The COVID-19 outbreak had a devastating impact on the retail sector this year. Many retailers had to close their doors to help slow the spread, making it difficult to generate sales. That caused significant financial hardship across the sector, leading several retailers to file for bankruptcy.
That had a trickle-down effect on retail landlords, which struggled to collect rent. Hardest hit were mall REITs (real estate investment trusts) CBL & Associates Properties (OTCMKTS: CBLAQ) and PREIT (NYSE: PEI), which both filed for bankruptcy in November. The latter had a quick trip through that process, as it recently completed a financial restructuring. While that's a positive development, it doesn't mean the REIT is in the clear.
Buying time and more breathing room
PREIT filed for Chapter 11 bankruptcy on November 1st, aiming to recapitalize its balance sheet and extend its debt maturities. The company had already secured a restructuring support agreement with most of its creditors, so it was able to move swiftly through the process.
Overall, the company and its creditors accomplished two objectives:
- They agreed to extend PREIT's debt maturity schedule.
- They recapitalized the company by providing it with access to $130 million of new funding.
By extending its debt maturity schedule, PREIT now has more time to address its debt. The hope is that its financial situation and market conditions will have improved enough to either pay off or refinance this debt upon maturity in the future.
Meanwhile, the liquidity injection will give PREIT the funding it needs to continue operating and advance its strategic priorities. That includes its ongoing multiyear strategic transformation to revitalize its properties into high-quality shopping, dining, and entertainment centers. The company is also selling outparcels to developers of multifamily and hotel projects, which will bring a more captive audience to its properties.
Not a total repair
PREIT sought a different outcome in bankruptcy than many filers. Instead of aiming to reduce its total debt, the company used the process to bolster its liquidity and buy it more time to address its debt. That's a different approach than CBL Properties, which is seeking to eliminate $1.5 billion of debt via its bankruptcy process.
As a result, PREIT still has to find a way to address its debt in the future. It included $890.8 million of mortgage loans, $559 million of term loans, and $375 million on its revolving credit facilities as of the end of the third quarter.
That means a lot is riding on the company's transformation program. It needs to finish its remaining projects, and they need to deliver results. The most notable one is Fashion District Philadelphia, a $210 million shopping, dining, entertainment, and cultural destination across three city blocks in Philadelphia that the company hopes will reach stabilization next year. The company also is working on the $90 million expansion of Woodland Mall and anchor repositioning projects at the Valley Mall, Willow Grove Park, Moorestown Mall, and Plymouth Meeting Mall that should also reach stabilization next year.
However, what's noteworthy about each project is that most of the new tenants PREIT has lined up are restaurants, fitness centers, and apparel retailers, which were among the hardest-hit by the pandemic. Because of that, it's unclear if these investments will pay off.
Meanwhile, the company is dealing with new vacancies throughout its malls after other tenants filed for bankruptcy this year because of the virus outbreak. As a result, the company's rental income will likely remain under pressure for some time as it backfills this space.
On a positive note, the pandemic seems to be nearing the beginning of the end as vaccines start getting rolled out around the country. As case counts come down and restrictions lift, it could provide the retail sector with a huge shot in the arm in the second half of 2021 as consumers blow off steam by unleashing pent-up demand for shopping, dining, entertainment, and cultural experiences. That would provide these mall tenants with the cash needed to get caught up on their rent. It would also take some of the pressure off PREIT's financial profile.
The bottom line: Still a risky REIT
While PREIT has exited bankruptcy, that doesn't mean the REIT has addressed all its problems. That's because it only pushed out its debt maturities and secured some funding for its strategic repositioning. It still needs to address that debt eventually, and its projects need to deliver results. Thus, it's not entirely clear if PREIT will survive, since continued weakness in the retail sector could send it back into bankruptcy.