SPG Simon Property Group Inc

A surge in store closures makes some mall proprietors leave troubled locations

By Esther Fung 

Mall landlords are increasingly walking away from struggling properties, leaving creditors in the lurch and posing a threat to the values of nearby real estate.

As competition from online retailers batters store owners, some of the largest U.S. landlords are calculating it is more advantageous to hand over ownership to lenders than to attempt to restructure debts on properties with darkening outlooks.

That, in turn, leaves lenders with little choice but to unload the distressed properties at fire-sale prices.

In the period from January to November 2016, 314 loans secured by retail property -- totaling about $3.5 billion -- were liquidated, 11% more loans than in the same period a year earlier, according to data from Morningstar Credit Ratings. The liquidations resulted in a loss of $1.68 billion.

"We're seeing a boatload of these kinds of properties coming to market," said James Hull, managing principal of Augusta, Ga.-based Hull Property Group, which bought five malls from foreclosure sales in 2016. "There have been some draconian losses for the enclosed-mall business."

The moves are an echo of the housing crash, when mortgage borrowers stopped making payments and walked away from homes that had lost value. In some cases they sent back the keys in envelopes, a practice derided by critics as "jingle mail."

As mall property values sink below their loan balances, "some mall owners are more aggressively taking the step to walk away," said Morningstar Credit Ratings Vice President Edward Dittmer.

Mall giant Simon Property Group early last year defaulted on a $45 million loan that was secured by Greendale Mall in Worcester, Mass., which was then foreclosed on. Simon declined to comment.

Washington Prime Group in November said it was considering turning two malls in Grand Junction, Colo., and Lancaster, Ohio, back to its lenders, mostly bondholders who hold the mortgages that have been bundled into securities. The Columbus, Ohio-based landlord also noted in an earnings call that malls it owned in Chesapeake, Va., and Merritt Island, Fla., had been foreclosed on. The value of the mortgages for the four malls was $247.5 million. Washington Prime didn't respond to requests for comment.

CBL & Associates Properties in 2014 announced plans to prune its portfolio and so far it has unloaded 14 malls, eight of which it sold and six it handed back to lenders. The six malls that CBL returned to lenders had a debt balance totaling $381 million.

The Wausau Center mall in Wausau, Wis., was a bustling regional shopping center when it opened in 1983 with three anchor stores. Today, J.C. Penney and Sears are gone, leaving department store Younkers as the only anchor tenant.

CBL last July returned to creditors the $18 million mortgage on the roughly 424,000-square-foot property. The mortgage, which had been bundled into securities and sold to bondholders, was initially underwritten by Wells Fargo & Co. A spokeswoman for Wells Fargo said the bank couldn't comment on specific loans but that it would continue to provide financing for malls on a case-by-case basis.

A CBL spokesman said the firm spent time and resources over a two-year period working with the city on revitalizing the mall, but was stymied by red tape.

"Delays, including the city approval process, held up the project past the point of what would have allowed for us to successfully complete it, " he said. "As a result, we decided that the best course of action for all parties would be to return the property to the lender and allow the city to execute their plans with new owners at their own pace."

Wausau Mayor Robert Mielke said CBL didn't do enough marketing or maintenance, with the mall plagued by lapses in plumbing, holes in the roof and lightbulbs not getting changed. "CBL wasn't a very good business partner," Mr. Mielke said.

"If a mall closes or goes into decline, you're going to see declining property values in the area," said Arthur C. Nelson, professor of Urban Planning and Real Estate Development at the University of Arizona. "The mall is a marker."

Despite a strengthening economy in 2016, the delinquency rate for loans backing retail property rose by 0.6 percentage point last year to 5.76%, according to Trepp LLC, a real-estate data service. Special servicers, which deal with troubled commercial mortgage securities, managed $3.1 billion worth of mall-backed loans last year, up from $2.9 billion in 2015, according to Trepp.

This year is off to a shaky start. Earlier this month, Sears Holdings Corp. said it would close 150 stores, and Macy's Inc. gave more details of a plan to close 100 stores.

Limited Stores Co. said it plans to close all 250 stores and filed for chapter 11 bankruptcy protection last week.

"We don't have a favorable outlook for secondary and tertiary malls with weaker sales. We look at them with a high degree of skepticism," said Eric Thompson, senior managing director at Kroll Bond Rating Agency.

One reason mall owners struggle to restructure loans is that many were packaged into commercial mortgage-backed securities, and these bonds in turn are owned by numerous investors, making it difficult to negotiate new deals.

Landlords can negotiate with lenders a "deed-in-lieu" of foreclosure, in which they sign over ownership of the mall to the lender. If this can't be arranged, a foreclosure process typically follows.

Borrowers typically take hits to their creditworthiness when forfeitures occur. But so far Washington Prime, CBL and Simon haven't had downgrades to their credit ratings.

Big mall landlords such as publicly traded real-estate investment trusts say walking away is a justifiable response to shareholder pressures to shore up balance sheets and unload troubled assets. In the case of a default, creditors make claims only on the collateral that backs the loan, not on the borrower itself.

"It doesn't negatively impact their corporate credit quality," said Steven Marks, who heads Fitch Ratings' U.S. REIT group. "If anything, we oftentimes view these transactions positively, as it indicates financial discipline to not commit corporate capital towards failing or uneconomic investments."

Write to Esther Fung at esther.fung@wsj.com

(END) Dow Jones Newswires

January 25, 2017 02:47 ET (07:47 GMT)

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