Malls and their Hapless Investors Keep Getting Crushed, by Wolf Richter

It’s an old lesson that has to be relearned every time: high yield equals high risk. From Wolf Richter at

(Creative) Destruction in the brick-and-mortar meltdown.

Investors in retail malls didn’t need another wake-up call. They’ve been wide awake all year, hearing from Wall Street that there’s no brick-and-mortar meltdown even as the shares of their real estate investment trusts (REITs) have gotten crushed by the travails of brick-and-mortar retail and the over-malling of America. But late Thursday, mall investors got another unneeded wake-up call.

CBL Properties, a mall REIT with 119 mostly retail-oriented properties, reported earnings, and shares plunged 26% on Friday, to $5.92. They’d already been dropping for years because the brick-and-mortar retail meltdown is structural, and not new, and will not turn around before it’s finished melting down. Shares of CBL are down 50% year-to-date and 75% from May 2013.

“This quarter’s results fell below our expectations as our revenues were impacted by additional bankruptcies, store closures and rent concessions,” CEO Stephen Lebovitz summarized it in the third-quarter earnings report.

Though investors knew the brick-and-mortar industry is in turmoil, they were nevertheless taken aback by the fact that it can still get worse – and that the sacrosanct dividends of a REIT can get slashed in no time.

CBL reported fundamental problems with the mall-REIT business (Q3 compared to a year ago, unless otherwise noted):

  • Revenues dropped 11% to $224.6 million.
  • Funds from Operations (“FFO”) per share fell 7.1% and “FFO, as adjusted,” per share fell 12.3%
  • Same-center Net Operating Income (parallel to same-store sales for retailers) at its malls fell 2.8%. This is a beautified version because CBL “excludes the impact of lease termination fees and certain non-cash items of straight-line rents, write-offs of landlord inducements, and net amortization of acquired above and below market leases.”
  • Occupancy rate of all properties declined 40 basis points to 93.1%. Mall occupancy rate declined a full percentage point to 91.6%.
  • Average gross rent per square foot at “stabilized malls” fell 13.7%: edging up 0.3% for new leases and plunging 16.1% for renewal leases. It shows what landlords have to do keep tenants.
  • Stabilized mall same-center sales per square foot for the 12 months ended Sep. 30 fell 1.8% to $373. Hang on to that $373 in sales per square foot; Moody’s has a warning about that in a moment.

The company lowered its guidance for 2017 across the board, including FFO per share (to $2.08-$2.12). Same-center NOI is now expected to decline by 2% to 3%. And occupancy rate is expected to decline by 1.25 percentage points.

To continue reading: Malls and their Hapless Investors Keep Getting Crushed


One response to “Malls and their Hapless Investors Keep Getting Crushed, by Wolf Richter

  1. True enough, but these days, it’s getting to be: high yield equals high risk.


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