Mall Owners Pennsylvania REIT and CBL File for Chapter 11

Nov 02

Two Shopping Center Owners Seek Court Approval to Restructure Debts

Pennsylvania REIT, owner of the Springfield Town Center in Springfield, Virginia, is one of two REITs looking to bankruptcy court to support the firm's restructuring plan. (CoStar)Pennsylvania REIT, owner of the Springfield Town Center in Springfield, Virginia, is one of two REITs looking to bankruptcy court to support the firm’s restructuring plan. (CoStar)

Just as the holiday shopping season swings into gear, two major shopping center and mall real estate investment trust have succumbed to the hardships retailers are facing after the pandemic forced many businesses to close and led to a rapid and massive shift in consumer spending.

Pennsylvania Real Estate Investment Trust and CBL & Associates Properties filed for Chapter 11 bankruptcy reorganization overnight after vying unsuccessfully for months to restructure their debts out of court. The REIT has owned and operated millions of square feet of retail space in more than a dozen sites up and down the East Coast and Michigan.

The owners and operators of enclosed malls and shopping centers were among the first REITs to acknowledge last spring that ongoing retailer bankruptcies and consumer and government responses to curb the COVID-19 pandemic made bankruptcy a real possibility.

PREIT filed a prepackaged financial restructuring plan under which the company seeks to be recapitalized and have its debt maturities extended.

PREIT announced last month that it had entered into restructuring agreement with more than 95% of its bank lenders. The deal was contingent upon getting approval from 100% of its lenders.

The plan calls for providing an additional $150 million to recapitalize the business. The Chapter 11 filing looks to secure court approval for a similar plan.

“We are grateful for the significant support we have received from a substantial majority of our lenders, which we expect will enable us to complete our financial restructuring on an expedited basis,” Joseph F. Coradino, CEO of PREIT, said in a statement. “With the overwhelming support of our lenders, we look forward to quickly emerging from this process.”

CBL & Associates and 176 affiliated companies also each filed petitions in the bankruptcy court seeking relief under Chapter 11, retaining the Berkeley Research Group to advise it.

CBL owns and manages more than 100 properties in 26 states, including dozens of enclosed, open-air and outlet retail centers. It said the bankruptcy filing came after months of discussions about alternatives, before executives decided Chapter 11 offered the best choice.

“With an aggregate of approximately $1.5 billion in unsecured debt and preferred obligations eliminated and a significant increase to net cash flow, upon emergence, CBL will be in a better position to execute on our strategies and move forward as a stable and profitable business,” Stephen D. Lebovitz, CEO of CBL, said in a statement.

Single-Tenant, Net-Lease Sector Bucks Slowdown in Chicago Retail Sales

Oct 29

Market Stat: Low-Interest Rates, Length of Cycle Contribute to Outsize Share of Sales

If there is one bright spot in an otherwise cloudy Chicago retail market, the single-tenant, net-lease sector is it, as sales have remained strong in the face of a broader slowdown in retail sales activity.

With approximately $1.8 billion of retail asset trades occurring in Chicago year to date, total retail sales volume is on pace to decline by more than 10% in 2019 relative to 2018. That would be the third decline in the past four years since the recent peak of $4.4 billion in 2015.

The sales slowdown has hit almost every segment of retail, including larger regional shopping centers, malls and smaller strip malls, with even the grocery-anchored segment slowing down after being a large contributor to retail sales earlier in the economic cycle that began with the end of the recession. The only segment holding strong is the single-tenant, net-lease sector, which has accounted for approximately $1 billion of total retail asset sales to date. This equates to nearly 55% of total retail sales activity this year, the highest level in the past 5 years.

Long favored for its “bond in a box” qualities, the single-tenant sector has become a darling for investors and banks alike. Investors have been drawn to the sector’s predictable cash flows, which are oftentimes secured by credit-rated tenants at yields higher than offered by those same tenants’ publicly traded bonds, despite similar credit risk and ownership of a real asset.

While their bond-like qualities lead net-lease capitalization rates to be highly sensitive to movements in interest rates, the current low-for-long environment, coupled with the prospect of further rate cuts from the Federal Reserve, have given investors confidence that the rate of return on investment will remain at, or near, record lows for the foreseeable future. In addition, contracted rental escalations that often exceed the rate of inflation provide a level of cushion should cap rates rise.

An additional catalyst to the strength of single-tenant, net-lease sales has been 1031 exchange investors, who are naturally drawn to the hands-off, bond-like qualities of the segment. The 1031 exchange allows investors to defer capital gains taxes from the sale of real property so long as the proceeds from the sale are put directly into the investment of like-kind property, subject to timing limitations. Thus, the length of this economic cycle has driven a 1031 sector that is flush with recycled capital currently seeking out exchange properties.

Lastly, commercial banks, being well aware of the struggles in the retail sector, have generally taken a risk-averse approach to speculative new construction and struggling secondary retail properties. However, single-tenant net-lease retail provides a much less risky way to maintain their commercial real estate loan exposure to the retail sector. Thus, while the retail sales slowdown is unlikely to reverse course in the near future, low interest rates and significant equity and debt capital should help the single-tenant, net-lease segment continue to buck the trend.

Sales Rebound, But Pricing Clarity Remains Elusive

Oct 29

The third quarter saw a bounce back in commercial property sales from the big declines of the second quarter. Unfortunately, that hasn’t translated into a clear direction on pricing.

High-quality assets traded well, while the most-challenged properties remain off the market, according to Robb Calhoun, a CoStar managing director and senior economist, in a new video report on the capital markets.

Deals for the third quarter totaled about $80 billion, up more than 50% from the second quarter. Even so, it’s still down more than 40% from the pre-pandemic third quarter of 2019.

Office deals were off the most as that property type faces some hard-to-answer questions about the timing of future demand, including how the widespread pandemic adoption of working from home will play out.

Industrial sector properties are getting a significant boost with a rise in e-commerce spending and a corresponding demand for space. The sector set a record for new leases signed in the quarter.