As Malls Face Default, Some Owners Hand Keys to Lenders

Indoor malls across the US are facing default on loans as they struggle to recover from the clobbering they took during the pandemic—and some mall owners are opting not to refinance in order to unload these leveraged assets, which in most cases can’t be traded for more than they were purchased. 

The malls staring default in the face include the largest shopping center in the state of New York and several US properties owned by Paris-based Unibail-Rodamco-Westfield (URW), which recently announced it is selling its entire portfolio of 24 US malls. 

Destiny USA in Syracuse, New York’s largest mall is facing a deadline to repay more than half of its estimated $700M in debt. According to a syracuse.com report, Destiny owner Pyramid Management Group has until June 6 to pay off $430M in mortgage. The report said the megamall’s value has shrunk to $140M. 

According to loan documents cited by Bloomberg Law, $300M of the debt coming due was transferred to special servicer Wells Fargo on April 1 due to “imminent payment default” ahead of its June maturity deadline, a step that usually precedes a foreclosure or the payment of a multimillion-dollar fee to secure an extension of the default deadline.

Pyramid reportedly already has asked for three extensions of the original June 2019 deadline for the loans—one for $300M and the other for $130M—which were issued by JPMorgan Chase in 2014 and then sold as commercial mortgage-backed securities.

GlobeSt reported last month that URW, Europe’s largest mall operator, is selling its 29 US properties, including 24 malls, aiming to unload the US assets by the end of next year in order to keep a pledge from a new CEO to reduce the company’s debt.

The portfolio includes some of the largest and highest-profile malls in the US, including the mall at the World Trade Center in New York. Unibail, which purchased the portfolio from Westfield Corp. four years ago for $15.7B, valued the portfolio at $13.2B as of the end of 2021.

According to a Bloomberg report earlier this month, investors who have purchased bonds backed by mortgages on URW properties are fearful the mall owner will default on more of its mortgages as it unwinds its US portfolio. 

URW has defaulted on loans for two of its mall properties in the past two years, Westfield Citrus Park in Tampa and Countryside Mall.

 An estimated $3.4B in mortgages on URW malls have been bundled into bonds and sold to investors. Money managers could face losses if URW hands over more properties to its lenders, Barclays strategists told Bloomberg, adding that even holders of relatively highly rated commercial mortgages bonds could take a hit.

The due date for some of URW’s mortgages may complicate the company’s efforts to sell its US properties. Five of URW’s loans come due by early 2024, meaning Unibail may either have to refinance the debt now itself or find a buyer willing to do so at a time when refinancing debt on malls is difficult, according to a recent report from Barclays.

Barclays said several URW mall properties in the US are close to being underwater and may be candidates for default, noting that opting out of refinancing these properties may be URW’s “easiest way” to unload them. “The easiest way to get out of some of their leveraged mall holdings is to not refinance at maturity,” a Barclay’s analyst said, in an interview with Bloomberg.

URW declined to comment on the potential for more defaults but, in a statement, made it clear that—one way or the other—it is getting rid of its US portfolio.

“URW is confident in its ability to radically reduce its financial exposure to the US over the course of 2022 and 2023, supported by the quality of its US assets, as well as the strength of the recovery,” the mall owner’s statement said.

The decision to sell Unibail’s US malls was made after a leadership struggle resulted in Jean-Marie Tritant becoming URW’s CEO in January. Tritant and his allies had pledged to reduce the company’s debt by selling the US assets.

After a presentation to investors by the CEO announcing URW’s aggressive 2-year timetable to sell the US assets, analysts suggested that Unibail was overestimating the value of the portfolio and would have a hard time unloading the properties after telegraphing its intention to divest its US holdings to reduce debt.

“If the bidder knows you’re on the run and you have to make a sale, they’re not going to offer you a good price,” Rob Virdee, senior analyst at Green Street, told the Wall Street Journal.