive for very long under their new ownership) the impact on the owning REIT's 4Q results will be dramatic.

If anyone wants to know the shortcuts to understanding which REITs will be impacted, give me a caLL.