Simon Property Group (NYSE: SPG), the largest retail REIT that owns and operates malls across the globe, lost its first mall to foreclosure on February 2, 2021. The Town Center at Cobb, located in Atlanta, has 1.2 million square feet of retail space, with 170 stores, including Macy's (NYSE: M), H&M (OTC: HNNMY), Belk, and J.C. Penney (OTC: JCPN.Q), all of which have closed stores or declared bankruptcy.
Deutsche Bank is now the proud owner of a mall
The original loan was created in 2012 by Deutsche Bank (NYSE: DB) for $200 million. Deutsche bank attempted to sell the mall at foreclosure sale, setting a minimum bid of $130.4 million, a 59.5% decrease from its original appraised value of $322 million at the time of origination. Duscht Bank and the commercial mortgage-backed security (CMBS) holders are now responsible for the management and disposition of the mall moving forward.
It's no secret that Simon Property Group, among other mall REITs, has suffered significant losses since the start of the pandemic. Other mall REITs, including CBL & Associates (NYSE: CBL) and Brookfield Property Partners (NYSE: BPY), were bought out or filed bankruptcy in 2020. However, Simon Property Group's high liquidity, low debt ratios, and forward thinking, adapting to the change in the marketplace by teaming up with companies like Amazon (NASDAQ: AMZN), made it seem as if they'd make it out unscathed.
This may not be the last
A recent study conducted by Trepp identified three other malls owned by Simon Property Group that could suffer the same fate. Rather than lose future properties to foreclosure, Simon Property Group may choose to follow in the footsteps of Brookfield Property Partners, which recently handed over the keys to a 1.3 million-square-foot mall to the lender utilizing a deed in lieu of foreclosure.
What this means for investors
Losing a property to foreclosure or deed in lieu isn't ideal, but also isn't a sign the company is done for. Simon has lost properties to foreclosure and handed over the keys in the past. Since commercial mortgage-backed securities (CMBS) are non-recourse, foreclosure and deed in lieus can be a strategic move to cut losses, reduce debt levels, and use cash on hand for other avenues of the business. I personally own shares in Simon and believe the company will be able to recover from the current challenges. And clearly, Simon does as well. The company recently announced its plans to launch a special purpose acquisition company (SPAC), having plans to acquire innovative businesses in the retail, hospitality, entertainment, and real estate industries.
Investors in Simon need to be patient and have a high tolerance. It will surely be a tough few years ahead for the company. Simon is aware of the stresses in the current retail environment and is adapting to the changes in the marketplace. But if its plans don't work out, it can always go to foreclosure.