EDITOR NOTE: Here’s something that many businesses don’t seem to get. Their profitability isn’t so much about consumers seeking products, but rather, consumer culture seeking experiences (in addition to products). Back in the 1980s, malls were less ‘functional’ than they were ‘fashionable.’ Another example: two decades ago, the coffee house was transformed from a place to buy coffee to a place to experience life--friends, dates, and schoolwork--with a cup of coffee, thanks to Starbucks. So, when a Mall Rat, I mean Mall REIT, like Washington Prime Group, goes bust, blaming its financial woes on the pandemic, you just know that it somehow got lost Back in the Future that never quite panned out. As for investors, it's important to bear in mind that not all income-yielding investments qualify as safe-havens. Physical gold and silver may not offer yield in terms of fixed income. But compared to certain fixed-income assets, they actually yield “appreciation” and “safety ” amid inflation, which is what safe-haven assets are all about. So, would you rather gain nominal income yielding negative value, or capital preservation and real growth?
Washington Prime Group and certain of its subsidiaries filed for Chapter 11 bankruptcy protection on Sunday, the third publicly-traded mall landlord in the US to file for bankruptcy in eight months, following the bankruptcy filings of CBL & Associates Properties and Pennsylvania Real Estate Investment Trust in November 2020.
The bankruptcy filing had long been in the cards. The company, in its announcement, blames the Pandemic, but the difficulties of the Pandemic just pushed the REIT, which had already been teetering, off the cliff.
Back in May 2014, when Simon Property Group [SPG], the largest mall REIT in the US, spun off Washington Prime Group, its shares [WPG] were initially trading in the $190 range, and for the suckers that bought them early and held on to them, it has been one heck of a punishment, as those shares have relentlessly dropped, interrupted only by false-hope sucker rallies. By February 2020, before the Pandemic plunge began, the shares were trading in the $25 range, down 87% from their early days. Now they’re down about 98% (data via YCharts):
In terms of revenues, the year 2015, the first full year as independent company, was the peak year, at $922 million. Revenues then declined every year. By 2019, they’d dropped by 29% to $656 million. In 2020, they plunged another 25% to $491 million.
Today, Washington Prime Group’s shares plunged around 50% when they opened, trading in the $2 neighborhood, but have bounced off those lows. In May, they’d already traded at this level, but in early June “spiked” again, to nearly $6 by June 9. That mini spike has now mostly been unwound.
This has been the long and methodical process of the brick-and-mortal retail meltdown, as department stores collapsed and disappeared, and as surviving department store chains shuttered innumerable stores. Department stores are the anchor stores that pull in foot-traffic at malls, and when they close, the rest of the mall is in real trouble. Mall landlords – and their creditors – take the hit. And with Washington Prime Group, Simon was able to spin off its weakest malls.
This was a prepackaged bankruptcy filing. Washington Prime Group said in the announcement that it had executed a restructuring support agreement (RSA) with its creditors, led by SVPGlobal, a PE firm that specializes in distressed debt, and which had bought a portion of the debt at big discounts to face value.
These “Consenting Creditors” hold about 73% of the principal amount outstanding of the secured corporate debt and 67% of the principal amount outstanding of the unsecured notes. The company listed $3.4 billion in total short-term and long-term debt on its balance sheet at the end of Q1.
To fund operations through the bankruptcy process, the company has obtained a $100-million “debtor-in-possession” (DIP) loan. The agreement with the Consenting Creditors includes provisions that would reduce the company’s debt by nearly $1 billion; and it includes the possibility of a $325 million equity rights offering.
During the bankruptcy proceedings, the company expects to continue operating its malls “in the ordinary course for the benefit of our guests, tenants, vendors, stakeholders and colleagues.”
This is what all malls face: The collapse of their anchor stores as brick-and-mortar department store sales have been on an irreversible trend to oblivion that has been going on for two decades, as ecommerce has taken over their business.
Some department store chains have been able to build up their ecommerce divisions, and now have a vibrant ecommerce and fulfillment business, and their ecommerce sales are an ever larger portion of their total sales, as their sales at brick-and-mortar stores have spiraled down, amid the structural change in how Americans buy the merchandise that department stores offer:
Originally posted on Wolf Street