As largest mall landlord in the US sheds its malls, CMBS holders, such as bond funds and pension funds, take the losses.
By Wolf Richter for WOLF STREET.
After Simon Property Group, the largest mall landlord in the US [SPG], stopped making monthly interest payments in June 2020 on a $100-million loan backed by the 1.1 million square-foot Montgomery Mall in North Wales, Pennsylvania, the slow gears toward foreclosure began grinding. On August 31, a formal notice of default was issued, followed by a loan acceleration notice a month later. Now it’s over.
The creditors have foreclosed on the mall and have obtained a judgement of $119 million, including principal, unpaid interest, and expenses, against the Simon entity that owned the mall, Mall at Montgomery LP, according to court documents, reported by Philadelphia Business Journal.
Simon Property Group got rid of the mall at the expense of the CMBS investors – one of a number of malls that Simon has shed over the past few years to deal with the brick-and-mortar meltdown predating the pandemic by years. Each mall that Simon had shed produced big haircuts for the creditors – namely investors in commercial mortgage-backed securities (CMBS).
The original $100 million 10-year interest-only loan was issued in April 2014 by the Royal Bank of Scotland which split the loan in two pieces of $54 million and $46 million that were securitized in May 2014 into CMBS, with Wells Fargo as the master servicer.
At the time, CMBS investors felt good about their deal. The mall, which had five anchor stores and was built in 1977, had been renovated in 2008 and in 2014. Just before securitization, it had been appraised at $195 million. With collateral of $195 million backing a $100 million loan, what could go wrong? Nothing, of course.
Last year, the special servicer then managing the CMBS had the mall re-appraised, and it came in at $61 million, a 69% haircut from the original appraisal.
By that time, it became clear that Simon would walk away from the mall. Why make interest payments on a $100-million loan for a property that was worth – perhaps at best – $61 million?
The process of wringing out the creditors has become fairly routine. These CMBS are in some pension funds or bond funds, and who cares.
In November 2020, Kroll Bond Rating Agency had put Montgomery Mall on a list of four malls that Simon would likely return to lenders, totaling $411 million in mortgage debts. The other three malls were the Mall at Tuttle Crossing in Dublin, Ohio; Southridge Mall in Greendale, Wisconsin; and the Crystal Mall in Waterford, Connecticut.
In February 2021, Simon got rid of another mall that way, when Deutsche Bank foreclosed on a $178 million mortgage, spread over two CMBS, backed by 560,000 square feet of retail space at the 1.2 million square-foot Town Center at Cobb, in Kennesaw, Cobb County, Georgia. At the time of securitization in 2012, the collateral was appraised at $322 million. In October 2020, after Simon had defaulted on the loan, the value was slashed by 60% to $130 million. When Deutsche Bank held a foreclosure sale on February 2, with an opening bid of $130 million, it received no bids.
Simon’s $28 million mortgage, backed by the 426,761-square-foot Springfield Plaza in Springfield, MA, is also in the lineup of potential foreclosures, according to special servicer notes reported in August 2020. When the mortgage was securitized in 2013, the property was valued at $39 million.
It started well before the pandemic: In 2019, as part of the regular brick-and-mortar meltdown that has been going on for years, Simon shed the 1-million-square-foot Independence Center in a suburb of Kansas City, Missouri via foreclosure. When the mall was sold in a foreclosure sale in April 2019, the $200-million CMBS backed by the mall generated a loss of 75% for the CMBS investors.
In addition to the process of malls being returned to creditors, three mall REITs have filed for bankruptcy since November 2020: last month it was Simon Property’s spinoff, Washington Prime Group, following in the footsteps of two mall REITs last November, CBL & Associates Properties and Pennsylvania Real Estate Investment Trust.
Among the malls that are not being returned to creditors are those in expensive housing markets, where the land itself has a lot of value, and where the vast parking lots, parking garages, and some or all of the mall structures can be bulldozed and redeveloped into apartment and condo buildings, with perhaps a sprinkling of office buildings. This is now underway in many cities, including in San Francisco, and often a most welcome change.
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