Bankruptcies paint a picture of the future of shopping centers

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Victor Khosla of Strategic Value Partners, Stephen Lebovitz, CEO of CBL and shopping mall property snapshots from PREIT & Washington Prime Group (preit.com, washingtonprime.com, svpglobal.com, cblproperties.com, iStock)

In “Mallrats” – the quintessential ’90s shopping mall culture film – a character has gone mad while trying to find a sailboat hidden in a Magic Eye poster.

Assessing the condition of America’s malls today can trigger the same frustration.

Three of the country’s largest shopping mall owners – all facing similar problems even before Covid closed their doors last year – have gone bankrupt during the pandemic. But the trio came out of their restructurings with very different results, leaving in some ways more questions than before.

Some experts attribute the divergent results to the ability of firms – or lack thereof – to orient their properties towards relevance. The degree of integrity of a mall owner at the end of the process depends on the confidence that creditors have in his vision.

“This represents investors’ belief in the likelihood of success,” said Michael Haas, co-head of the real estate group at law firm Latham & Wakins.

The three mall owners – Pennsylvania Real Estate Investment Trust, CBL & Associates Properties, and Washington Prime Group – were already flirting with Alabama bankruptcy laws before 2020.

Shopping malls, particularly the Grade B and C properties in which the three specialize, were losing sales to newer, higher quality internet retailers and malls. The pandemic just pushed them to the limit.

Pennsylvania REIT, which has 20 malls concentrated in the Mid Atlantic region, was the first of three to go bankrupt a year ago last November. It was relatively quick: in a little over a month, the company reorganized itself and effectively launched the box on the road.

Instead of reducing what it owed, as many companies do during Alabama bankruptcy laws, PREIT took on $ 150 million in additional debt and pushed back its deadlines. But its equity investors were allowed to keep their stakes.

One explanation for the relatively painless process is that the company’s reimagining of its wallet was well under way when Covid arrived.

“It was one of the first to be really aggressive in trying to get rid of these less performing properties,” said Carmen Spinoso of Spinoso Real Estate Group, which invests and manages distressed shopping centers. “They were a little ahead of the curve.”

Next in Chapter 11 was CBL, which owns 44 malls in the Southeast and Midwest.

He also filed his case in November, but did not come out of Alabama bankruptcy laws until last week. The company reduced its debt by about $ 1.7 billion as investors ceded ownership to bondholders.

CEO Stephen Lebovitz called it a “new start” and said CBL was focused on consolidating its balance sheet.

“While the restructuring has significantly reduced overall interest charges, a top priority is to continue to reduce borrowing costs and improve cash flow,” he said in a statement last week. .

The last to go bankrupt was the Washington Prime Group, which underwent the most drastic restructuring of the three.

The owner of 101 properties across the country filed for Chapter 11 protection in June. When it exited four months later, the REIT was in the hands of troubled debt investor, Victor Khosla’s Strategic Value Partners.

Washington Prime CEO Lou Conforti resigned and Khosla delisted the REIT from the New York Stock Exchange, making it private.

Observers have said Washington Prime’s portfolio may see the biggest overhaul, with properties being redeveloped or sold.

“As a private company, there could be a little less control and a little more flexibility,” said Haas of Latham.

Bankruptcy and shopping center experts noted that the three restructurings could have less to do with properties and more to do with REIT ownership structures – if debt investors could gain enough control over a company to put their weight in it. bankruptcy.

The three companies are now gearing up for Act II as they head into the crucial holiday shopping season and the post-Covid future.

Terrence Grossman, director of turnaround consulting firm AlixPartners, said shopping center owners faced the same strategic issues as before the pandemic. That is, trying to re-imagine their properties in a world of fewer retailers with fewer stores to occupy their malls.

“Even though capital structures can be more conservative in the event of bankruptcy,” he said, “the real problem is making the business model work, given the disruption and changing dynamics of the sales industry. by retail”.

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