One of the benefits of publicly traded real estate investment trusts (REITs) over their non-traded peers is liquidity. An investor can log into their brokerage account and easily buy or sell shares of the REIT, which trades freely on a major stock exchange like the New York Stock Exchange (NYSE) or Nasdaq. However, companies need to meet specific criteria to remain listed on a major stock exchange. If they don't, they risk getting delisted.
That recently happened to mall REIT CBL Properties (OTCMKTS: CBLAQ), which lost its listing on the NYSE. Here's why that occurred and what can happen when a REIT gets delisted.
Getting to boot after going bankrupt
CBL Properties started its journey as a publicly traded REIT in 1993, when CBL & Associates Properties formed a REIT, acquiring all CBL & Associates' assets and then going public via an initial public offering. The shares traded on the NYSE under the ticker symbol CBL until late November 2020.
The NYSE decided to remove CBL's listing due to an "abnormally low" share price of less than $1, which is one of the exchange's thresholds to remain listed. The REIT's stock had tumbled below that price point due to the impact the retail apocalypse and the COVID-19 outbreak had on its malls and finances. Its balance sheet was in such bad shape that CBL joined fellow mall REIT PREIT (NYSE: PEI) in filing for bankruptcy in early November.
While PREIT has since reemerged from bankruptcy and continues to trade on the NYSE, CBL hasn't finished restructuring. Because of that and its ultra-low share price, the NYSE delisted its stock, forcing it to move to an over-the-counter market (OTC). While the switch to an OTC market won't impact its business operations, it can affect trading of its shares. Due to low share prices, OTC stocks tend to be highly volatile and don't have as much volume as stocks traded on the two major exchanges. That can make it harder for investors to buy and sell.
What's ahead for CBL and other delisted stocks?
When a stock gets delisted, there are a few potential outcomes. It can remain on an OTC market, get canceled and no longer trade publicly, or take steps to regain compliance with the standards of the NYSE or Nasdaq. For a stock to move back to a major exchange, it usually needs to fix whatever issue caused its delisting in the first place. In CBL's case, that means existing bankruptcy and then addressing its low share price.
Bankruptcy filings can have a variety of potential outcomes for existing shareholders. In a best-case scenario, a company completes its restructuring without diluting investors by issuing stock to creditors in exchange for debt. That was the case with PREIT, as its restructuring resulted in agreements with its lenders that extended its debt maturities and gave it access to new financing. On the other end of the spectrum, companies can cancel their existing shares, leaving investors empty-handed.
Meanwhile, some plans allow investors to receive a portion of the equity in the reorganized company. That middle ground appears to be the desired outcome for CBL's bankruptcy. It submitted a reorganization plan to the bankruptcy court to allow existing shareholders to get 10% of the new company's stock.
If the REIT completes that proposed plan, it will then need to take one more step to regain compliance with NYSE listing standards by getting its share price above $1. Given the number of new shares it will likely need to issue to creditors, the only way to achieve that goal will be to enact a reverse stock split. That would result in investors holding fewer shares of the company, which should boost the stock's price back above the required level. Then, as long as the company doesn't run into financial trouble again, it should continue to trade freely on the exchange.
The bottom line: A delisted stock is a troubled stock
Major exchanges will delist stocks because they fail to meet their listing requirements, usually an ultra-low share price due to the company's financial troubles. While a delisted company can address its issues and regain compliance, some never make it back. So REIT investors should tread carefully around companies at risk of losing their listing on a major stock exchange.