Keeping pace with disruption: retail and real estate in the digital age June 19, 2018 Presented by: S&P Global Market Intelligence
Keeping pace with disruption: retail and real estate in the digital age
June 19, 2018
Presented by:
S&P Global Market Intelligence
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Today’s Speakers
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approval of S&P Global Market Intelligence. Not for distribution to the public.2
Alyssa Le-Sayone
Director, Consumer/Retail
S&P Global Market
Intelligence
John Collins
Co-Founder, Chief
Product Officer
Thasos Group
James Elder
Director, Risk Services
S&P Global Market
Intelligence
Ana Lai, CFA
Senior Director
S&P Global Ratings
Robert Schulz, CFA
Managing Director
S&P Global Ratings
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The Current State of the Retail Industry
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Our View of the U.S. Retail Landscape
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Macro
• Consumer remains very value focused since the financial crisis
• Wage growth has been limited – that’s changing?
• Share of wallet battle: Retail competing with autos, rent, healthcare, tech, “experiences”
Industry
• Risks and opportunities of shifting preferences.
• E-Commerce disintermediation (Wholesalers go direct); Millennials; Activists/Financial policies; International competitors with far better supply chains
• Severe pressure in apparel continues.
• Many other sectors “merely” challenged.
• Discounters good to go!
Ratings
• Past the tipping point, but not at the bottom…
• 75 downgrades in 2017. Negative Outlooks: 36% Negative
• ~17% of ratings are CCC+ or lower.
• Eleven defaults in 2017, six in 2016, and three in 2015
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Retail downgrades: Over 100 downgrades since Jan. 2017
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Month Company Sub-Sector Downgraded To Month Company Sub-Sector Downgraded To
February Payless Inc. Apparel CCC/Negative October CEC Entertainment Non-Apparel B-/Negative
February Charlotte Russe Inc. Apparel CCC+/Negative October Sears Holdings Corp. Dept. Stores CCC/Negative
February TGI Fridays Inc. Restaurants B/Stable November Starbucks Corp. Restaurants A-/Stable
February Neiman Marcus Group Inc. Dept. Store CCC+/Negative November 99 Cents Only Stores Discounter SD
February Charming Charlie LLC Apparel CCC+/Negative November GNC Holdings, Inc. Non-Apparel B/Negative
February Evergreen AcqCo1 LP d/b/a Savers Discounter CCC+/Negative November Carrols Restaurant Group, Inc. Restaurants B-/Stable
February Bluestem Brands Inc. Non-Apparel B/Negative November Evergreen AcqCo1 LP d/b/a Savers Discounter CCC/Negative
February Rent-A-Center Inc. Non-Apparel B-/CW Negative November SAL Acquisition Corp. Grocery B-/Stable
February Macy's Inc. Dept. Store BBB-/Negative November Bon-Ton Stores Inc. Dept. Store CCC/Negative
March GNC Holdings Non-Apparel BB-/Negative November Guitar Center Holdings Inc. Non-Apparel CCC-/Negative
March Everest Holdings LLC Apparel CCC+/Negative December Dillard’s Inc. Dept. Store BB+/Stable
March BI-LO LLC Grocery CCC+/Negative December GNC Holdings, Inc. Non-Apparel CCC+/CW Negative
March David's Bridal Inc. Apparel CCC+/Negative December Charming Charlie Apparel D
April Payless Inc. Apparel D December HT Intermediate Holdings Corp. Apparel CCC/Negative
April Smart & Final Stores Inc. Grocery B/Stable December Charlotte Russe, Inc. Apparel CC/Negative
April Rue 21 Inc. Apparel CC/Negative December The Bon-Ton Stores, Inc. Apparel SD
April Ruby Tuesday Inc. Restaurants CCC+/Negative December PetSmart, Inc. Non-Apparel CCC+/Negative
May Guitar Center Holdings, Inc. Non-Apparel CCC+/Negative December BKH Acquisition Corp. Restaurants CCC-/Negative
May Rue 21 Inc. Apparel D December GNC Holdings, Inc. Non-Apparel CC/CW Negative
May Tops Holding LLC Grocery CCC+/Negative December GNC Holdings, Inc. Non-Apparel SD
May FullBeauty Brands Holdings Corp Non-Apparel CCC+/Negative January Petco Holdings Inc. Non-Apparel B-/Negative
May Fresh Market Inc. Grocery B-/Negative January David's Bridal Inc. Apparel CCC/Negative
May SSH Holdings d/b/a Spencer Spirit Non-Apparel B-/Negative January Sear's Holding Corp. Dept. Store CCC-/Negative
June The Gymboree Corp. Apparel D January Tops Holding LLC Grocery CCC/Negative
June J. Crew Group Apparel CC/Negative January Sear's Holding Corp. Dept.Store CC/Negative
June Neiman Marcus Group Apparel CCC/Negative January Steak N Shake Inc. Restaurant CCC+/Negative
July True Religion Apparel Inc. Apparel D January Albertson's Cos. LLC Grocery B/Stable
July Bluestem Brands Inc. Non-Apparel CCC+/Negative February Charlotte Russe Inc. Apparel SD
July J. Crew Group Apparel SD February The Bon-Ton Stores Inc. Dept. Store D
August SSH Holdings d/b/a Spencer Spirit Non-Apparel CCC+/Negative February Payless Inc. Apparel CCC/Negative
August Tops Holding II Corp. Grocery CC/Negative February Tops Holding LLC Grocery D
August Staples Inc. Non-Apparel B+/Stable March CVS Health Corp. C-Store BBB/Stable
August CNT Holdings III Corp. Non-Apparel B-/Stable March Guitar Center Holdings Non-Apparel CC/Negative
August Tops Holding LLC Grocery SD March Ascena Retail Group Inc. Apparel B/Negative
September Toys “R” Us Inc. Non-Apparel CCC+/CW Negative March Claire's Stores Inc. Apparel D
September New Academy Holding Co. Limited Non-Apparel CCC+/Negative March Rent-A-Center Inc. Non-Apparel CCC+/Negative
September BI-LO LLC Grocery CCC-/Negative March PF Chang's China Bistro Inc. Restaurant CCC+/Negative
September Toys “R” Us Inc. Non-Apparel CCC-/CW Negative March BI-LO Holding Finance LLC Grocery CC/Negative
September PetSmart Inc. Non-Apparel B/Negative March Signet Jewelers Ltd. Non-Apparel BB+/Negative
September Belk Inc. Dept. Store B-/Stable March Sears Holding Corp. Dept. Store SD
September Toys “R” Us Inc. Non-Apparel D March BI-LO Holding Finance LLC Non-Apparel D
September Charlotte Russe Inc. Apparel CCC-/Negative April Petco Holdings Inc. Non-Apparel CCC+/Negative
September GNC Holdings, Inc. Non-Apparel B+/Negative April Guitar Center Inc. Non-Apparel SD
September HT Intermediate Holdings Corp Apparel B-/Negative April Bed Bath and Beyond Non-Apparel BBB-/Negative
September Ascena Retail Group, Inc. Apparel B+/Negative May FullBeauty Brands Holdings Corp. Non-Apparel CCC-/Negative
September Fresh Market Inc. Grocery CCC-/Negative May O’Reilly Automotive, Inc. Non-Apparel BBB/Stable
September 99 Cents Only Stores Discounter CC/Negative May Sally Beauty Holdings, Inc. Non-Apparel BB-/Negative
October Bed Bath & Beyond Inc. Non-Apparel BBB/Negative May Pier 1 Imports, Inc. Non-Apparel B-/Negative
October Charming Charlie Apparel CCC/Negative May J.C. Penney Co. Inc. Dept. Store B/Negative
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Issuers CC+ to CC
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7.3% 5.6% 4.7% 2.9% 4.4% 2.6% 5.6% 6.8% 17.0% 17.2%
New Academy
Holding Co.
LLC
HT
Intermediate
Holding Corp.
The Neiman
Marcus Group
LLC
Petco
Holdings,
Inc.
The Fresh
Market, Inc..
Guitar Center
Holdings Inc. J. Crew Group
Inc.
Charlotte
Russe Inc.
Barneys
New York
Inc.
99 Cents
Only Stores
Neiman
MarcusPetSmart Inc.
SSH
Holdings.
Brookstone
Inc.
Bon-Ton
Stores Inc.
99 Cents
Only StoresBI-LO LLC
Ruby
Tuesday Inc.Payless Inc.
FULLBEAUTY
Brands
Holdings Corp.
Harry & David
Operations
Corp.
Barneys
New York
Inc.
Claire's
Stores Inc.
Bon-Ton
Stores Inc.
BKH
Acquisition
Corp.
J. Crew
Group Inc. P.F. Chang’s
China Bistro
Evergreen
AcqCo1 LP
d/b/a/ Savers
Loehmann's
Holdings
Inc.
El Pollo
Loco Inc.
Barneys New
York Inc.
BCBG Max
Azria Group
Inc.
Fairway Group
Holdings Corp.
Claire's
Stores Inc.
Charlotte
Russe Inc.
FULLBEAUTY
Brands
Holdings Inc.
99 cents only
stores LLC
Bluestem
Brands Inc.
Mastro's
Restaurants
LLC
Harry & David
Operations
Corp.
Buffets Inc.Radioshack
Corp.
Guitar Center
Holdings
Inc.
Gymboree
Corp.
Gymboree
Corp.
Petsmart,
Inc.
Tops
Holdings
LLC
Rent-A-Center
Inc.
HT
Intermediate
Holdings Corp.
Oriental
Trading
Co. Inc.
Keystone
Automotive
Operations Inc.
Caribbean
Restaurants
LLC
BCBG Max
Azria Group
Inc.
New
Albertson's
Inc.
Gymboree
Corp.
Logan's
Roadhouse
Inc.
J. Crew
Group Inc.
Claire's
Stores Inc.
Sears
Holdings
Corp.
David’s Bridal
Inc.
New Academy
Holding Co.
LLC
Perkins &
Marie
Callender's Inc.
Mastro's
Restaurants
LLC
DirectBuy
Holdings Inc.
Jill Holdings
LLC
Sbarro
LLC
Penney
(J.C.)
Co. Inc.
Penney
(J.C.)
Co. Inc.
Rue 21
Inc.
David's
Bridal Inc.
Steak ‘n
Shake Inc. Guitar Center
Holdings Inc.
Everest
Holdings LLC
Sagittarius
Restaurants
LLC
Perkins &
Marie
Callender's Inc.
Jill Holdings
LLC
Orchard Supply
Hardware
LLC
Sears
Holdings
Corp
RadioShack
Corp.
Sears
Holdings
Corp.
Sears
Holdings
Corp.
Everest
Holdings LLC
d/b/a Eddie
Bauer
Bluestem
Brands
Inc.
GNC Holdings
Inc.
BKH
Acquisition
Corp.
Sbarro Inc. Sbarro Inc.
Mastro's
Restaurants
LLC
Sears
Holdings
Corp.
The Great
Atlantic &
Pacific Tea Co.
Inc.
Sears
Holdings
Corp.
True Religion
Apparel, Inc.
True
Religion
Apparel, Inc.
Evergreen
AcqCo1 LP
d/b/a Savers
SSH
Holdings
Steak n
Shake Inc.
The Fresh
Market
Sears
Holdings
Corp.
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
9 Issuers 7 Issuers 6 Issuers 5 Issuers 6 Issuers 4 Issuers 8 Issuers 8 Issuers 22 Issuers 23 Issuers
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Retail and Restaurant Default HistoryGNC
Holdings, Inc.
The Bon-Ton
Stores, Inc.
Charming
Charlie LLC
99 Cents
Only Stores
Toys “R” Us
Inc.
BI-LO
LLC
Loehmann’s
Holdings
Co.
Fairway
Group
Holdings
Corp.
Tops
Holding
II Corp.
Guitar Center
Inc.
BCBG
Max Azria
Blockbuster
Inc.
Claire’s
Stores Inc.
J. Crew
GroupBI-LO LLC
Finlay Fine
Jewelry
Corp.
Eddie
Bauer
Oriental
Trading
Co. Inc.
Claire’s
Stores Inc.
True Religion
Apparel Inc.
Sears
Holdings
Corp.
Buffets
Holdings
Inc.
Finlay Fine
Jewelry
Corp.
The Great
Atlantic and
Pacific Tea Co.
Inc.
Harry &
David
Operations
Corp.
The Great
Atlantic &
Pacific Tea
Co. Inc.
The
Gymboree
Corp.
The
Gymboree
Corp.
Tops Holding
LLC
Mrs. Fields
Famous
Brands
Pier 1
Imports Inc.
Sagittarius
Restaurants
LLC
Perkins
& Marie
Callender's
Inc.
Barneys
New
York Inc.
Orchard
Supply
Hardware
LLC
Guitar
Center
Holdings
Inc.
RadioShack
Corp.
Sports
Authority
Rue 21
Inc.
Charlotte
Russe Inc.
Movie
Gallery
Vicorp
Restaurant's
Inc.
Duane
Reade
Uno
Restaurant
Holdings
Co.
Sbarro Inc. Buffets Inc.
Mastro’s
Restaurants
LLC
Sbarro LLC
Logan’s
Roadhouse
Inc.
Logan’s
Roadhouse
Inc.
Payless
Inc.
The
Bon-Ton
Stores Inc.
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
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Credit Spectrum
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Credit Ratings
Financial and Qualitative
Factors
Complete Global and
Sector Coverage
CreditModel
Quantitative: Calibrated on
Ratings
Private and Public
Corporates and FI’s
PD Model Fundamentals
Quantitative: Calibrated on
Defaults
Private and Public
Corporates and Banks
PD Model Market Signals
Quantitative: Based on
Stock Price Volatility
Public Companies
Increased Stability Early Warning
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Unrated Companies are Typically Riskier…
9
Source: S&P Capital IQ Platform, as of June 4, 2018.Credit quality of unrated firms (“Credit Score”) is determined by converting PD Fundamental One-Year Probability of Default to historical default rates of rated companies. Chart depicts 50,000 companies within the Retailing Industry. S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence PD credit model scores from the credit ratings issued by S&P Global Ratings.
Distributions of Credit Quality in the Retail Industry, by Company Type
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0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Rated Unrated
% o
f C
om
pa
nie
s
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Fundamental Risk Escalating
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Source: S&P Global Market Intelligence as of June 15, 2018.CQ = Calendar Quarter S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence PD credit model scores from the credit ratings issued by S&P Global Ratings.
Average One-Year Fundamental Probability of Default
CQ12016 CQ22016 CQ32016 CQ42016 CQ12017 CQ22017 CQ32017 CQ42017
Average
Credit Score
CQ42017
U.S. - Apparel Retail 7.47% 9.14% 8.92% 7.02% 7.22% 9.54% 13.95% 14.52% ccc+
U.S. - Specialty Stores 6.49% 6.30% 6.87% 6.27% 6.20% 5.84% 12.85% 14.11% ccc+
U.S. - General Merchandise Stores 6.79% 5.20% 5.48% 6.30% 6.20% 2.70% 12.11% 13.34% ccc+
U.S. - Department Stores 5.53% 6.23% 5.77% 5.77% 6.32% 5.43% 5.23% 11.00% ccc+
U.S. - Computer & Electronics Retail 7.98% 8.50% 5.89% 6.00% 5.86% 5.58% 10.15% 10.67% ccc+
U.S. - Internet & Direct Marketing Retail 7.28% 7.29% 7.26% 7.18% 7.88% 7.69% 10.10% 10.44% ccc+
U.S. - Distributors 6.62% 6.61% 6.47% 6.24% 6.19% 5.78% 7.16% 7.66% b-
U.S. - Automotive Retail 6.64% 6.82% 6.67% 6.60% 6.35% 6.17% 6.67% 7.65% b-
U.S. - Homefurnishing Retail 4.98% 4.83% 4.87% 4.48% 4.63% 5.93% 7.39% 6.98% b-
U.S. - Home Improvement Retail 4.83% 4.75% 4.58% 4.45% 4.58% 3.67% 3.67% 3.87% b
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Riskiest Public Unrated Apparel Retailers & Department Stores
Company (ticker-exchange) Retail focus 1-year PD (%) Implied credit score
Destination Maternity Corp. (DEST) Apparel retail (primary) 10.23 ccc+
Destination XL Group Inc. (DXLG) Apparel retail (primary) 8.98 ccc+
Christopher & Banks Corp. (CBK) Apparel retail (primary) 8.03 b-
Vince Holding Corp. (VNCE)
Apparel, accessories and luxury goods
(primary); apparel retail 7.91 b-
Stein Mart Inc. (SMRT) Apparel retail (primary) 7.88 b-
Stage Stores Inc. (SSI) Apparel retail (primary); department stores 4.72 b
New York & Co. Inc. (NWY) Apparel retail (primary) 3.83 b
DGSE Cos. Inc. (DGSE) Apparel retail (primary) 3.46 b
Differential Brands Group Inc. (DFBG)
Apparel, accessories and luxury goods
(primary); apparel retail 3.38 b
Delta Apparel Inc. (AMEX:DLA)
Apparel, Accessories and Luxury Goods
(primary) 1.76 bb-
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PD Model Fundamentals
Data compiled June 11, 2018.Includes currently operating S&P Capital IQ-covered publicly traded U.S. companies with a primary industry classification of apparel retail, department stores, or textiles, apparel and luxury goods and a secondary industry classification of department stores or apparel retail.Ranking based on 1-year fundamental probability of default with a score date of Jan. 1, 2017 or later. Implied credit score reflective of probability of default.
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Mall and Strip Center REITS - Sector Comments and Themes
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A21%
BBB72%
BB7%
Rating Distribution by Issuer
Negative 7%
Stable93%
Outlook Distribution by Issuer
• Retail REITs operating metrics are decelerating, sector facing secular shift in retailing with
ongoing store rationalization
• Strip-center fundamentals remain stable as low supply has kept markets in balance, however,
future shadow supply could tip the scale
• High quality mall fundamentals expected to hold up well against a more challenging retail
environment. Lower quality malls feeling more pressure
• Bankruptcies and widespread store closures remain headwinds. Leasing and occupancy
pressure more evident for weaker mall assets
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REITs Non-Stable Outlooks
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BBB+
• Realty Income Corp.
BBB
• Alexandria Real Estate Equities Inc.
• Digital Realty Trust Inc.
• HCP Inc.
BBB-
• SL Green Realty Corp.
BB
• CyrusOne Inc.
Positive
BBB+
• Tanger Factory Outlet Centers Inc.
BBB-
• Government Properties Income Trust
• Washington Prime Group Inc.
BB+
• CBL & Associates Properties Inc.
• Medical Properties Trust Inc.
BB
• Mack-Cali Realty Corp.
Negative
BBB
• DCT Industrial Trust Inc.
CCC
• Quality Care Properties, Inc.
Watch Pos.
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Market Disruptors
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Disruption – A key theme in 2018
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• Tech Disruption: U.S. Healthcare is “Prime” for Change by Amazon (and Others)
• Healthcare Disruption Update: Thinking About the Current Retail – Insurance – Healthcare
Mega Deals
• Tech Disruption: Amazon Drive (And Flies) into the Delivery Business – Not So Fast
• Disruption: U.S. Grocers Must Stay Fresh to Meet Customer Demands
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Key Takeaways: Grocery
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Spending on Food At Home vs. Away From Home
($1,572)
($2,072)
($5,680)
($11,063)
Target
Kroger
Costco
Wal-Mart
Select Grocers Market Capitalization Loss On Announcement
80%
85%
90%
95%
100%
105%
6/15/2017 6/22/2017 6/29/2017 7/7/2017 7/14/2017 7/21/2017 7/28/2017 8/4/2017
Combined Grocery Market Capitalization - Time to Recovery
Includes Wal-Mart, Costco, Kroger, and Target
Combined Grocery Market Capitalization SPX
AMZN’s Impact on Grocery – WFM Announcement
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Ecommerce – Most and Least Disrupted
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Highly
Disrupted
Already
Trend
Evident
Little Hint
of Shift
Everyday Low Price/Discounter Full Price/Full Service
Conventional
Grocery
Off-Price
Retailers
Dollar Store
Segment
Restaurants
Specialty
Grocery
Office
Supplies
Pet Stores
Specialty
Apparel
Home
Furnishing
Drug Stores
Home
Improvement
Department
Stores
Big Box
Discounter
Electronics
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Whole Foods Acquisition Impact On Market Perceived Credit Risk
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Source: S&P Global Market Intelligence as of June 26, 2017.
0%
1%
2%
3%
4%
5%
6%
6/15/2017 6/16/2017 6/17/2017 6/18/2017 6/19/2017 6/20/2017 6/21/2017 6/22/2017 6/23/2017
Pro
babili
ty o
f D
efa
ult
U.S. + Food Retail Median Probability of Default
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Whole Foods Acquisition Had The Strongest Impact On The Industry
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Source: S&P Global Market Intelligence, 'Death by Amazon': Should You Believe the Hype? as published on May 23, 2018
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Resiliency of REIT Ratings
• A well-diversified tenant base
• A concentration of high-quality assets. Locations in desirable and affluent markets can be repositioned or repurposed to attract a diverse mix of tenants;
• REITs’ supporting their tenants’ multi-channel distribution strategies. For specialty retailers, space attracting high traffic in city centers has become an essential platform to advertise and display products
• Active management of asset portfolio. The “non-recourse” nature of secured property-level debt gives REITs the ability to walk away from underperforming assets and hand these properties to lenders.
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Mall and Strip Center REITs
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-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
88%
89%
90%
91%
92%
93%
94%
95%
96%
97%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
SS NOIOccupancy Historical Occupancy and SS NOI
Mall - Occupancy Strip Center- Occupancy Mall - SS NOI Strip Center - SS NOI
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YoY Change in Customer Visitation at Whole Foods
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New and Regular Customers at Whole Foods
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New Customer Attribution
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Net Defection
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Whole Foods Quarterly Store Traffic
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https://www.wsj.com/articles/a-year-after-amazon-devoured-whole-foods-rivals-
are-cooking-up-countermoves-1528628400
• Whole Foods store traffic is currently
up approximately 3% year over year
after 8 consecutive quarters of
negative growth.
• Thasos data as reported by the Wall
Street Journal
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Foot traffic, the rise of e-commerce, and decline of malls
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Mall and Strip Center REITs
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-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
88%
89%
90%
91%
92%
93%
94%
95%
96%
97%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
SS NOIOccupancy Historical Occupancy and SS NOI
Mall - Occupancy Strip Center- Occupancy Mall - SS NOI Strip Center - SS NOI
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Disruption in Retail Weigh on Malls
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• We expect continued headwinds of e-commerce, bankruptcies, and store
rationalization, to exert some pressure on occupancy in 2018, and rent growth could
feel some pressure.
• Retail REITs operating metrics are decelerating, sector facing secular shift in retailing
with ongoing store rationalization
• Across the globe, there is a big disparity in retail real estate per capita. The U.S. is
"overstored", while other regions are expanding or enhancing their physical footprints.
• Excess capacity, shifting consumer preferences and accelerating growth of e-
commerce is pressuring US retailers more than other regions resulting in record
downgrades and defaults.
• REIT landlords ratings have been more resilient as they have been actively
redeveloping their assets to lure new retail tenants to malls to drive foot traffic. But
negative rating bias growing for US mall REITs holding weaker assets
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YoY Change in Visitation Across Mall Types
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YoY Change in Visitation at CBL, GGP, and SPG
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Analysis of Individual Properties for CBL and GGP
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Q&A
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approval of S&P Global Market Intelligence. Not for distribution to the public. 33
Alyssa Le-Sayone
Director
S&P Global Market
Intelligence
John Collins
Co-Founder, Chief
Product Officer
Thasos Group
James Elder
Director, Risk Services
S&P Global Market
Intelligence
Robert Schulz, CFA
Managing Director
S&P Global Ratings
Ana Lai, CFA
Senior Director
S&P Global Ratings
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Thank you!
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