Mall REITs are bracing for tougher times ahead

By: Auther Bett
Auther Bett
Auther V. Bett, CPA started reporting in the finance and accounting space in 2016. His interests span stocks, bonds, real estate,… read more.
on May 4, 2020
  • Mall owners with REITs are staring at hard times ahead following massive closure of retail businesses.
  • Property owners have recorded a sharp increase in rent payment defaulting among renters amid the pandemic.
  • CBL, an American REIT, recently declared a nil dividend, hinting at a brewing property market crisis.

The outbreak of the deadly Coronavirus has dealt a major blow to the global economy. Some of the most effective measures put in place to curb the virus spread include social distancing, which is awful news to mall owners with real estate investment trusts (REITs) in their portfolios.

Businesses are already shifting online and closing brick and mortar locations in malls, thanks to a strained economy. But even before the Covid-19 pandemic, malls had already been hit by a drastic shift to online shopping, and it has only taken a couple of weeks to put struggling ones out of business.

Forced closure

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A majority of the malls are built to bring the masses together at a central point, and considering how easily Covid-19 spreads in crowds, that makes these locations unsafe today. If you also take into consideration the fact that several retailers housed by the properties that mall REITs are vending discretionary items such as jewellery and clothing, you realize its no wonder malls were among the first to be closed when lockdown measures were announced by respective governments globally.

But then it wouldn’t be such a bad thing if tenants continued paying rent. Reports, however, indicate that most retailers are under serious financial strains with most opting to rent-renegotiate or total closure. And of course, some have outrightly declined to pay up and the logic is that if malls are not operational, why should they remit rent?

However, the renters have their fair share of bills to settle including bank loans, salaries, maintenance, and more. If they fail to carter to these expenses, things could turn ugly pretty fast.

Unfortunately, that is what is currently happening.

While the most leveraged malls are the ones feeling the most heat from creditors, it is only a matter of time before their high equity-financed counterparts run bankrupt too, owing to prolonged financial distress.

Additionally, those malls that are less desirable are also on the receiving end. For instance, a mall operator like CBL (NYSE: CBL) with a relatively weak balance sheet was forced to record a nil dividend even before the world was badly hit by the Coronavirus pandemic. Sources alerted Bloomberg that the company has since engaged a team of advisors for possible restructuring.

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