WPG - 1 Struggling Mall REIT Is Running Out of Time
Real estate investment trusts (REITs) rarely file for bankruptcy protection. As income-oriented investment vehicles, REITs tend to be managed conservatively: Steady cash flow is the goal, not rapid growth. Most REITs also have diversified tenant bases, mitigating the risk of losing rent due to tenant-specific problems. Furthermore, lenders generally require REITs to limit their borrowings to no more than 60% or 65% of the value of their assets, providing a meaningful margin of safety in the event of market turbulence.
However, while REIT bankruptcies are rare -- and may not lead to a complete loss of shareholder value, as seen following the 2009 General Growth Properties bankruptcy -- REIT stocks can go to zero. Indeed, that could soon be the fate of long-suffering mall REIT CBL & Associates (NYSE: CBL). Earlier this week, CBL skipped an $11.8 million interest payment. If it doesn't make that payment within a 30-day grace period, the company would default on much of its debt, likely leading to bankruptcy.
Problems have been building up at CBL for several years. Unless you've been living under a rock, you're probably aware that mall traffic has been plunging in the U.S. The convenience of e-commerce, the low prices available at discount and off-price stores (which typically aren't located in malls), and a shift in consumer spending away from apparel have represented a triple-whammy for malls -- and the department stores that typically serve as anchor tenants.