“Amazon Effect” Amplified by Covid Lockdowns — Investors in Certain Mall REITs May Have FINRA Arbitration Claims
As recently reported (May 14, 2020) in the Wall Street Journal: “Amazon.com hurt many retailers. Coronavirus will finish some of them off.” Indeed, numerous U.S. shopping mall real estate investment trusts (REITs) now find themselves attempting to operate their businesses (and stave off bankruptcy) through a quagmire with no definite end in sight.
In the decade leading up to March 2020—when the Covid-19 pandemic began to meaningfully accelerate in the United States—malls and the REITs that operate them were already facing increasing pressure from a growing online shopping trend. This so-called “Amazon Effect” has been profound. According to some estimates, in 2010, eCommerce accounted for only about 7% of total retail sales in the U.S. (up from only 1% in 2000). However, by year-end 2018, eCommerce had essentially doubled, representing approximately 14% of total retail sales.
Over the past several years, as the Amazon Effect has gained further momentum, shopping mall REITs have been negatively impacted, with some demonstrating significant loss of revenue. Take, for example, CBL & Associates Properties, Inc. (NYSE: CBL). Headquartered in Chattanooga, Tennessee, CBL owns and manages a portfolio of “108 properties totaling 68.2 million square feet across 26 states,” primarily in the Southeast U.S. In 2016, CBL’s adjusted funds from operations (FFO)—a key earnings metric for REITs that is somewhat comparable to earnings per share (EPS) for other companies—peaked at $2.41 per share.
Since year-end 2016, CBL, which primarily operates B-class malls including middle-tier stores in smaller, middle-tier markets, has continued to struggle. In 2017, CBL’s adjusted FFO fell to $2.08 per share, and in 2018, CBL’s reported adjusted FFO was $1.73. This downward trend continued through 2019 year-end, with CBL only reporting adjusted FFO of $1.39. And now—with the coronavirus pandemic accelerating (as of this writing, the U.S. is fast approaching 4 million confirmed cases)—shopping mall REITs like CBL that were already beleaguered by the Amazon Effect are now struggling to survive.
For April 2020, CBL only took in 27% of rental payments from its tenants and anticipated a similar amount for May. On June 1, 2020, CBL was unable to meet an interest payment coming due and, as of mid-July 2020, has entered into several forbearance agreements with the owners of its debt, including on a credit agreement, as well as with the holders of more than 50% of certain 5.25% senior unsecured notes.
Other shopping mall REITs displaying similar financial distress include Washington Prime Group Inc. (NYSE: WPG) and Pennsylvania Real Estate Investment Trust (a/k/a PREIT) (NYSE: PEI). Washington Prime Group was formed in May 2014, through a spin-off from Simon Property Group, Inc. (NYSE: SPG); shortly after this spin-off, WPG acquired Glimcher Realty Trust in January 2015. As recently reported in the Wall Street Journal (May 11, 2020): WPG “is in discussions with creditors about a potential debt restructuring and warned it may not survive if the talks fail.” Year-to-date, WPG is trading down nearly 80% from its 52-week high.
PREIT is geographically concentrated on owning and operating shopping mall assets in Pennsylvania (in addition to surrounding Mid-Atlantic states). For the quarter ending March 30, 2020, Philadelphia-headquartered PREIT announced that, due to the Covid-19 pandemic, it was amending “its 2014 7-Year Term Loan and 2018 Term Loan Facility to provide certain debt covenant relief through September 30, 2020.” Furthermore, PREIT stated that it “anticipates not meeting certain financial covenants applicable under the credit agreements after September 30, 2020.” Year-to-date, PREIT is trading down roughly 80% from its 52-week high.
Investors who were steered into certain risky shopping mall REITs by their broker or financial advisor may have claims to be pursued before the Financial Industry Regulatory Authority (FINRA), provided the recommendation to invest was unsuitable or otherwise misleading. The attorneys at Giarrusso Law Group LLC have considerable experience working closely with investors in REITs, including non-traded REITs and private placement offerings, to recover their investment losses. Investors who wish to discuss a possible claim are invited to contact us by telephone at (201) 771-1115 or by email at info@gialawgroup.com for a no-cost, confidential consultation.