Is PREIT's Fight For Survival A Pandemic Tragedy Or Its Own Fault?

Virtually from the moment Pennsylvania Real Estate Investment Trust emerged from bankruptcy at the beginning of last year, it has been working furiously to avoid going under again for good. 

PREIT CEO Joe Coradino said in 2019 that he expected the next year to be the beginning of a turnaround after years of struggling to modernize its portfolio.

But the pandemic instead made 2020 one of the worst years in the history of retail real estate. PREIT entered a pre-packaged bankruptcy restructuring agreement late that year in an attempt to avoid liquidation, but the new debt it took on as part of that strategy has quickly become the company’s biggest threat, as it has acknowledged in filings with the Securities & Exchange Commission since the start of this year. 

Coradino declined to be interviewed for this story, but he still believes that PREIT was set up for success going into 2020, he told Bisnow in an emailed response to a list of questions.

“We had just opened major redevelopments, wrapping up a multi-year investment program to evolve our assets,” Coradino said in the email, referring to PREIT’s overhaul of the Gallery Mall in Philadelphia’s Center City into Fashion District Philadelphia as part of a joint venture with Macerich. “Obviously, the black swan event was never anticipated, but the business has recovered nicely, with traffic and sales now ahead of pre-pandemic levels and [net operating income] registering at 92% of 2019 levels.” 

PREIT is far from the only retail-focused REIT to struggle either during the pandemic or the years leading up to it, but companies like CBL Properties and Simon Property Group are not staring down the same sort of near-term existential threat. All three REITs, which count enclosed malls as the majority of their properties but also have holdings in other retail formats, have lost significant value over the past five years on the public market.

Yet PREIT’s fall was much more dramatic.

Part of PREIT’s more tenuous position is due to having only 24 properties in its portfolio. It has lost 97% of its value in the past five years, down from $12 per share in mid-2017 to $0.26 per share at the close of trading on Wednesday, before it consolidated its common shares in a 1-for-15 split that took effect Thursday, the Philadelphia Business Journal reports. Its market capitalization sat at about $25M before the split and the boost in trading it experienced during Thursday trading as a result — less than the price it fetched for the Exton Square Mall earlier this quarter.

CBL has lost 21% of its value in the past five years, while Simon has lost nearly 40% of its value over that interval, with share prices around $25 and $94, respectively, at the start of trading on Thursday. Though Coradino claimed PREIT’s reverse split “righted the ship” by bringing its stock price above $1 per share, preventing the company from being delisted on the NYSE, that was not the only imminent danger it had been facing.

Bad Debt, The ‘Sword Of Damocles’

CBL, which entered bankruptcy within two days of PREIT in 2020, announced June 7 that it had redeemed $335M worth of 10% senior notes and replaced them with a nonrecourse loan worth $360M and secured by several outparcels and open-air retail properties, reducing its interest payments and the number of restrictions on its properties. 

By contrast, about $1B of PREIT’s nearly $1.9B in debt is floating rate, and it entered 2022 expecting to pay nearly 8% interest on that debt, according to its year-end report to the SEC. That prediction preceded Russia’s invasion of Ukraine, which set off a macroeconomic chain reaction resulting in the Federal Reserve raising its benchmark interest rate several times this year already, culminating in a hike of 75 basis points Wednesday.

Nearly all of PREIT’s debt is secured by its properties, leaving it vulnerable to cascading foreclosures should it fail to meet obligations for any one loan.

The most pressing and onerous obligations for PREIT include a pair of term loans, held primarily by Wells Fargo Bank and coming due in December, with a combined principal value of over $910M, and a term loan against Fashion District, referred to as the FDP Loan in PREIT’s SEC filings, with an outstanding balance of $201M. The FDP Loan is held by multiple creditors and comes due in January. 

All three loans come with options for one-year extensions that PREIT must hit certain requirements in order to exercise. Perhaps most challenging among the requirements are escalating debt yield benchmarks that PREIT has been unable to meet with profits from its malls alone due to its sky-high interest payments. 

“They have the sword of Damocles hanging over their head,” said securities broker Sheldon Grodsky, who has followed PREIT in some professional capacity or other since it began being traded publicly in 1970. “It’s encouraging the sale of everything that isn’t nailed down, if not the whole company.”

PREIT sold the Exton Square Mall, a half-occupied center in the Philly suburbs that it considered a noncore asset, to Brandywine Realty Trust for $27.5M this quarter. It has also carved out land from parking lots and outlying buildings surrounding its malls to sell. It expects to close $109M in such deals by the middle of the year, with a further $166M or so in some stage of negotiation, Coradino said in the company’s Q1 earnings call. 

For many of the land parcels PREIT is looking to sell, the company has been seeking developers who want to build apartment buildings or hotels in the hope a mix of uses improves long-term business prospects for the adjacent malls, in addition to short-term cash. In marketing its parcels as development sites, PREIT has been doing the advance work of lining up local zoning and entitlements — work that has been beset with delays, as is so often the case when dealing with local land use rules. 

“It’s hard to hurry that process,” Grodsky said. “In the meantime, their interest expenses have been skyrocketing. It’s a tough dilemma.”

If PREIT brings in the full $275M it is expecting from land sales, it could be enough to make up the shortfall in debt yield that presents the company’s most imminent threat. But with the Federal Reserve accelerating its interest rate hikes at a rate much faster than most economists predicted at the beginning of the year, deals have been severely repriced or fallen apart in the due diligence stage across the commercial real estate industry in the past few weeks.

Coradino declined to comment on the potential effects the current financing environment may have on its pending transactions when asked by Bisnow, instead reiterating his confidence that PREIT will raise the necessary funds to extend its credit agreements.

Since the pandemic first hit in the spring of 2020, many lenders have shown patience or deference to borrowers navigating through successive periods of uncertainty. In retail specifically, many CMBS lenders have seemed hesitant to foreclose on delinquent loans, which could also reflect an unwillingness to deal with operating the shopping centers backing them.

PREIT's lenders were nowhere near as patient, based on the terms of its bankruptcy deal that November. 

PREIT’s prepackaged bankruptcy plan replaced loans that were coming due with the two credit agreements it has in place now, using the malls it owned debt-free as collateral. In addition to rapidly escalating debt yield thresholds, a minimum cash reserve of $25M and floating interest rates, the two agreements contain covenants that bar PREIT from a wide range of business activities, with some exceptions. Among those activities: 

— Paying dividends. 

— Taking on new debt.

— Selling certain properties.

— Selling all of its assets to or merging with another company.

— Entering into “major leases” on the properties it used as collateral.

— Renegotiating leases or offering significant lease discounts for tenants larger than 7,500 SF.

“PREITs lenders have continued to cooperate with the company such that we were able to deliver record new leasing,” Coradino said in an email when asked about the covenant banning new, major leases.

Grodksy said that when PREIT announced that its restructuring plan was approved by 95% of its lenders, the remaining 5% represented one lender who pushed for some form of foreclosure or liquidation, a claim Coradino called “categorically untrue” in an emailed response. Wells Fargo did not respond to requests for comment.

“Under normal circumstances, I would think that creditors would cut them some slack, but I guess they feel they’ve cut them slack already through the prepackaged bankruptcy,” Grodsky said. “At the moment, PREIT’s lenders are bleeding them dry, and at some point, they have to decide whether they’d rather deal with a bankrupt borrower or a healthy borrower.”

The Right Malls In The Wrong Places At The Wrong Time

PREIT’s portfolio may be small, but that is a result of a multiyear process of selling off underperforming and lower-quality mall assets that largely began when Coradino became CEO in 2012. Both the trimming of PREIT’s portfolio and its aggressive strategy in repositioning vacated anchor spaces were mostly completed before the pandemic, which was central to Coradino’s rosy prediction in 2019.

Though PREIT’s core portfolio consists solely of what it calls Class-A malls, those malls are concentrated in the mid-Atlantic region, with a few in the Midwest and New England — parts of the country that are losing population to the Sun Belt and the Southwest. In a late April survey by moving and storage company Pods of where its customers are relocating, Washington, D.C., and Philadelphia, the two metropolitan areas on which PREIT depends the most, were ranked seventh and 10th among markets with the most customers moving away.

By contrast, CBL’s properties are scattered across the Southeast, Southwest and Midwest, with a handful of properties in Pennsylvania, while Simon’s portfolio stretches across multiple continents.

“If you have a mall in a market with significant out-migration and changing customer profiles, you’re going to have challenges,” Colliers National Director of Retail Services & Practice Groups Anjee Solanki told Bisnow.

PREIT is far from alone in looking to activate the land surrounding its malls with nonretail uses, and it could go even further in the future. For the Plymouth Meeting Mall in the Philly suburbs, PREIT has retained brokerage firm Binswanger to market up to 300K SF of what had been inline retail space for redevelopment into medical or office uses, going so far as to post conceptual renderings as part of a LoopNet listing, MoreThanTheCurve.com reported in May.

“What you’re seeing is really an expansion of the previous effort where PREIT is working to create a distinctive, multi-use community hub at the mall,” PREIT spokesperson Heather Crowell told the site at the time. “Plymouth Meeting Mall is ideally situated for an expanded mix of uses that we are working through Binswanger to introduce, with tremendous access to roadways and an amenity-rich platform.”

Coradino declined to answer specific questions from Bisnow about PREIT’s plans at Plymouth Meeting Mall.

Though most mixed-use redevelopments at malls have focused on either outparcels or vacated anchor boxes — due in part to restrictions in contracts with current anchor tenants — changes in lease agreements and loss of tenants have given mall owners opportunities to make bigger and more radical changes at their properties, Solanki said.

With anchor lease conditions and local land use restrictions slowing such redevelopments, PREIT could be ahead of the curve in what it is mulling for Plymouth Meeting Mall, much like it was in replacing anchor tenants in the past decade.

“A lot of restrictions are gone now, so it has opened up a major opportunity for landlords to essentially say, ‘This is our time to take the chance to add value,’” Solanki said. “It’s accelerating the opportunity to create more mixed-use environments.”

Density of the surrounding population and a lack of nearby retail competition are also key factors in the success of malls going forward, Solanki said. In this regard, Fashion District Philadelphia should have been a slam dunk. Smack dab in one of the most residentially dense downtown areas in the U.S. and in a city without any other enclosed malls, Fashion District also opened with a modern mix of uses, heavy on experiential retail and with multiple coworking operations.

Much like the American Dream mall in Northern New Jersey, however, its opening could not have come at a worse time.

When Fashion District opened for business in late 2019, Coradino predicted it would be stabilized by the end of 2020. Now, it is approaching three years in operation and still is neither fully occupied nor stabilized, though PREIT now projects the latter to occur later this year, per its SEC filings. With Philadelphia still missing a large chunk of its pre-pandemic daytime population, Fashion District has yet to produce enough revenue to fulfill the debt yield requirements of the loan PREIT and joint venture partner Macerich took out to finance its construction. 

“Fashion District may have been PREIT’s biggest disappointment,” Grodsky said.

Needing a cash infusion to stay current on its FDP Loan last year, PREIT ceded management of the mall to Macerich and borrowed $100M as well in what its financial documents refer to as the Partnership Loan, which had a remaining balance of $57M at the start of this year. Until it pays off that balance, PREIT will not receive cash proceeds from Fashion District, though it still owns 50% of the property.

The value of that ownership has dropped precipitously, as the partnership loan triggered a new appraisal that marked the value of Fashion District down by $184.5M last year, PREIT disclosed in its annual filing. Because it no longer controls the mall’s operations, PREIT does not list Fashion District among its core mall assets in financial disclosures.

“It would take a lot of things going right for [Fashion District] to hold on to some of the value that it once looked like it had,” Grodsky said. “That’s a big amount of suffering for PREIT, and that’s why its situation is dicey. There’s no easy way out and the choices are negative.”

Among PREIT’s core malls, sales have been increasing nearly across the board for multiple quarters, with Q1 this year setting new records for same-store sales at some of its malls, Coradino said on the quarterly earnings call. This quarter, PREIT saw a 4.4% year-over-year increase in same-store base rents at its core mall properties. That would have combined with the sales growth to put PREIT’s funds from operations into positive territory if PREIT’s interest payments were not so far above market rates, PREIT Chief Financial Officer Mario Ventresca said on the call.

Self-Inflicted Wounds

On that Q1 earnings call, as it has for several quarters now, PREIT eschewed the standard procedure of opening the floor to questions from stock analysts in favor of answering questions recited by its public relations representative that it said were from an online submission portal. The new system has resulted in a sharp drop-off in the average number of questions that Coradino and Ventresca have answered on calls.

“I’m guessing they didn’t particularly want to field questions from disgruntled shareholders, short-sellers, etc.,” Grodksy said. Representing his firm, Grodsky Associates, he was one of the last analysts to participate in an open Q&A on a PREIT earnings call. “It’s kind of an ‘ask me no questions and I’ll tell you no lies’ situation.”

PREIT’s debt isn’t the only issue for which its leadership might look to avoid questions. Big Four accounting firm KPMG found in an audit that PREIT “has not maintained effective internal control over financial reporting as of Dec. 31, 2021.” KPMG’s audit of PREIT’s financial statements themselves did not find any specific errors or discrepancies. On the same day PREIT released the results of KPMG’s audits as part of its annual SEC filing, it dismissed KPMG as its auditor, replacing it with BDO USA.

Since mid-May, PREIT has also disclosed to the SEC that it agreed to retention bonuses in the form of vesting stock options or cash to members of its board and certain high-ranking executives, to be paid out in late 2023 on the condition they remain with the company until then. PREIT indicated in its annual filing that a loss at the leadership level could have a material effect on its ability to continue as a business. 

Even in light of those possible causes for controversy, it is difficult to create a narrative that PREIT is solely responsible for its difficult position, Grodsky said. 

“PREIT, for much of its history, had very little bank debt, but as they went through the development process with much of their malls, they may have felt it was absolutely necessary to have bank debt,” he said. “But it was a mixed blessing then, and with the pandemic, it became a curse on their existence. It comes down to circumstances beyond their control.”

If PREIT manages to sell enough assets to achieve its debt extensions, investor sentiment could improve enough for its shares to gain more value, as it has since it opened trading on Thursday at its post-split price, or for its next refinancing to come with friendlier terms or different lenders. 

“PREIT’s doing what they have to do, but if they come up with a similar credit agreement to what they presently have, their survival is still in doubt,” Grodksy said. “Under the circumstances, from an operational point of view, they’ve done pretty well. Time will tell whether they’ll be rewarded for it, or if the rewards will go to the next owner of its properties.”