Prizm Outlet Mall in Las Vegas recently sold at auction on the Ten-X auction platform (CoStar Group (NASDAQ: CSGP)) for $1.525 million, a 95% reduction in value from its July appraisal for $28.2 million. This deep discount isn't a huge surprise, considering the state of the mall industry today, with a record number of retailers closing their doors or filing bankruptcy. It was only a matter of time before distressed assets, particularly malls and hotels, started to hit the market.
The first of many distressed retail sales
Dan McNamara, a principal at hedge fund MP Securitized Credit Partners, expects more discounted sales to follow. According to McNamara, who has a bet against the index, 31 of the 39 malls in CMBX 6, an index that trades tranches of commercial mortgage-backed securities (CMBS), are compromised. The original $73 million loan for Prizm Outlet Mall was one of 48 loans bundled as a CMBS and sold as a conduit in 2012. The CMBX 6 is made up primarily of retail debt originated in 2012, including Prizm Outlet Mall.
CMBX indexes are sold in tranches by large investment funds and banks, meaning smaller investors aren't able to participate in the same way as McNamara. However, trading activity for these indices give us a bigger picture of where the market could be headed.
Well-positioned malls that are adapting to the current shift in consumer shopping trends may be able to outlive the current pandemic. But with several mall real estate investment trusts (REITs) filing bankruptcy already and a second wave of concern over a prolonged and possibly more contagious coronavirus strain, there doesn't seem to be hope on the horizon anytime soon for malls.
What it means for investors
Investors should prepare for more distressed retail sales, likely coupled with distressed hotel sales. This could be in the form of auctions, traditional sales, or sales on the CMBS markets. Some mall REITs that are adapting to the new "normal" by converting space into apartments, warehouses, or headquarters while leasing to new tenants such as Amazon (NASDAQ: AMZ) may be able to survive the current crisis, but there are many that aren't well-positioned financially to ride out another year or two of declining sales and more closures.
It's more important than ever to do your due diligence on retail REITs. There are a lot of discounts in the market right now, but discounts don't always mean value.