The Big (Mall) Short Pt. 3: 2017
TL;DR:

• Apollo Global Management had some CMBS exposure back in 2017. Apollo Global later bought Yahoo Finance, had former SEC chair (GG's current job) Jay Clayton join them, and tried to buy GME in 2019.
• Ex-Sears & Kmart CEO Eddie Lampert sold off ~230 Sears & Kmart properties to Seritage Growth Properties, who jacked up the rents to new tenants. Some of these jacked-up properties were later bundled into CMBS bundles with Chase.
• In CMBS loanspeak, Walmart is often a part of what's called a "Walmart Shadow Anchored Portfolio", a mall that has Walmart as its biggest retail store with little retail stores all around it. Walmart is called an "anchor store".
• When "anchor stores" fail--like Macy's, Sears, Dillard's, etc.--then all the retail stores around usually are at higher risk of failing. This affects the CMBS bundles with loans for all those retail stores.

Read Pt. 1: RC’s Tweet, TUEM v. TUES, & 92 Dayshttps://www.reddit.com/Superstonk/comments/s5o8ok/the_tuesday_morning_rabbit_hole_revisiting_the/
Read Pt. 2: On Shorting Commercial Real Estate and Jerica Capital Managementhttps://www.reddit.com/Superstonk/comments/s6ff2the_tuesday_morning_rabbit_hole_revisiting_the/
Read Pt. 3: 2017https://www.reddit.com/Superstonk/comments/s7h25l/the_tuesday_morning_rabbit_hole_revisiting_the/
Note: Be forewarned this is my least technical of the DD series, and one I try to fancy up a bit with creative writing-y stuff. A good part of it is to also set the scene for Pt. 4: Pick Your Teams.
Table of Contents

1. Retail in 2017
2. Sears & Seritage Growth Properties
3. Anchor Stores and Dead Malls

In Pt. 2, we mentioned that 2017 was when many of those who had wanted to short malls, like Jerica--who was later caught in a "mall" short squeeze or CMBS short squeeze by Chase--, were revving up their bets at the table.
If you recall from Pt. 2, CMBS--or commercial mortgage backed securities--are a grab bag of loans to different offices, retail stores, and commercial real estate that you can buy or sell, or bet whether the price of all those leases will be paid off as those spaces do business. They’re often tied in with signed leases to these spots. If many of those offices, retail stores, and commercial real estate spots fail, welp then they can’t pay their lease and the entire grab bag (CMBS) might go down. These leases can be made to offices or factories, but they can also be made to retail stores like Tuesday Morning or GameStop.
We also learned before that these loans can be bundled into bigger bundles (think the Jenga towers from "The Big Short") and can be bought, sold, cut up, or even be bet for or bet against (short). We've been looking at CMBX, which bundles many CMBS loans together. (For example, CMBX.6 contains GameStop, and was shorted against by some.)
Before we move forward in time, let’s add to what the retail sector looked like around then in what may have been the most important year leading up to the “Bigger Short” on malls & retail stores like GameStop.

1. Retail in 2017

Around 2017, one of the biggest retail company fears was the rise of online shopping, even among clothing retailers (where you normally pretty much need to shop in person, try things on, etc.). Fitch had one specific stress test scenario it shouted a shit ton back then: a sped-up or accelerated 3-year shift in the clothing market where Amazon’s push into clothes could sink JCPenney’s, Dillards, and Kohl’s stock prices further. This would fan out and hit REITs (real estate investment trusts) and--you guessed it--CMBS loans hard:
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https://preview.redd.it/5yl6b7b0bkc81.png?width=2879&format=png&auto=webp&s=571156474dad85e7255a273f56e28ee38318e1ac

“This shock would likely fan out broadly across retail real estate…we estimate that as many as 400 of approximately 1,200 US malls could close or be repurposed as a result of retailer liquidations and square footage reductions. Widespread defaults…would have a significant impact on credit quality for Fitch-rated CMBS transactions. Given the accelerated timeframe of this retail shock scenario, special servicers would be forced to sell lower tier malls at significantly distressed values rather than undertaking normal stabilizing efforts. We estimate that significant negative ratings migration would occur for 92 of 145 Fitch-rated CMBS classes in 19 deals. These 19 deals have exposure to retail loans exceeding 50% of the current pool.”

Fitch warned nearly 1 in 3 malls could close, and if Amazon powered up at full strength then most malls could barely muster the pocket change to break even on their leases. Some retail critics then added that the US had 5 times the malls in the UK per 100K people (per capita), and 2x Australia’s, adding to the views of failing malls.
For the country at large, back then as now wages were being hurt bad (woo America!):
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https://preview.redd.it/xh618lhjbkc81.png?width=1266&format=png&auto=webp&s=7414445890b56b8b02c7a90e8c968b20627132a3
Rising inflation, rising interest rates, and even a time when “a quarter-point increase in the Fed funds rate will hit consumers with $1.6 billion in extra finance charges on their credit cards” meant retail (you + me = us) would get more and more fucked, and have less and less to spend with retail even if we wanted.
In 2017, around the time that Jerica signed on to short malls with Chase, IHS Markit, who owns the CBMX loan bundles, said that as XRT dropped from poor retail performance, spreads were widening (potentially more money to be made on shorts) especially in BB- (dogshit rated) loans. CLOs with exposure to now-zombie stock Sears hurt hedge funds like Apollo Global Management worst with 30% exposure:
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https://preview.redd.it/qroopf3rbkc81.png?width=1218&format=png&auto=webp&s=33e9640d4b6587340906442a8c8955b832d6e1c9
In case, Apollo Global Management doesn’t ring a bell, these posts might help:
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https://preview.redd.it/q1lpvxiojkc81.png?width=1734&format=png&auto=webp&s=89305d032ac093427ae3ce36189a00bcd09b3745
Yes, that’s right. Apollo Global, the very same who bought out Yahoo Finance (“NFT marketplace = DoA + al Qaeda!”), where the person who held Gary Gensler’s job before–former SEC Chair Jay Clayton-–moved to to get a cushy job, with ragged cumtaint Leon Black at the helm, all while driving coal mining companies into the ground and bankruptcy while they suppress worker wages? Ah yes, that Apollo.
And oh wait, most importantly…they also tried to buy GME back in 2019, potentially bidding for the firm back in Feb. 2019 alongside Sycamore Partners for a private buyout.
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Apollo Global Management & Sycamore Partners. 2019.
So Apollo, at the very least, who we know was trying to buy GME back in 2019 also had an early hand being caught in the mousetrap that was exposure to CMBS loans (specifically Sears) starting to falter back in 2017. (And in case, you’re wondering if Apollo Global Management will come up again in this CMBS saga, spoiler alert: they do.)
That same 2017, analyst Crystal Kim mentioned how despite Macy’s & JCPenny’s being small slice of XRT (2% then), commercial real estate loans in CMBS packages weren't hurt too much.
But by then, Bloomberg was already shouting about Wall Street’s “Next Big Short”:
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“Cracks have started to appear. Prices on the BBB- (dogturd) pool of CMBS have slumped from roughly 96 cents on the dollar in late January to 87.08 cents last week, index data compiled by Markit show…Many of the malls are anchored by the same struggling tenants, like Sears, J.C. Penney and Macy’s (all either zombie stocks or meme stocks now), and large-scale closures could be ‘disastrous’ for the mortgage-backed securities. In the worst-case scenario, the BBB- tranche could incur losses of as much as 50 percent, while the BB portion might lose 70 percent.”

For ETFs that tracked retail, like XRT, it skewed clothing store heavy for a good amount of the years (22% of XRT's weight then).
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Despite all this, I couldn't find many direct links between XRT and CMBX or CMBS loans apart from one unruly SeekingAlpha (SA) blogger called “Heisenberg” playing up the potential short in April 2017:

"For instance, [BoFA] recently (and this is a quote from a note out this week) "chalked up the [61,000 retail jobs that were lost over February and March] to a slowdown in consumer activity on weak demand for seasonal goods...According to Bank of America aggregated credit and debit card data, we see considerable weakness in card spending in department stores "
Look at this chart which compares CMBX 6 tranches (BBB- has been the short du jour) spreads to spreads on corporate credit retail names:

https://preview.redd.it/w9ee2pdmhkc81.png?width=530&format=png&auto=webp&s=92deb9dae9b6325988c984e8f12686cb0cd873ce

Or, you can short CMBX 7 BBB- which, as you can see below, is probably trading far to tight versus CMBX 6 BBB-...

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He later ended up saying that the 6 trade was old news and if you reallyyyyy wanted to get early you short CMBX.7 instead (if you even could). But since most retail investors couldn’t (remember the whole needing a Bloomberg terminal to even find CMBX?), well…
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Again, if you're in anything that's tied to brick and mortar (XRT), you need to get out, and get out now. Because as you can see, the writing on the wall couldn't possibly be any clearer.
It is over for brick and mortar. Game. Set. Match.
I don't care how you trade it - pile into the CMBX 6 short, be the guy who shorts CMBX 7 while the getting is good, buy protection on the underlying individual names, buy puts, short the physical retailers. Whatever.
Just don't be the guy/gal who looks up five years from now and wonders what happened!

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Speaking of XRT, I also haven’t been able just yet to factor in XRT’s short interest into my research fully, especially from around 2017, as seen in posts like these (credit to u/fastpath7):
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https://preview.redd.it/a7rg53x1hkc81.png?width=668&format=png&auto=webp&s=4d34eaa3158ddc6c500ef22c98906b3f0764731f
Although there are some noticeable spikes into early 2018 (we don't get short interest like that until now in XRT), I haven't been able to confirm or deny whether more than average short interest began around 2017, when more and more may have been piling into the CMBX short (and for extra spice, shorted XRT alongside).
On another side note, an extra side XRT fact I found: in 2012, the SEC settled over charges of insider trading with ex-Goldman employee Spencer Mindlin and his daddy Arthur. Using info from his old job, Spencer could front run big trades by Goldman employee on stocks that would be added or taken off XRT before it was announced. He’d buy huge chunks before Goldman did, and would short companies before Goldman sold en masse. He “...anticipated Goldman’s trades by calculating the shares that Goldman would need to trade in order to hedge its XRT position.” Literally, fraud fuckers everywhere.

2. Sears & Seritage Growth Properties

So we already knew that as early as 2017, hedge funds and banks thought malls & other business real estate could fail. That included Jerica stepping into CMBX.4 to short it and short malls, and others pushed shorting CMBX.6 through 2019. GameStop was a part of CMBX.6.
Now, I didn’t end up finding the MP report from Pt. 1 first in this rabbit hole. I actually found out about GameStop being a part of a CMBX bundle when I looked to see if GME had any exposure to any CMBS loans.
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One such example was the Glenbrook Square Mall in Fort Wayne, Indiana.
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Glenbrook Mall.
With a $820 million loan first made by Goldman (originator), it was bundled with other malls including one in Lubbock, Texas (tranche).
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Both malls had GameStop, Sears, JcPenney, and Claire’s stores among others like Macy’s, Payless & Children’s Place.
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Forbes wrote about those stores that “all…are closing stores or have been identified as being among the most troubled companies on S&P Global’s list of retailers.”
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Then THAT bundle was then passed to Wells Fargo who cut it up (like Jim Cramer cuts up coke) into 3 other bundles: one deal for Goldman, Wells Fargo, and Citi each (CMBS). With more fuckery included, that Glenbrook mall was owned by Seritage Growth Properties, a spinoff of Sears Holdings made by Sears CEO and hedge fund cunt extraordinaire Edward Lampert back in 2015.
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distended scrotum or ex-Sears & Kmart CEO Eddie Lampert
This Seritage spin off let then Sears CEO Eddie Lampert sell 230+ Sears & Kmart stores to Seritage. Seritage then turned around and leased the SAME space to new tenants with jacked up rents. That $2.8 billion buy was helped wrapped up into a CMBS later with Chase where literally ONE ENTIRE CMBS loan is backed by some of those jacked up rent properties Seritage & Chase worked on together.
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A Forbes writer might have been secretly calling out Lampert for this utter bullshit if he was trying to save Sears (which surprise he wasn’t): “The financial goals of Sears and Seritage, then, are not necessarily aligned, given that Sears closures could potentially damage the retailer yet benefit the REIT spinoff.”
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This means if big stores like Sears or Kmart failed, then lucky him he makes money off their failure when Seritage buys them for cheap, jacks up rent for new businesses filling the space, then makes money AGAIN selling those bundled rents to Chase who sells the bundles AGAIN to other ppl.
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This ends up being tricky for malls. If you remember in Pt. 1, KeyBank helped finance a loan for a property that contained Tuesday Morning, but it was “anchored” by a Fairway. Deals like this Indiana one meant if that Sears collapsed, then maybe the GameStop nearby does too.
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And when that happens, we get a dead mall.

3. Anchor Stores and Dead Malls

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https://preview.redd.it/ibcrz3k7fkc81.png?width=1236&format=png&auto=webp&s=c7d781ba8c92e765bc98b7d9a301ca1cd03f2333
For non-US apes, it might not be too obvious but retail–and especially malls–were a huge part of the landscape of the US and even American history. Although you had predecessors to malls that first began in the 1800s like the Arcade above (built in 1828) in Providence, Rhode Island, as cars and car grew culture grew in the US you had malls pushed out from downtowns of major cities to further and further out suburbs and exurbs.
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https://preview.redd.it/xpxa77wafkc81.png?width=1238&format=png&auto=webp&s=3ab91e718e80df35c8b5cd597d87782fe9b3106e
The history of malls itself is fascinating (TIL that carpets were uninstalled from some malls because they thought that the carpet’s friction slowed down people from walking around the mall fast!), but its evolution into strip malls–because they’re basically a strip of concrete land with shops on them–and bigger retail centers meant shops clustered there, and eventually it became a de facto stand-in for everything missing from downtowns decimated in the 1970s & 1980s: shops, culture, food, community.
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But all good things came to an end, and the structures that were copy-pasted all over the American landscape fell ill to less foot traffic and sales, according to a common diagnosis.
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Sample mall map from state of NJ.
One of the things to understand about why it matters that bigger stores like Sears go under can affect a whole mall, or nearby stores like GameStop, and then also hurt CMBS loans is the structure of many malls.
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Bigger malls–like Glenbrook or the one above–have “anchor stores”: giant stores that increase foot traffic with littler stores and kiosks in between the big ones. It’s no different then what you might see in how amusement parks are structured, with little shops and food stands set between big rides.
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IYKYK.
In the mall map further up above, notice how you have giant shops like Sears at one edge. One of the jokes for giant failing mall “anchors” is that often it becomes the place where you go for free parking to walk into the mall (no one buying from that anchor store means fewer people = fewer cars = more parking spots).
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Despite the jokes, once an anchor store goes under then not only does it mean that that company and its workers are fucked, but even the surrounding stores, food shops, etc.This isn’t the only way that a mall can be set up with a large store “anchor”. Another common form includes big box stores.
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In my digging, I realized that one of the more common forms of this mall structure hand dropped somewhere in the American landscape is tethered by one of the largest companies in the world: Walmart.
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https://preview.redd.it/a66kj9cmfkc81.png?width=1246&format=png&auto=webp&s=29ae6f442c68fff55c0b2c6022839b7a6208b070
Now this isn’t here to smack talk Walmart (even though I have many many reasons to); they’re also not the only big store that can act as an anchor. But I bring them up as it ends up being super relevant to the rest of the explanations in this series.
Some CMBS loans can be part of what’s called a “Walmart Shadow Anchored Portfolio”. Which is exactly what it sounds like.
Instead of a giant connected mall structure, you might have a giant Walmart looming in the background while other small retail shops are in nearby concrete strips or even across streets and highways. Here’s an example of what a potential “Walmart Shadow Anchored Portfolio” might look like using this town in Minot, North Dakota:
https://preview.redd.it/a5i1qy5rfkc81.png?width=1234&format=png&auto=webp&s=cb7b5d32f74f54ea2c040cc9633206e344e2e9e1
You might notice the Dollar Tree or Buffalo Wild Wings nearby as an example of nearby stores in its “shadow”.
The appeal of these “Walmart Shadow Anchored Portfolio” is–to some degree–obvious given how much foot traffic matters, and you knowing that Walmart won’t go bankrupt anytime soon–perhaps unfortunately–means it’s more a sure thing than perhaps Sears in some ways. You might have companies like this one praising their search for this type of setup:
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“In April, Schostak Bros. & Co. Inc. spent $100 million to acquire a portfolio of 28 properties from Memphis-based Spectra Group Inc. While there have been plenty of more expensive deals this year, Schostak Bros' transaction stands out.
The reason? Not one of the properties in the deal have anchors. All sit next to Wal-Mart Supercenters that [they have] absolutely no control over. The firm instead is building a portfolio entirely based on the concept of shadow anchors. It is consciously looking to buy centers adjacent to stores owned and operated by the world's largest retailer. But it has no interest in being Wal-Mart's landlord. Its strategy is to capitalize on all the benefits of having Wal-Mart as a traffic generator without having the headaches (and meager rents) that come from being a big-box landlord.”

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As I mentioned, Walmart ends up being something that many can hang their hat on, without having to worry about going under. Because what happens when maybe an anchor store does go under, whether from poor sales, mismanagement (Sears), crappy leveraged buyout deals from hedge funds (Toys R Us), or even being (naked) short sold into the fucking ground (GameStop)? You get a dead mall.
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https://preview.redd.it/3ts3ceavfkc81.png?width=1800&format=png&auto=webp&s=4616bca131e731d86a8f9b20d85bf1638150f3a4
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https://preview.redd.it/lcryyh7wfkc81.png?width=2048&format=png&auto=webp&s=91a155b90f7e2636e557114f870b58aeabca09c3
Dead malls have come under their own resurgence online due to YouTube channels by people like Dan Bell and his "Dead Mall Series", as well as others who explore dead malls. Myself, a fan of exploring abandoned properties, first learned about his channel actually here through Reddit and have been amazed ever since.
Movie came out in 2014.
For movie and book fans, dead malls factor heavily into the film “Gone Girl”, which is based on a book. I didn’t realize it too much then but the 2014 film is–apart from its main storyline–also seen as a story of the crash of 2008 and the ensuing recession. One famous scene involves the main character seeking out info in a dead mall:
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https://preview.redd.it/vra2w7f8gkc81.png?width=1024&format=png&auto=webp&s=9969246c4924a44f0b9a2ff92dd52d5ef8dcd994
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“All of the houses are abandoned in their upper-class neighborhood except very few neighbors because of the crumbling economy in Carthage. Not many people can afford to live in this development, let alone, live in a house at all in this town. Also, the abandoned mall shows signs of decay as well.
As Nick searches for clues regarding Amy’s disappearance, he describes the mall, “It was suburbia, post-comet, post-zombie, post-humanity” (113). The recession had led to the closure of the town’s mall. This affected the lives of many citizens living in Carthage because they had lost their jobs. The increase of unemployment led people to illegal jobs, such as drug dealing.
These people were found throughout the abandoned mall. Nick explicates, “Carthage had a bigger drug epidemic than I ever knew: The cops had been here just yesterday, and already the druggies had resettled, like determined flies” (116). For many people living in Carthage, the only means of work is to drug deal in the abandoned mall and not even the police can stop them from making the money it takes to keep themselves alive”

Sometimes dead malls get lifelines, and convert empty space from anchor stores or small retail leased space to fitness centers, churches, senior centers, offices, public libraries, and even medical clinics. For one, medical clinics in malls rose 15% from 2011 to 2016.
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But for big malls, losing an anchor store like Dillard’s, or Sears can’t be easily replaced with another, or even another smaller store (you couldn’t cleanly fit a GameStop’s inventory over 3 floors of a Macy’s if you tried and it wouldn’t make sense to pay that big of a lease). So it’s often dying against the light, and you get a dead mall nonetheless.
A dead mall is a symptom, a diagnosis, a crime scene, and symbol all in one.
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This was especially the case for accelerating dead malls in the recession, just years after big banks fucked over people in 2008. A dead mall means a lot of things to a lot of people.
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GameStop in Bluefield, West Virginia. 2020
Yes, a dead mall means a lot of things to a lot of people.
But a dead mall also means to some, that your entire tower of commercial mortgage backed securities, also just became a little more wobbly.
In Pt. 4, we'll figure out the teams: who wasn't sure about the "mall short" enough to jump in, and who were the ones that went balls deep alongside MP & Jerica.
TL;DR:

• Apollo Global Management had some CMBS exposure back in 2017. Apollo Global later bought Yahoo Finance, had former SEC chair (GG's current job) Jay Clayton join them, and tried to buy GME in 2019.
• Ex-Sears & Kmart CEO Eddie Lampert sold off ~230 some Sears & Kmart properties to Seritage Growth Properties, who jacked up the rents to new tenants. Some of these jacked-up properties were later bundled into CMBS bundles with Chase.
• In CMBS loanspeak, Walmart is often a part of what's called a "Walmart Shadow Anchored Portfolio", a mall that has Walmart as its biggest retail store with little retail stores all around it. Walmart is called an "anchor store".
• When "anchor stores" fail--like Macy's, Sears, Dillard's, etc.--then all the retail stores around usually are at higher risk of failing. This affects the CMBS bundles with loans for all those retail stores.

Pt. 1: The Tuesday Morning Rabbit Hole (RC’s Tweet, TUEM v. TUES, & 92 Days)https://www.reddit.com/Superstonk/comments/s5o8ok/the_tuesday_morning_rabbit_hole_revisiting_the/
Pt. 2: Shorting Malls and Jerica Capital Managementhttps://www.reddit.com/Superstonk/comments/s6ff2the_tuesday_morning_rabbit_hole_revisiting_the/
Pt. 3: 2017https://www.reddit.com/Superstonk/comments/s7h25l/the_tuesday_morning_rabbit_hole_revisiting_the/
Pt. 4: Pick Your Teams: https://www.reddit.com/Superstonk/comments/s9hbethe_tuesday_morning_rabbit_hole_pt_4_pick_you
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Edit: words, bolding, extra explanation

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