Predicting death of the mall, one at a time
BACK in February, J.C. Penney said it planned to close down about 140 struggling stores. That might be just the beginning.
Analysts at System2 LLC, a big- data startup, have identified another 197 stores at risk. The outlets – Omaha, Nebraska – have a more than 64 per cent likelihood of closing.
How does System2 know? Its computers say so. Founder Matei Zatreanu threw aside a hedge fund career to test a simple theory: That crunching mobile phone pings, demographic information, credit- card bills and other unconventional data yields a better way to invest in real estate and other areas.
Using algorithms and machine learning, the company says it can determine which stores have a future and which ones will die – and do it more accurately than investors that rely on conventional information. So far, it’s only studied J.C. Penney Co., because its plans to shutter stores have been in the news, but it’s ready to look at more retailers, Zatreanu said.
“There’s new data that’s out there,” he said. “But then what we try to focus on is how do we use this data in a smarter way.” Zatreanu last year left King Street Capital Management, which oversaw US$ 19 billion ( RM85 billion) as of January.
Daphne Avila, a spokeswoman for Plano, Texas-based J.C. Penney, declined to comment, citing a policy against commenting on market or industry speculation.
System2 is trying to sell commercial-mortgage bond investors on a kind of analysis that is foreign to many of them: Scrutinising every single retailer tied to mortgages in their securities, and figuring out how each company’s fortunes tie into the health of a mall or mallbacked bonds. The edge that big data and artificial intelligence have given to money managers in equities may help commercialmortgage bond investors too, according to Zatreanu.
Looking closely at individual loans backing a bond is more common among residential mortgage- security buyers. For commercial mortgages, less data has traditionally been available, and there can be more variables in any transaction because of the wide range of tenants and customers for the property, making forecasting much more difficult.
“There are so many idiosyncratic type events in CMBS securities,” said Kin Lee, a money manager at Angel Oak Capital Advisors. “I don’t think there’s a good way to necessarily model that out,” he said.
David Tawil, president and co-founder of Maglan Capital, a hedge fund that invests in distressed companies, said more sophisticated information can be a helpful tool for money managers.
“Big data will help us either weed out a bunch of potential investments down to a very select few that we’ll then do research or, to the extent that we found one that we’re very interested in and have a very solid thesis on, it will help us either confirm or debunk the thesis,” Tawil said. He hasn’t looked at System2’s offering.
Traders have already bet a fortune on whether bricks- andmortar retailers can survive a stampede out of their stores and toward online shopping. J.C. Penney’s stock is trading near an all-time low and wagers against it climbed to 40 per cent of shares outstanding in August, Markit data show. Meanwhile short positions on some of the riskiest slices of commercial mortgage-backed securities rose to more than US$ 5 billion earlier this year.
About US$ 760 million of mall loans that support these bonds have entered a form of default or near default known as special servicing since March, according to Wells Fargo research. Real estate investment trusts are also in the line of fire, with more than 20 per cent of space in malls run by CBL & Associates Properties and Washington Prime Group exposed to distressed or shrinking retailers, according to a Moody’s Investors Service report.
“It really does boil down to location, location, location,” said Gary Greenberg, a money manager at Payden & Rygel. “You want to avoid the tertiary mall or the mall that’s the weaker mall within an area that’s still struggling economically.”
Zatreanu by his own admission isn’t reinventing the wheel; instead his team looks at the kinds of metrics that owners of J.C. Penney stock or the CBL REIT would consider to compile their list of the walking dead. — WP-Bloomberg
Analysts at System2 LLC, a big-data startup, have identified another 197 stores at risk. The outlets – Omaha, Nebraska – have a more than 64 per cent likelihood of closing.