Kmart Corp. filed for Chapter 11 protection today and announced that its 2,100 stores will continue to operate as it restructures its operations.However, Kmart is seeking court approval to terminate leases on 350 retail locations that it has already closed. Doing so could save $250 million, the company said in a statement.

The question for the shopping center industry is whether Kmart's financial woes will eventually lead to a wave of store closings. Although Kmart said its stores will remain open, it plans to review their future by the end of April.

If Kmart chooses, as some analysts believe it will, to close several hundred under-performing stores, the move could create major headaches for shopping center companies with portfolios populated by Kmart-anchored centers.

"We would expect that shopping center owners are going to have a whole bunch of Kmarts they're going to have to re-lease," notes Salomon Smith Barney analyst Ross Nussbaum.

According to some estimates, the Troy, Mich.-based retailer could close up to 400 of its 2,100 stores. If that happens, companies with the most to lose include Malan Realty Investors, which earns 26% of its rents from Kmart leases; Agree Realty, which earns 24% of its rents from Kmart; and Kimco Realty, which earns 13.3%.

Kmart's troubles have already hurt Kimco's stock price, which dipped last week after Salomon Smith Barney downgraded Kimco's rating from "outperform" to "neutral." Developers Diversified Realty and Glimcher Realty Trust, both of which earn between 2% and 3% of their rents from Kmart leases, also saw their stock prices fall.

If Kmart initiates a wave of store closings, analysts say, shopping center companies will eventually fill most of the vacancies. Likely replacement tenants include Target and Wal-Mart, notes John Roberts, REIT analyst for J.J.B. Hilliard, W.L. Lyons.

The question is whether they'll be able to achieve prior rent levels, Nussbaum says. "There are certain Kmart leases that are above market," he says. "Kimco's average rent from Kmart is $7.27 per sq. ft., and there are a couple of other REITs that have average rents from Kmart in the $3 to $4 range."

Another important consideration is the effect Kmart store closures could have on surrounding tenants, some of which will be legally entitled to cancel their leases if a Kmart space goes dark. "The other thing you've got to remember is that if Kmart declares bankruptcy, it's not going to close all of its stores," Roberts says. "It's going to close the bad ones."

The more lucrative stores will stay open, but the poor-performers could end up being much harder to re-lease. "With each REIT it's going to be on a case-by-case basis," Roberts says. "It depends on the specific shopping center."

A steady decline

Analysts blame Kmart's troubles on poor holiday sales and increasingly strong competition from retailers such as Target and Wal-Mart. In recent weeks, Kmart's share price has continued to fall amid a series of debt downgrades. On Monday, one of the retailer's major suppliers stopped shipping goods to Kmart stores because Kmart failed to make a regular payment, Reuters reported.

Moody's Investors Service downgraded the retailer's debt to "junk" status on Monday, and Kmart's share price fell to a 38-year low in early trading Tuesday.