On March 9, CBL & Associates Properties filed its annual report with the SEC that included a word that wasn't there the year before: "pandemic."
It was included on a list of factors beyond the company's control that could affect shopping at the malls it operates and owns. In a bullet point, CBL said that pandemic outbreaks, or the threat of, could "cause customers of our tenants to avoid public places where large crowds are in attendance."
The week after that language appeared in a regulatory filing, retailers began rushing to close their stores en masse as it became apparent that the COVID-19 pandemic was making its way through the U.S. with deadly consequences. The closures would go on for months, and as retailers tried to ensure their survival by raising and maintaining cash, retailers of all sizes and financial profiles skipped their rent payments.
Those skipped payments are still reverberating throughout the ecosystem. And CBL could become the first large landlord to crack and file for bankruptcy, as the system undergoes a shock unlike any other it has faced.
CBL, according to analysts, operates mainly B-class malls, exposing it to all the struggles of that class of shopping center. It has middle-tier stores in middle-tier markets, in a world where the middle is getting hollowed out by income stratification, as consumers break left and right for value or luxury and experience.
When Moses Lebovitz, his son Charles Lebovitz (today the chairman of CBL) and Jay Solomon started developing shopping center real estate in 1961, launching a business partnership that would eventually lead to the creation of CBL, they were part of a thriving market.
"Let's not forget that malls were a central part of the U.S. retail system in the 1960s, 70s and 80s," Nick Egelanian, president of retail development firm SiteWorks, said in an interview. Malls then were a one-stop destination that revolved largely around everyday goods.
The ensuing decades changed that, as discounters, big-box stores and strip centers disrupted department stores and other mall retailers, and the malls themselves started to shift toward fashion, which brought higher margins for retailers and higher revenue for mall operators.
The drift toward apparel and fashion within the entire mall reshaped the business, creating a bifurcation among shopping centers themselves. While other real estate companies such as Simon Property Group bought up other REITs and malls, or conversely sold themselves to others, CBL plugged along with a portfolio that was diminishing in value.
"You started to have this class of super valuable, super premium fashion malls. If you were not getting Nordstrom, Neiman Marcus, Saks, Bloomingdale's or a really good Macy's, you were going backwards," Egelanian said. "What was a good business for CBL … started to see declines."
"Companies like CBL really didn't understand it," he added. "It was happening in slow motion."
But the decline is plenty apparent today. Dozens of retailers have gone bankrupt, including major anchors like Sears, Bon-Ton and J.C. Penney, as well as numerous fashion and mall-based specialty retailers. The upheaval in retail shows in CBL's numbers. It's revenue has declined for each of the past five years and the company has recorded sizable net losses for the past two years.
Looking at the list of CBL's most important retail tenants, in terms of the revenue they bring in, few are without troubles right now. L Brands tops the list, with 128 stores at CBL properties and accounting for more than 4% of the REIT's revenue. L Brands, with its Victoria's Secret banner wrestling with a years-long decline, is looking to close some 250 stores in the near future. Second on the list is Signet Jewelers, which plans to close nearly 400 stores and turn to an e-commerce focus after major sales and profit losses.
Going down in terms of revenue, some other names on the list include Ascena, The Gap, Finish Line, Express, Forever 21, J.C. Penney, Barnes & Noble, Hot Topic, The Children's Place, Claire's and Macy's, among others — all of which have experienced business struggles of varying degrees, from periodic sales declines to open or exited bankruptcies.
In mid-April, deep in retail's unprecedented physical shutdown around COVID-19, CBL announced it was cutting spending on maintenance and executive salaries, and furloughing employees.
The majority of CBL's properties closed because of government mandates. CEO Stephen Lebovitz said in late May that for the month of April, CBL had received just 27% of billed cash rents, with the rate for May not looking much higher. (By late May, the majority of the company's properties had reopened.) The company's rental revenue fell 15.6% year over year in the first quarter.
"The majority of our tenants requested rent relief, either in the form of rent deferrals or abatements," Stephen Lebovitz said in a statement. "We have placed a number of tenants in default for non-payment of rent." He added that "a significant portion" of April and May rent that was deferred would be collected later in 2020 and into 2021. "However, negotiations are ongoing, and it is premature to estimate a recovery rate at this time," Stephen Lebovitz said.
As rent payments slowed to a trickle, the company negotiated payment deferrals on secured debt, but Stephen Lebovitz said that "[s]ecuritized lenders in general have shown minimal flexibility in amending loan payments."
On June 1, CBL skipped an $11.8 million interest payment on a set of unsecured bonds, not due until 2023, setting in motion a 30-day grace period. As it negotiated with debtholders, it skipped another $18.6 million payment on another group of unsecured bonds, which came with its own grace period. Earlier, in March, the company breached a covenant in its senior secured credit facility after making a draw on the credit line, giving lenders the ability to accelerate its maturity. (They haven't yet done so, and CBL said its seeking a waiver.)
In announcing the first missed payment, the company raised the possibility that it might not be able to survive over the next year.
"Given the impact of the COVID-19 pandemic on the retail and broader markets, the ongoing weakness of the credit markets and significant uncertainties associated with each of these matters, the Company believes that there is substantial doubt that it will continue to operate as a going concern within one year after the date these condensed consolidated financial statements are issued," the company said in its quarterly securities filing in June.
A system disrupted
CBL's troubles in the post-COVID world are not unique. Only about 29% of April mall rents were paid, according to data compiled by Jefferies analysts. (The figure is closer to 26% if you toss out Seritage Growth Properties, which had relatively high payment rates compared to its peers.) For office space, by comparison, 94% of rents were paid, and even strip center rents were nearly 64% paid, according to Jefferies data, which was emailed to Retail Dive.
The early figures for May showed 30% rent collection at malls.
Mall owners and operators, of course, have their own obligations to pay — mortgages, interest, employees and so forth. So as retailers pull back on rent to stay alive, the pain is felt throughout the system. So far, creditors are giving landlords some wiggle room.
"The lease says you have to pay it, and the loan says you have to pay it, but if you pay it you're going to go out of business."
Nick Egelanian; President, SiteWorks
"I think a lot of landlords have been able to get forbearance on their loans," Linda Tsai, a senior equity analyst with Jefferies, said in an interview. "Lenders understand this is an extraordinary situation. For the most part they're willing to give the assistance mall owners need to see how it plays out."
But the system, where more or less every retail tenant pays their rent on time except for the occasional retailer in distress, was not built for a shock of this scale. And thus there is no playbook for dealing with it.
In this environment, landlords are suing retailers for unpaid rent, retailers are suing landlords to get out of rent, and retailers are filing or contemplating bankruptcy to seek shelter from rent or because they're facing lockouts and default notices from their landlords. Bloomberg reported in late May that landlords had sent out "thousands" of default notices to retail tenants.
"Retailers in the best case got some forgiveness, and in the worst case deferred everything," Egelanian said. "And they're not going to pay all that rent."
Which means more mall operators, already struggling before COVID-19 with a decline in the sector, could fall short on funds to pay their own obligations. Retailers and landlords and mall operators are making stark choices about rent and debt payments, and more could come. "The lease says you have to pay it, and the loan says you have to pay it, but if you pay it you're going to go out of business," Egelanian said. "Public companies now have to start looking out for themselves."
What has been a "well-oiled system of interlocking gears" is at risk of becoming "a system of dominoes to knock each other down," according to Egelanian. "It's just unsustainable right now," he said. "You're going to see landlords fall, retailers fall, REITs fail in the market."