Recently we learned that two mall real estate investment trusts, or REITs, declared bankruptcy after the COVID-19 pandemic decimated their already-fragile businesses. Pennsylvania Real Estate Investment Trust (PEI) and CBL & Associates (CBLQ) were the first two victims of the pandemic, but will there be others in the mall REIT space? In this Fool Live video clip from our Nov. 2 Industry Focus show, host Jason Moser and Fool.com contributor Matt Frankel, CFP discuss why these two mall operators ran into trouble, what comes next, and whether mall REIT investors should be worried about other major operators.
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Jason Moser: Let's move over to one of your specialties, real estate investment trusts, REITs. We love talking about these companies because they are typically very high yielding investments. They like to pay out or they have to pay out a lot of their income, their dividends in order to maintain that REIT and tax-advantaged status. But we saw news today, there are two more mall owners and CBL and Pennsylvania real estate investment trust. These are smaller REITs to be fair, but they have filed for Chapter 11 bankruptcy protection and when I saw this headline this morning, I immediately thought of you because you know this space so well and on the one hand I thought, well, they're small. I don't know that it's all that big of a deal but the other hand I'm thinking, is this a sign of continued trouble headwinds, problems that investors should be aware of?
Matt Frankel: Well, first off, these aren't necessarily small companies. These are companies that have become penny stocks over the past few years. They didn't start out that way.
Jason Moser: They earn their way to smallness.
Matt Frankel: They own a lot of malls, so in essence, they're actually pretty large companies.
Jason Moser: Yeah.
Matt Frankel: I mean, Pennsylvania Real Estate Trust owns the mall I used to shop at as a kid that's still in New Jersey. The Cherry Hill Mall, if anybody knows where that is. Both of these filed Chapter 11 today. It's really rare for a real estate investment trust to have to file bankruptcy. It's very, very rare. I can't tell you the last one that did it. It was just a matter of time for these two though. These were kind of inevitable, especially in CBL's case, their debt's just spiraling out of control. Uncollected rent, a lot of big mall tenants have gone bankrupt this year. Ascena Brands (ASNA), which is the parent company of Ann Taylor of LOFT, and a few other brands. Tailored Brands, which has Men's Wearhouse and JoS. A. Bank and J. C. Penney, which is a giant anchor, especially for these two companies, have all gone bankrupt. So this was CBL's case, which was the debt was unsustainable before all those went bankrupt. So just to put this in perspective, this was a $0.17 stock before this happened.
Jason Moser: Wow.
Matt Frankel: It was pretty much already priced in, I wouldn't even take the bankruptcy really moved the needle all that much. In the case of Pennsylvania real estate trust, this was a planned in what they call a prepackaged bankruptcy and there's a $150 million in recapitalization financing, ready and waiting. They are expecting to emerge pretty quickly. But for existing common stockholders, it's not very good news. The one thing to keep in mind is that these are, not only are they not what they call the Class A malls, these are the regional malls, the ones that have had been struggling for years. The companies don't have a lot of liquidity, which is the word of the day, 2020, REITs that have liquidity are doing well, the ones that don't, are not. Don't worry about the Class A mall operators. Just because of this, like Simon Property Group (SPG 3.41%), I'm not planning to sell anytime soon.
Jason Moser: Right.
Matt Frankel: They have over $8 billion in liquidity, a very manageable debt load, and they have the capital available to reposition their properties when a tenant goes bankrupt.
Matt Frankel: Simon just bought J.C. Penney actually, come to think of it.
Jason Moser: That's right, I remember we talked about that.
Matt Frankel: Right. So they own the operating business now. So they bought a of few it, they bought J. Crew. They recently bought Lucky Brand. Simon has the money to do that. So I wouldn't worry too much about the high-end mall operators because not only are they buying up these retailers left and right, but they have the capital to reposition their properties to adapt to the new retail environment. Say, OK, you don't want a big department store, fine. We're going to put a concert venue where that was. Companies like CBL and Pennsylvania Real Estate Trust don't have the money to do that. So it's not really an apples-to-apples comparison. Though the writing was on the wall for a long time. Their malls are going to stay open, both are continuing operations while the bankruptcy proceedings are going on in Pennsylvania Real Estate Investment Trust's case, it's expected to emerge fairly quickly. This just kind of really underscores that quality matters more than ever right now. Especially in the troubled sectors like retail, hotels, things like that. The troubled sectors of real estate quality is the most important thing to look out when you're evaluating the stock
Jason Moser: Yes, I'm glad you said that. I'm glad you said that regarding quality because going back to just what we were talking about a minute ago in regard to evaluations and price matters. When we see these types of valuations that we're seeing with a lot of these businesses today. Some of them are going to end up being great ideas. Some of them are going to be really successful and some are not. Just to really focus on the quality of the business when you start getting to these lofty valuations and you feel like that's a little bit of a concern, just make sure to give that quality a little bit of an extra waiting when you're considering businesses to add to your portfolio because it really can help you sleep at night. I can tell you that.
Matt Frankel: For sure. It's always important to focus on quality when you're talking about real estate. But especially in tough times like this when it's really just uncertain and companies need to have capital available to weather the storm.