Many retail REITs had been struggling long before the COVID-19 pandemic, so it isn't surprising that some of the weaker players in the space ended up declaring bankruptcy in 2021. Washington Prime Group (WPG) is the latest one to do so, and in this Fool Live video clip, recorded on June 14, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss whether other mall REITs could be headed for a similar fate.
Jason Moser: Matt, we like to talk about REITs on the show, real estate investment trusts. I know that you love digging into the space for your services with Millionacres, Real Estate Winners, etc. There was a headline here, mall owner Washington Prime, one of the latest REITs to file for Chapter 11 bankruptcy. Just an interesting back story there with Washington Prime where it originally came from. We wanted to hit this from two angles, I think really because first and foremost, we just talk a little bit about Washington Prime and what really prompted this. Then also, generally speaking with REITs, I mean what were the signs? Or were there signs that this was coming? Are there things that investors can look out for when it comes to real estate investment trust to make sure that they avoid getting involved with the situation like this one.
Matt Frankel: It's a really interesting dynamic with retail real estate specifically right now. This really highlights how much quality matters in the retail space. You can buy an industrial REIT that has maybe some older warehouses. You can get an office REIT that has some older office buildings and they could be OK. With retail, the quality really matters here. Washington Prime has about 100 shopping centers. These are not A malls, they're not the A quality malls. This is not the big destinations. Simply put, the impact of COVID is to great. Do you want to tell them where they came from or should I.
Moser: I wanted to let you do. You're the guest here. You know more about this back story than I do. Yeah give our listeners an idea where the story came from.
Frankel: Washington Prime came from Simon. They were a spin-off of Simon Property Group (SPG 2.42%) in 2014. Simon is the A malls that I was just talking about, the destination centers.
Moser: A REIT that you like. You've talked about on the show plenty of times.
Frankel: A REIT that I own, that I would recommend. I'm a big fan of Simon, that's best-in-breed. They probably got rid of these assets because they weren't the best assets and they want them anymore.
Moser: This was just an investment decision on their part.
Frankel: It turns out, a smart one.
Frankel: The impact of COVID was just too great on Washington Prime. Simon not only has top quality properties, they also have a top quality balance sheet with a lot of liquidity, a manageable debt load. Because they have such quality assets, have such a great track record, the cost of capital is much lower than its peers, which allowed us to make it through the tough times better. Listen to this statistic. Simon's rental income was down 10% year-over-year in the first quarter because of the COVID pandemic. The first-quarter of 2020 was mostly normal, especially in terms of retailers paying the rent. Things didn't really shutdown to late March last year, and Washington Prime was down 13%, pretty similar. Both were down around 10% when it comes to just rental income. Ten percent of the tenants couldn't pay their rent in the first quarter, whatever. Simon was still very profitable. They are FFO, funds from operations, which is the REIT version of earnings was down 11% pretty much in line with their rental income. Rental income dropped by 10%, earnings drop by 11%. To be expected. Washington Prime, rental income dropped 13%, their earnings dropped 55%, year over year. The reason is they have higher debt load, higher cost of capital, and it's just not as high quality, and that difference tells the whole story, not really a whole story but there's a lot behind the scenes that goes on with these bankruptcies. Their debt just got overwhelming. Their cash flow in the first quarter was down to $3.33 million versus $10 million in the first quarter of last year. That's a big drop-off. They're not making enough money to cover their obligations. It's just an ugly situation. This was very anticipated. For a company to declared bankruptcy and their stocks went down 20% today. That means it was pretty much a question of when not if.