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Investors Load Up on Mall Debt

Equity investors aren’t crazy about retail real estate these days, but the sector is getting plenty of love from lenders.

Shares of real-estate investment trusts specializing in malls have plunged roughly 39% since August 2016, as a spike in store closures and the growth of e-commerce have fueled uncertainty about their earnings strength and asset values.

But publicly listed landlords are having little problem taking on fresh debt. Banks are still issuing loans, and bond investors continue to scarf down debt issued by retail-based real-estate investment trusts—including the ones that own weaker malls.

In all, mall REITs raised $2.65 billion in senior debt capital in the first eight months this year, compared with $1.92 billion and $1.35 billion raised during the same periods in 2016 and 2015, respectively, according to data from S&P Global Market Intelligence.


In August, CBL & Associates Properties Inc.CBL -0.73% raised $225 million through a senior debt offering at a yield of 5.95% that is due in 2026, while Washington Prime Group issued a $750 million bond at a 5.95% coupon that will mature in 2024. Both companies hold a mix of thriving and slumping properties.

“They are not as scared as the equity folks are,” said Farzana Khaleel, CBL’s executive vice president and chief financial officer, of bond investors. “They’ve seen us through many, many cycles, so I don’t think this cycle scares them because there were other cycles that should have scared them,” Ms. Khaleel said during a presentation at a recent Bank of America Merrill Lynch real estate conference.

Fixed-income investors are typically more focused on cash flow and borrowers’ ability to pay interest on their bonds, analysts said. Part of their confidence stems from the fact that bond investors have more of a claim on the company’s assets than equity investors. That allows them to be more patient.

“Long-term holders of mall debt are focused on what the management is doing for the longer term and not as focused on one quarter’s worth of funds from operations or occupancy levels,” said John Guarnera, a credit analyst at BlueBay Asset Management LLP, which is an investor in CBL’s earlier issued bonds. “Bond investors have found a way to be a lot more optimistic about the second-tier mall story than what the equity market is telling you.”

Ratings firms have noted that mall REITs have reduced their debt levels and have been unloading underperforming assets from their portfolios. Some firms have negative outlooks on second-tier mall operators that are seeing slower growth.

In June, Moody’s Investors Service maintained the lowest investment grade rating, Baa 3, on CBL and Washington Prime but revised their outlooks to negative from stable, which makes new debt costlier to issue.

The issuances by CBL and Washington Prime in August both were at a yield of 5.95%. By contrast, for its $1.35 billion debt issuance in May, Simon Property Group , which has a portfolio of higher quality malls, had a weighted average coupon rate of 3.04%.

But mall REITs generally posted sturdy earnings in the second quarter and have been able to fill vacated space and keep their centers occupied.

“At least from an operations standpoint, they don’t appear to be in distress,” said Keven Lindemann, senior director of global real estate at S&P Market Intelligence, noting that mall REITs balance sheets still look healthy. “But stocks are trading as if a disaster is imminent.”

The volatile retail environment has led to differing expectations among investors on occupancy levels, debt repayment and the effect of e-commerce. Some believe the challenges are cyclical and the publicly traded landlords have an upper hand over their competitors in repositioning their malls as town centers and gathering places. Others believe mall REITs face structural challenges that are hard to reverse.

“Although we think there is some near-term stress, there’s enough cash flow in investment-grade portfolios,” said Brian Phillips, director of commercial real-estate research at AllianceBernstein LP, an asset management firm that has invested in the unsecured bonds of mall REITs across the quality spectrum.

Publicly listed mall REITs have access to multiple forms of capital and can afford to change the tenant mix in their centers with more restaurants and entertainment, and they will prevail over less capitalized owners that don’t have the scale or name to compete, Mr. Phillips said.

Written by Esther Fung from the Wall Street Journal.  Write to Esther at