Many of America's mall operators have been struggling for some time, as e-commerce headwinds have pressured brick-and-mortar retailers. To put it mildly, the COVID-19 pandemic and the economic disruption it caused didn't help matters.
Well, we now have our first two casualties in the mall real estate investment trust (REIT) industry. CBL & Associates (NYSE: CBL) and Pennsylvania Real Estate Investment Trust (NYSE: PEI) both filed for Chapter 11 bankruptcy protection. Here's what will happen next, what this means for investors in both companies, and whether other mall REITs could be next.
What's next for these companies?
Let's take these one at a time, because the circumstances are quite different. CBL operates a total of 108 mall properties in 26 states and has been very adversely affected by tenant bankruptcies. J.C. Penney (OTCMKTS: JCPNQ) is a major CBL tenant, and bankruptcies of Ascena Retail Group (OTCMKTS: ASNAQ) (parent of Ann Taylor, Loft, and others) and Tailored Brands (OTCMKTS: TLRDQ) (parent of Men's Wearhouse and Jos. A. Bank) have weighed on the company. In all, more than 30 of CBL's tenants have filed for bankruptcy protection in 2020 alone. Most of the company's malls are Class B and C, meaning they aren't exactly prime retail real estate.
CBL owes about $4.5 billion to its lenders and warned investors several times it would need to file for bankruptcy if it didn't get relief from some of its debt obligations. CBL plans to restructure its operations and emerge from bankruptcy. But it doesn't have a firm restructuring plan in place yet.
Meanwhile, Pennsylvania Real Estate Investment Trust, better known as PREIT, operates 21 malls with a concentration in the Philadelphia area. Its malls are generally higher quality than those owned by CBL. One example is the recently opened Fashion District in Center City Philadelphia. Unlike CBL, PREIT has what it calls a "prepackaged" restructuring plan, with $150 million of new financing in place and support from 95% of its creditors.
Both mall operators plan to continue operations of their properties uninterrupted while bankruptcy proceedings play out.
What about shareholders?
To be perfectly clear, although both REITs plan to keep operating and emerge from bankruptcy eventually, both of their shareholders are most likely going to be wiped out. Common stockholders have the lowest claim on a company's assets in bankruptcy, and based on the sheer size of the debts owed by these two REITs, they're unlikely to get anything here.
This is why CBL and PREIT's common stocks are trading for roughly $0.10 and $0.50, respectively. This is not a bargain. These shares will most likely be worthless once these companies restructure their operations.
Should investors in other mall REITs be worried?
The short answer is, "it depends." These two REITs had some fatal flaws that led them to where they are. First, debt was crushing them to the point where even if they didn't have to deal with any further tenant bankruptcies and everyone paid rent, the businesses wouldn't have done well.
Second, neither company operates top-tier malls. CBL's malls, for example, have been grappling with high vacancies for years, especially when it comes to department stores. Finally, neither had the liquidity to do anything about its situation -- after all, a mall REIT with access to capital can redevelop a vacant space into whatever will resonate well with consumers.
Take leading mall REIT Simon Property Group (NYSE: SPG). The company has a very reasonable debt load, its malls are among the best in the U.S., and Simon has $8.5 billion in liquidity to make sure it stays that way.
The Millionacres bottom line
In today's retail real estate environment, quality of assets and a rock-solid balance sheet are more important than ever. These two REITs didn't have those things, so if a retail REIT you own does, this news isn't necessarily a cause for alarm.