Will Icahn be the short seller to finally win this bet?

Activist Carl Icahn has taken another big bet against a sector. This time, the hedge fund manager is targeting mall operators. Icahn could earn $400 million or more if mall operators start to face debt problems. According to the Wall Street Journal and its sources, Icahn likely holds the largest short position against these companies.

The Wall Street Journal notes that Icahn is now in a battle with the “mall bulls” Putnam Investments and Alliance Bernstein.

Activist Carl Icahn and the Bond Market

David McNamara of hedge fund MP Securitized Credit Partners, a Manhattan-based hedge fund, says Icahn’s battle is a big one. The fight over mall operators is “the biggest battle in the mortgage bond market today,” McNamara says.

Naturally, the shorting of malls isn’t new by any means. Eric Yip made similar headlines in 2017 betting against the malls. Given the ongoing Apocolypse in U.S. retail, stores are failing to keep up with e-commerce and other major consumer trends. Tack on expected concerns about debt in a late-cycle economy and Icahn is trying to time this short properly.

However, it’s not about shorting an entire sector. Anyone who might follow suit should do a little bit of homework on mall operators and understand a few basics.

What Mall Operators Will Survive?

To understand which mall operators will survive, let’s look at the basics.

Class A malls should be fine. These malls are in high-income areas that have affluent customers and more luxury-oriented stores. Most of them are still reporting decent sales per square feet and high occupancy rates.

Open-air shopping centers that have more internet-resistant tenants like gyms, movie theatres, healthcare providers and restaurants should also survive. So will grocery-anchored shopping centers for the most part.

Instead, focus on class B and C malls if you’re targeting debt.

These firms operate in less affluent areas that had (or may still have) stores like Sears and JC Penney as key anchor tenants. Those firms are probably in danger of failing.

It is the smaller malls with traditional retail tenants that face the most danger.

Watch for dividend cuts, declining occupancy rates, and credit downgrades to help steer clear of the malls most likely to fail or candidates to short.

By: Tim Melvin

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