Mall owner PREIT declares bankruptcy for a second time since the pandemic

After 50 years as a publicly traded shopping mall company and the collapse of its share value, the Pennsylvania Real Estate Investment Trust (PREIT) is giving up control of the company to its bankers as part of its second bankruptcy reorganization in three years.

The beleaguered mall owner is struggling under massive debt and has been unable to off-load some of its lower-performing properties to help balance its books. In a news release, PREIT said that the plan would reduce its indebtedness by $880 million and that only “first lien lenders,” who have priority, will be paid back in full.

“Unusual economic conditions” forced the company into Chapter 11 reorganization, PREIT CEO Joseph F. Coradino said in a statement, citing inflation and rising borrowing costs.

In legal filings, the company noted that it anticipated completing the voluntary Chapter 11 bankruptcy process quickly, and that tenants, vendors, and employees would not be affected.

PREIT retained investment bank PJT Partners this year to try to navigate the almost $1 billion in debt coming due at the end of 2023. Bankruptcy turned out to be the best option, PREIT said, and the restructuring will be accompanied by $135 million from investors led by Redwood Capital Management and Nut Tree Capital management, both based in New York City.

PJT “robustly marketed” some of PREIT’s malls for sale and tried to attract new investors but failed, trustee Michael DeMarco said in a statement.

PREIT’s new plan relies on the “second lien lenders exchanging their debt for an equity interest in the company,” spokesperson Heather Cromwell noted in an email message.

Before the pandemic, PREIT’s shares were trading at well over $100, adjusted for splits, not far off from other prominent mall companies. At the time in late 2019, the company, in partnership with California-based Macerich, opened the Fashion District of Philadelphia, a refurbished high-end shopping mall in Center City.

The ambitious endeavor foundered during pandemic shutdowns, the rise of remote work, and a lag in tourist and suburban shopper spending. Now PREIT and Macerich have a $75.8 million loan that matures on Jan. 22. Earlier this year PREIT reported that it wouldn’t be able to make its share of the payment without outside help.

Macerich did not immediately respond to a request for comment.

The Philadelphia 76ers are proposing to build a downtown basketball arena in the part of the mall along Market Street between 10th and 11th Streets. The team stated earlier in the year that it would help the mall stay solvent “as the process plays out.” It was not immediately clear what that meant in light of PREIT’s bankruptcy, although the 76ers noted that PREIT’s larger troubles were separate from those of the Center City mall where Macerich has the controlling stake in the property.

“This does not affect our plans or ability to deliver a $1.5 billion world-class arena and residential building,” said David Adelman, who is part-owner of the 76ers and leads 76 Devcorp, which is leading the project.

As the Fashion District struggled during the early years of the pandemic, PREIT’s shares plummeted in value to under a dollar and the company filed for Chapter 11 bankruptcy in 2020.

The company’s travails are part of a larger landscape of distress in commercial real estate markets. A second PREIT bankruptcy was widely anticipated given the present climate. Observers say that such decisions are likely from similarly positioned companies, and PREIT could even be in this position again.

“They can continue to reorganize as long as people are willing to lend them money, not forever, but it can happen again,” said Charles Elson, a corporate governance consultant and founding director of the University of Delaware’s Weinberg Center for Corporate Governance. “Listen, how many times has Donald Trump gone broke? In the real estate business, it’s not unusual that people have to reorganize.”

In recent years PREIT has tried to diversify its tenancy, adding apartments and health-care facilities to some malls and sold off others. But the company had mixed success with these endeavors, partly because of spiking interest rates as well as more local impediments such as neighbors’ concerns about apartments in suburban jurisdictions.

“We look forward to quickly emerging from this process as a financially stronger company with the resources and support to continue creating diverse, multiuse property experiences throughout our portfolio,” Coradino said in the news release.

The turmoil at PREIT resulted earlier this year in a shareholder revolt against Coradino and his fellow directors, who offered to resign because a majority of shareholders refused to support them in elections. But the seven embattled members of the nine-seat board were able to successfully vote in support of one another remaining in place.

PREIT made clear that Coradino and his team would remain a part of the company going forward.

“The management team played a major part in bringing this restructuring to fruition and have developed strong relationships with the lending group,” PREIT spokesperson Cromwell said. “It is anticipated that management will remain in place.”

Despite PREIT’s precarious financials and boardroom turmoil, some company assets are relatively healthy. The Cherry Hill Mall is one of the strongest retail operations in the Philadelphia region and, with the exception of the Fashion District and Exton Square malls, tenancy and sales in PREIT’s other operations are strong.

The market for selling a mall is weak right now, further limiting the options of investors. Indianapolis-based Simon Property Group, which owns the King of Prussia Mall, is the only purchaser of high-end malls, and on the other end of the spectrum, more distressed assets could be purchased by hedge funds interested in running so-called ghost malls.

In that context, a bankruptcy in which PREIT remains in charge of the physical assets may make more sense for lenders who would not know what to do if they were given the keys to the company’s holdings.

“Lenders are in the business of lending, not operating real estate,” said Alexander Goldfarb, a commercial real estate analyst with Piper Sandler Investment, who emphasized that he is not commenting directly on PREIT as he has no knowledge of the company.

“If it’s a good asset with good cash flows that just needs to be restructured, that’s [reorganization and bankruptcy] a much better option for a lender than taking it back,” Goldfarb said, “especially if we’re talking about malls because there’s not that many buyers of them.”