Malls’ Decline Pushes Landlords CBL, PREIT to Bankruptcy
While retailers have reopened, foot traffic is still down, putting mall owners at odds with impatient lenders
Two major mall owners, CBL & Associates Properties Inc. and Pennsylvania Real Estate Investment Trust, filed for bankruptcy protection as sharp declines in retail foot traffic continue to devastate commercial property landlords even as businesses have reopened.
CBL, the larger of the two landlords, operates 107 shopping centers concentrated in the Midwest and Southeast, and counts more than 30 retail tenants that filed for bankruptcy in 2020, including J.C. Penney Co. and GNC Holdings Inc.
PREIT, which owns stakes in 26 retail properties mostly in the mid-Atlantic region, also relies on department chains that are slimming down store counts. Retailers under bankruptcy protection have more leverage over their landlords to break leases and negotiate rent reductions.
Even those stores that have stayed afloat have skipped rent in unprecedented numbers, squeezing landlords. Mall owners, particularly those with properties in saturated markets already weakened by changing consumer habits and the growth of e-commerce, have taken the brunt of the pain as tenants struggled with or withheld rent.
Lenders, meanwhile, are running out of patience to allow rent deferrals and other concessions.
In recent years, mall owners have tried to sell noncore properties to strengthen their balance sheets while renovating to draw more relevant tenants. Still, values for retail property have tumbled—for some malls by as much as 80%—hurting owners’ access to the capital and debt markets they once enjoyed.
“Families used to come on weekends, drop their children off, get a burger and their entertainment fix. People don’t spend six to seven hours in a mall anymore,” said Abdi Mahamedi, president of privately held Carlyle Development Group, which has owned, managed and redeveloped malls in New York, Arizona, Massachusetts, Missouri and Tennessee.
Even before the pandemic, CBL faced a challenging environment with some retail tenants closing stores and seeking breaks on rent last year, according to documents filed by the company’s financial adviser, Mark Renzi.
PREIT said the once-in-a-century global pandemic has devastated many of its tenants. Those retailers’ distress had a “trickle-up effect” on the landlord, it said.
All mall owners, including CBL and PREIT, temporarily shut down enclosed shopping malls in March to curb the spread of Covid-19. Many tenants stopped paying rent for a few months. Almost all of CBL and PREIT’s malls have since reopened.
Yet more customers than ever are shopping online, driving purchases to the mall industry’s biggest disrupter, Amazon.com Inc., which capitalized on pandemic-era demand to post record sales and profits.
For landlords, the picture has brightened somewhat as the country has reopened and tenants have resumed paying rent. But ongoing social-distancing guidelines and less traffic meant many have had to cut rents by around 25% to retain their tenants, property brokers said.
CBL’s rents have been picking up after they slowed to a trickle in April, returning to 100% of the totals owed in September, the company said in a regulatory filing Monday. Foot traffic has also picked up at some of CBL’s malls, though the number is still off by 30% to more than 40% compared with last year, according to the filing.
“Although restrictions are being relaxed in various jurisdictions and the malls have reopened, the financial losses suffered by properties in those jurisdictions will not be easily recovered,” Mr. Renzi said.
PREIT said it believes it will continue to have difficulty collecting all rents it is owed so long as worries about the coronavirus make shoppers hesitant about returning to malls.
After months of leniency, banks and other lenders have started to crack down on mall owners and other landlords of retail properties.
CBL’s bank lenders took steps in the middle of debt restructuring talks to collect rents for themselves that would otherwise have gone to the company, forcing an “emergency” chapter 11 filing, Mr. Renzi said. The agent for CBL’s bank lenders, Wells Fargo Bank NA, declined to comment.
CBL carries more than $4 billion in debt, including $2 billion in mortgages on its properties, while PREIT owes more than $900 million in debt.
CBL is proposing to use chapter 11 powers to slash nearly $1.5 billion in debt and other payment obligations while handing over 90% of the company to bondholders. Common and preferred stockholders are in the money under CBL’s proposal, receiving shares and warrants in the restructured company.
PREIT’s restructuring offer includes extending its debt maturities and converting unsecured debt into secured debt while retaining equity for shareholders. While PREIT has convinced most creditors to go along with its restructuring, the company said one investor, Strategic Value Partners LLC, is holding out. Strategic Value Partners declined to comment.
CBL and PREIT require court approval to put their proposals in motion.