Mall Operator on Brink of Default After Retail Rents Go Unpaid

(Bloomberg) -- Unpaid rent from retailers is upending turnaround efforts at CBL & Associates Properties Inc. and forcing the mall owner to skip an upcoming interest payment while it negotiates with creditors.

CBL said in a filing it withheld the $11.8 million due June 1 on its 5.25% unsecured notes, which mature in 2023, and invoked a 30-day grace period. Last week, the company drew $280 million from its line of credit, furloughed employees and halted redevelopment investments designed to reverse the decline facing many American malls.

The move could put the rest of CBL's debt in jeopardy, too. If the company doesn't make good on the missing bond payment, holders of CBL's senior secured credit facility and other notes due in 2024 and 2026 could demand immediate repayment, according to the filing.

“Our priority during this time of uncertainty has been to preserve cash,” Chief Executive Officer Stephen D. Lebovitz said in an statement to investors last week. Chief Investment Officer Katie Reinsmidt declined to comment.

Trends haven't been in CBL's favor, and it's not just because of the wave of bankruptcies and store closings that predates the virus crisis. Analysts have long predicted a major shakeout in retail properties serving less affluent areas, which dominate CBL's roster of more than 100 properties in 26 states. Its malls have been hard hit by the departures of anchor stores such as Sears, J.C. Penney, Macy's and Forever 21.

“It's definitely a lower, less-productive portfolio,” Bloomberg Intelligence analyst Lindsay Dutch said in an interview. Its same-store sales average less than $400, compared with more than $660 for Simon Property Group Inc., the largest U.S. operator.

CBL lags in occupancy rates, a problem that could grow as retailers elect to keep more stores permanently shuttered. The Chattanooga, Tennessee-based company also lacks the cash to invest in attracting consumers and innovative tenants to its properties, Dutch said.

CBL has reopened 66 of the 68 malls it owns or manages, Lebovitz said. However, it collected just 27% of billed cash rents in April and likely will get 25% to 30% of May rents, based on preliminary receipts and conversations with retailers, he said.

“We have placed a number of tenants in default for non-payment of rent,” Lebovitz said in the May 26 statement. “We anticipate a significant portion of April and May rents will be collected later in 2020 and into 2021 under agreed upon deferral plans. However, negotiations are ongoing, and it is premature to estimate a recovery rate at this time.”

Life Isn't Just About Money, Says CEO of Mall Owner Down 99%

In January, CBL said it was exploring ways to reduce leverage and interest expense andto extend the maturity of its debt. The company hired the law firm Weil, Gotshal & Manges LLP and financial advisory Moelis & Co. LLC, according to the filing.

Even top-ranked centers are hurting now, with market rents at A-level malls expected to fall about 20% in the coming years, said Green Street Advisors, the real-estate research and consulting firm, in a May 27 note.

Green Street has forecast that more than half of all mall-based anchors will close by the end of next year. “Many mall-based retailers are in a much worse financial position compared to last cycle,” Green Street analysts wrote in the note. “Bankruptcy activity could be widespread and the surviving brands will likely seek to reduce their store fleets.”

J.C. Penney Bankruptcy Shows That Retailers Need to Slim Down

Still, the bankruptcy of General Growth Properties in late 2009 shows there can be a second act. The company reworked its $27 billion in debt, incurred during numerous aquisitions, and emerged the following year with Brookfield Asset Management holding a 26% stake. Brookfield took over the mall operator, then as now the second-largest in the U.S., in 2018.

More recently, Brookfield announced the creation of a $5 billion fund to shore up troubled retailers, following moves with larger competitor Simon Property Group to take stakes in bankrupt retailers Aeropostale and Forever 21.

But as shopping centers start to reopen, expect more retail distress, Dutch said.

“Some of those closings are going to be permanent,” she said, and when even healthier merchants decide to close locations, they're going to choose less-productive malls first. “The demand for lower-quality locations isn't there.”