Why Mall Owners Increasingly Choose Bankruptcy As Pandemic Continues

The mall industry - and its lenders - are increasingly recognizing that it may be more profitable in the long run to start over and reimagine mall real estate than to try and reinvigorate a sector already failing due to changing consumer behavior, which Covid has accelerated. JL

 Esther Fung reports in the Wall Street Journal:

Mall landlords are starting to seek bankruptcy protection or shutting down, the latest signs that the pandemic is deepening a crisis that began before Covid-19. Even if the pandemic comes under control, the glut of department stores and other retail tenants struggling with lower sales will continue to haunt the mall industry. Many malls purchased with a mortgage within the past 10 years are now underwater. The closure of outdated retail businesses and properties will result in a healthier business environment for both landlords and tenants. Covid-19 also compelled these businesses to become more versatile.

Mall landlords are starting to seek bankruptcy protection or shutting down, the latest signs that the pandemic is deepening a crisis that began before Covid-19.

CBL & Associates Properties Inc. and Pennsylvania Real Estate Investment Trust, two midsized publicly listed mall owners, said last week they were filing for chapter 11 bankruptcy protection after their earlier debt-restructuring efforts failed. Both companies said they have secured support from a majority of their respective bondholders entering the bankruptcy process and hope to emerge from it as soon as possible.

While retailers like Neiman Marcus Group Inc., Brooks Brothers and J.C. Penney Co. have filed for bankruptcy in recent months, it’s rare for real estate investment trusts that own malls or shopping centers to do so. That is because REITs have more conservative debt levels than many retailers. They also have multiyear leases across a wide variety of tenants.

Still, analysts said the mall-owner bankruptcy filings weren’t a surprise.

“Retail has gone through a radical transformation in the last five years,” said Larry Young, a managing director at consultant AlixPartners’ turnaround and restructuring group. “You are getting a knock-on effect as lessees move out. A fundamental reset is what you should be thinking about.”

Mall closings are also picking up, too. Phoenix’s Metrocenter Mall shut down in July, just a few weeks after it was allowed to reopen. The 47-year-old mall had around 30 tenants, less than a fifth of what the property had at its peak decades ago. Cascade Mall in Burlington, Wash., and the Northgate Mall in Durham, N.C., also closed in recent months.

Shares of mall owners and other real estate companies rallied on Monday, after a Covid-19 vaccine developed by Pfizer Inc. and BioNTech SE proved 90% effective in trials. Simon Property Group Inc.’s stock price rose 28%, as investors bet that easing public health fears would bring more people out to the malls.

But analysts say even if the pandemic comes under control, the glut of department stores and other retail tenants struggling with lower sales will continue to haunt the mall industry. In the spring, government-mandated shutdowns and social distancing guidelines further hurt rent collection, which in turn, made it difficult for some owners to service their debt.

Many malls purchased with a mortgage within the past 10 years are now underwater, leading owners to return properties to their lenders at a record pace. But some lenders don’t want struggling properties on their balance sheet and have batted them back by extending their loans.

From January to October this year, 76 loans secured by retail properties totaling $1 billion were liquidated. That was about half the number of loans recorded in the same period in the previous year, according to credit ratings firm DBRS Morningstar.

“The quantity of distressed debt and distressed opportunity is at a historical high,” said Andy Weiner, president of RockStep Capital, a shopping center investment firm that owns 11 malls across the country.

The recent setbacks aren’t all bad news. Some analysts said the closure of outdated retail businesses and properties will result in a healthier business environment for both landlords and tenants.

‘The quantity of distressed debt and distressed opportunity is at a historical high.’

— Andy Weiner, president of RockStep Capital

Covid-19 has also compelled these businesses to become more versatile, including adjusting clauses that allowed tenants to reduce their rent if key tenants or a certain number of tenants leave the retail space. Many landlords offered rent abatements in exchange for fewer restrictions on how they can lease neighboring space.

“I’ve never seen more flexibility in these conversations,” said Dana Telsey, chief executive of Telsey Advisory Group in a recent online discussion.

Many owners are already dismantling the traditional makeup of a mall. Rather than having three or four department stores, they are preparing to live with one.

RockStep sees hope for the sector and is looking to buy some of these distressed malls, bring in more-modern tenants and offer more-affordable leases.

“We are reaching out and welcoming conversations with communities concerned about the viability of their malls,” Mr. Weiner said.