Ichan’s Bet on Mall Failures Falls Short

Good morning,

Ichan’s bet on mall failures falls short; banks see warning signs in office loans despite profit growth; Miami luxury rentals cool as supply rises, demand eases; and Walgreens closes healthcare clinics to boost profitability. Let’s delve into today’s topics.

📈 Market Update

🏬 Ichan’s Bet on Mall Failures Falls Short

Carl Icahn made a massive bet against shopping malls, wagering billions on credit default swaps tied to commercial mortgage-backed securities. Icahn expected malls to default on loans during the pandemic, triggering payouts on his CDS positions. Initially, the trade paid off, gaining $900M in 2020. But as the pandemic waned, malls showed signs of recovery.

↪️ The Takeaway: 
The fate of Icahn's trade came down to struggling malls like Crossgates in New York. When Crossgates debt was sold for just enough to avoid CDS payouts, Icahn cried foul. He alleges the price was artificially inflated to manipulate derivatives markets. While plausible, analysts say such disputes are common in complex trades where small price differences mean big swings. Icahn has watched his potential jackpot slip away as his CDS positions fall in value.

⚠️ Banks See Warning Signs in Office Loans Despite Profit Growth

Even as major U.S. banks like JPMorgan Chase, Wells Fargo, and PNC reported higher third quarter profits, they are seeing distress emerge in their commercial real estate loan portfolios, especially for office properties. The banks continue to increase loan loss provisions, though by smaller amounts than last quarter, to brace for expected losses as occupancy and rate challenges pressure their weakest office loans. With few property sales, banks lack pricing discovery to accurately gauge potential stresses. But nonperforming loans are already rising, foreshadowing coming pain points in banks' CRE books.

☀️ Miami Luxury Rentals Cool as Supply Rises, Demand Eases

After skyrocketing during the pandemic, Miami's red-hot luxury rental market is cooling rapidly as new inventory floods the area and fewer people vie for units, allowing renters to negotiate concessions and lower rents. Though still above pre-pandemic levels, rates for high-end Miami apartments and homes have dropped 15% or more from last year's peaks. With thousands of new luxury units under construction and workers returning to offices, the supply-demand imbalance has eased.

🏪 Walgreens Closes Healthcare Clinics to Boost Profitability

After rapidly expanding its healthcare services business, Walgreens is now closing about 60 unprofitable VillageMD clinics to focus on "profitable growth." The pharmacy chain has been shifting beyond retail into healthcare via acquisitions, but its U.S. healthcare division posted a $294M loss last quarter. To turn that around, Walgreens plans to exit underperforming markets and realign costs, concentrating instead on high-opportunity regions. The clinic closures come as Walgreens aims to cut $1B in costs next year, including by reducing headquarters spending and shutting unprofitable pharmacies.

✍️ Further Reading

• Here's Why Experiential Retail May Not Always Be That Great for Landlords (CS)

• Who’s Lending in Multifamily (GS)

• The U.S. Government Has Too Much Office Space (RD)

• Multistory Warehouses’ Future Is Looking Up (CPE)

• Blackstone Might Consider Investments in Sports Teams (CS)

📊 Chart of The Day