Now they get to deal with the brick-and-mortar meltdown.
By Wolf Richter for WOLF STREET.
Publicly traded mall landlord Pennsylvania Real Estate Investment Trust announced today that it filed for a pre-packaged Chapter 11 bankruptcy, after having already filed for a prepackaged bankruptcy in November 2020, and that as part of the restructuring deal, existing preferred and common shares will be canceled, and that “PREIT will no longer be a publicly traded company,” and that certain creditors – an investor group that had bought the crushed second lien debt, led by PE firm Redwood Capital Management and distressed-debt fund Nut Tree Capital Management – will get the company.
Shares have been trading over the counter ever since they were delisted from the NYSE in December 2022. In June 2022, the company did a 1-to-15 reverse stock split, where your 15 shares become 1 share, but the price multiplied by 15, in order to bring the share price over $1 and stave off the delisting, which worked for a few months.
Shares [PRET] spiked by 81% today, to $0.43, because, as part of the restructuring deal under which they will lose all their equity, preferred and common shareholders will get a consolation prize of $10 million, minus the costs associated with distributing the cash. Of that, 30% will go to common shareholders. There are about 5.4 million common shares outstanding, to divvy up $3 million minus costs.
Two other major publicly traded mall REITs have filed for bankruptcy since November 2020: the SPG’s spinoff, Washington Prime Group and CBL & Associates Properties. There is a huge laundry list of retail chains, from Sears on down, that collapsed into bankruptcy to be dismembered and mostly liquidated, leading to vacant stores and then to zombie malls to be bulldozed and redeveloped into something else, such as housing, or to be left to rot.
PREIT is part of a structural shift in how Americans choose to shop. And ever more intensively, Americans have been choosing ecommerce, a process that I started calling the brick-and-mortar meltdown in 2016, and that has continued unabated.
PREIT’s share price reflects that brick-and-mortar meltdown. Reverse-split-adjusted, shares traded at $374 in late 2016 and then careened down to nothing:
The #2 bankruptcy filing had been expected just about ever since it filed for bankruptcy the first time in November 2020; it became a near-certainty earlier this year; and it became a certainty in October when the company announced that it was working on a restructuring deal with its lenders, to be formalized in bankruptcy court.
PREIT had $1.8 billion in debt at the end of Q3, despite the #1 bankruptcy filing whose purpose was to reduce the amount of debt. The company has booked net losses year after year, including $168 million over the first three quarters of 2023.
In today’s bankruptcy announcement, PREIT laid out the Restructuring Support Agreement (RSA), which it said was approved by 95% of the creditors.
The RSA includes $60 million in Debtor-in-Possession (DIP) financing to get it through the bankruptcy proceedings and another $75 million in “exit financing” when it emerges from bankruptcy, for $135 million combined, from an investor group led by PE firm Redwood Capital Management and distressed-debt funds Nut Tree Capital Management.
As part of the deal, it will pay all vendors, suppliers, and employees during the bankruptcy proceedings.
Holders of first lien debt (banks) will “at their election” either get paid in full in cash, “or their pro rata share of term loans under the exit term loan facility in an amount equal to 101% of their Prepetition First Lien Claims.” PREIT said that these banks “have committed to provide an additional $150 million to recapitalize the business and extend the Company’s debt maturity schedule.”
Holders of second lien debt will get the equity in the restructured company. These are the PE firms and distressed debt funds, led by Redwood Capital Management and Nut Tree Capital Management, that had bought the second lien debt over the years for cents on the dollar. They will get 65% of the new equity; and those second-lien holders that committed to backstopping the exit funding will get the remaining 35%. After the exit from bankruptcy, PREIT will be owned by these PE firms and distressed debt funds.
And it’s up to them to deal with the brick-and-mortar meltdown. Maybe they have plans to bulldoze some of the malls and grade the huge parking lots and build high-density housing on them, thousands of housing units per mall.
And for your amusement, here is the long-term chart of PREIT, adjusted for the 1-to-15 reverse stock split. It has been a tumultuous ride to heck — but not in a straight line — from 2007 on. Buy and hold:
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