The two U.S. mall owners that filed for bankruptcy on Sunday could be just the beginning.
As retailers ranging from J.C. Penney Co. to Brooks Brothers Group Inc. go bust, their landlords are struggling, too. But rescuing malls will be unusually complicated because the properties have byzantine webs of financing that have only grown more elaborate with time. Interest groups ranging from lenders to shareholders to tenants to holders of complex mortgage bonds are wrangling over how to fix the situations, and for many large property owners, bankruptcy will be the only option, restructuring professionals said.
That’s what CBL & Associates Properties Inc., which controls more than 100 retail properties including malls and shopping centers, found. The real estate investment trust spent months trying to restructure out of court before entering bankruptcy in November. Pennsylvania Real Estate Investment Trust, the owner of about 30 retail properties in mid-Atlantic states, also filed for bankruptcy this week. Both aim to continue operating in bankruptcy.
There’s more pain to go around. As of October, 14% of U.S. malls were delinquent on their mortgages, almost double the high after the financial crisis, according to an analysis of mortgage bonds by research firm Trepp.
Traffic, Revenue
Some of CBL’s peers, like Taubman Centers Inc. and Washington Prime Group Inc., have already been scrambling to get lenders to ease terms of their credit agreements. They’ve asked debt investors to relax requirements like the minimum amount of earnings they need relative to their borrowings, according to regulatory filings.
Malls are financed with a dizzying array of bonds, loans and equity, including debt obtained through the commercial mortgage backed securities market. Many of the properties are at least partly owned by one or more of the department stores that anchor them. The varieties of debt that malls have taken on have only grown more complex over the last decade.
Jeffrey O’Neale, a partner in the real estate practice of law firm Mayer Brown in Chicago, likened the drama for most malls to a family.
“It was easier to make decisions in my household when it was just me,” O’Neale said. “When I’m with my wife, and my brother and sister-in-law are in town, it’s another story,” he said. “It’s the commingling of a lot of interested parties that makes things so much more complex.”
Some malls are just trying to reduce their debt levels, or ease restrictions on their borrowing, when they may need to make more drastic changes that can happen only in bankruptcy, O’Neale said.
“Traffic is down and revenues are down. Some of these malls are not gonna make it under the current business model,” he said. “No amount of restructuring can change that.”