Sears Holdings (SHLDQ) closed hundreds of stores during its 2018 fiscal year in a futile attempt to reduce its losses and stave off bankruptcy. The long-suffering retail icon finally filed for bankruptcy last October anyway. At the time, it had a little over 750 stores remaining.

Sears and sister chain Kmart were nearly liquidated entirely, but controlling shareholder Eddie Lampert eventually rescued a fragment of the company. The hope was that Sears and Kmart could survive by focusing just on their most profitable locations. However, Sears is already embarking on another round of mass store closures. This shows that its turnaround plan is not working, and it spells danger for weaker landlords like CBL & Associates (CBLQ).

Shrinking yet again

In the months after it filed for bankruptcy last year, Sears Holdings closed more than 300 stores in several waves. By the time Lampert bought the Sears and Kmart chains in a bankruptcy auction in early February, he did so with the intention of operating just 425 locations -- 223 Sears stores and 202 Kmarts.

Even then, Lampert's business plan acknowledged that the company would likely close another 36 Kmart stores over time. However, Lampert once again overestimated his ability to turn around the out-of-favor Sears and Kmart chains.

Over the past few months, Sears has continued to close a handful of full-line stores. In April, it closed a prominent location in Oak Brook, Illinois, a little more than six months after completing a major renovation that downsized the store. Last month, it closed a Sears store in Yonkers, New York, that was also traditionally a top-performing location. Full-line stores are also in the process of closing in Staten Island, New York; Wayne, New Jersey; and Dartmouth, Massachusetts.

The exterior of a Sears full-line store

The Sears full-line store base keeps shrinking. Image source: Sears.

The "new" Sears Holdings is now moving beyond the one-off store closures of the past few months. Citing "a number of challenges returning our stores to sustainable levels of productivity," the company plans to close another 26 stores this fall, according to a statement released earlier this week. While there are five Kmarts on the list, the other 21 locations set to close are full-line Sears stores.

Some landlords could benefit from store closures

All but one of the Sears stores slated for closure this fall are located in malls. The majority of those malls are lower-tier properties not owned by real estate investment trusts (REITs). (There are a handful of prominent exceptions, but most privately owned malls in the U.S. are low-quality assets.)

Of the eight REIT-owned malls impacted by the current round of Sears store closures, four are owned by Brookfield Property Partners (BPY), two are owned by Simon Property Group (SPG 0.97%), and the last two are owned by CBL & Associates.

Brookfield and Simon will probably be happy to see these stores go. Both companies specialize in owning high-traffic malls that typically have tons of interest from prospective tenants. Just as importantly, Brookfield Property and Simon Property Group have rock-solid balance sheets. That gives them the financial flexibility to invest in repurposing these Sears stores for tenants that will pay higher rents and drive more traffic to their malls.

Weaker landlords won't like this news

By contrast, CBL has a weak balance sheet and is struggling to support its $4.4 billion of debt, given its declining earnings power. Moreover, the company already has dozens of vacant anchor spaces that it's trying to fill, and limited capital available for redevelopment.

The good news is that Sears owns its stores at Valley View Mall in Roanoke, Virginia, and Mid Rivers Mall in St. Peters, Missouri -- the two CBL properties where it's closing -- so it isn't paying rent to CBL for these stores. However, interior mall tenants -- which generate the vast majority of rent for most malls -- often have "co-tenancy" clauses built into their leases, which automatically reduce their rent shortly after an anchor closes (until that anchor is replaced).

CBL probably can't afford to buy the Sears buildings and then spend even more money to redevelop them for new tenants. However, that means it may risk a long-term decrease in cash flow from these two malls, unless it gets lucky and another company redevelops the Sears stores for new retail tenants. Furthermore, the longer the Sears stores stay vacant, the more they could damage the image of these malls, driving shoppers away.

The loss of two more Sears stores probably won't be the difference between life and death for CBL & Associates. However, it adds to the pressure on this already-struggling mall REIT, giving investors just one more reason to stay away. Stronger rivals like Brookfield Property and Simon Property Group will be better able to navigate the changing retail landscape.