What happened

CBL & Associates Properties (NYSE:CBL), a real estate investment trust, or REIT, that owns a portfolio of 119 properties, mostly retail-oriented, reported third-quarter earnings that disappointed investors. As of 10:30 a.m. EDT on Friday, November 3, the first trading day after the announcement, the stock had plunged by more than 25%.

The results were pretty terrible all around. FFO and adjusted FFO (the REIT version of "earnings") dropped by 7.1% and 12.3% year over year, respectively, and portfolio occupancy declined by 40 bps from the same quarter in 2016.

Two parents and teenage daughter holding several shopping bags.

Image source: Getty Images.

In addition, same-store sales dropped year over year, leasing activity looked awful, and the company slashed its full-year FFO guidance ratio from a range of $2.18-$2.24 to $2.08-$2.12. The company is now expecting same-store NOI growth to be negative 2%-3%.

Not only did earnings disappoint, but the company made the decision to slash its dividend by 25% -- a major red flag for REIT investors.

Analyst downgrades followed the gloomy report. Notably, Wells Fargo downgraded the company to market underperform with a $7 price target, which is undoubtedly adding to the downside pressure on the stock.

So what

Nobody should be surprised that the mall retail space is facing challenging times right now. There have been 22 major retail bankruptcies so far in 2017, and many of these are retailers you would ordinarily expect to see in malls and shopping centers. However, CBL's report just shows that the retail headwinds are affecting the company even more than expected.

Now what

Obviously, the third quarter is a big disappointment for CBL & Associates' shareholders, and it should be. The question is how long it will take for mall operators to adapt to the changing retail environment, and how much the adaptation process will affect profitability.

CBL's president & CEO Steven Lebovitz said the company is "successfully replacing underperforming retailers with higher performing tenants and more diverse uses." He went on to say that the company is transforming its properties into suburban town centers that offer dining, fitness, health and beauty, and more service-oriented businesses, which should certainly help the company adapt to e-commerce headwinds.

If the company's strategy proves to be successful, the current low share price could be a bargain. However, there's definitely a major element of risk, which is even greater now after the poor results this past quarter.

Matthew Frankel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.