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Per Bloomberg, CBL & Associates Properties, Inc (CBL) is filing for bankruptcy. That's no surprise to our subscribers as we've been deterring curious distressed REIT prospectors from investing in the name for several quarters.

Before discussing updates pertaining to CBL, well put the rarity of this event into context by briefly reviewing the bankruptcy of General Growth Partners ("GGP"). With CBL's filing finalized, these two firms are the only recent equity REIT bankruptcies in the modern era.

For those interested in an in-depth analysis of CBL, please see our previous article. We will not rehash all the details.

CBL and GGP combined excessive leverage with mall properties of mixed quality.

Source: Q1 Supplemental Filing

CBL's properties are self identified at 20%, 34%, and 26%, Tier 1, 2, and 3 caliber properties, respectively.

Here's a quick summary from WERs previous work:

GGP went on a massive buying spree in the 2000s resulting in $25 billion in debt. As leverage ratios entered the teens, a figure that is unheard of in today's market, the CEO was removed but remained the Chairman of the Board. There is a long list of corporate governance failures within GGP's story. In 2009 and in the midst of the greatest modern liquidity crunch, GGP missed a $900 loan payment backed by two Las Vegas properties. By the time that occurred, GGP's stock was down 98%. Bill Ackman of Pershing Square, a name many of us are familiar with, owned a 25% stake in GGP prior to its demise. The resulting bankruptcy was and still is the largest in real estate history.

This led to a recapitalization and dissection of GGP's massive asset base.

By February 2010, the "smart money" arrived in the form of a $2.625 billion equity investment by Brookfield (BAM). These assets would later become the bedrock of Brookfield Property REIT (BRP) and Brookfield Property Partners (BPY). Despite the bad news and much in part due do Brookfield's investment in the troubled firm, GGP's creditors were paid in full with even equity investors receiving a favorable recovery rate. This is as rare as GGP's bankruptcy itself.

Firms we follow and have investments in were intimately involved.

GGP stayed around in one form or another until it was acquired by Brookfield Property Partners in August of 2018. Before the final transaction, GGP's leverage remained elevated and issues cropped up as a result. Brookfield diversified out of the properties by selling large stakes to TIAA and the CBRE Group.

Our continued financial analysis of CBL indicated that it was "highly likely" that not one, but multiple covenants had been breached by early Q2 of 2020. Given the disdain for mall properties by the public and private markets, our deep understanding of the firm's financial situation, and a struggling high yield credit market, our certainty that CBL would not remain solvent was nearly absolute.

A few days after our piece was published to subscribers, CBL warned on June 5 that "its ability to continue as a going concern is in doubt."

This announcement is because CBL did not pay an $11.8 million interest payment due June 1. An already tough situation was made impossible with government lockdowns, heightened concern surrounding big box department stores, and an accelerated shift toward online shopping.

With nearly 50 J.C. Penny stores (OTCPK:JCPNQ) in its portfolio, a retailer that recently declared bankruptcy itself and cut another 1,000 jobs a few days ago, and the collection of 25%-30% of rent in both April and May, CBL's fate was sealed.

In the midst of an active redevelopment campaign and saddled with mid-quality mall assets, CBL never really had a chance once governments began shutting down their local economies.

Source: Seeking Alpha

Speculators betting on equity REITs' nearly impeccable track record of avoiding Chapter 11 or Chapter 7 watched as CBL absorbed an 80% loss year-to-date. Investors often confuse a low dollar price with lower principal risk, a 50% loss is a 50% loss whether the stock falls from $1,000 a share to $500 or $1.00 to $0.50. In WERs experience, many individual investors' largest losses are on low dollar value stocks.

While performing institutional operational and investment due diligence on a variety of managers, WER obtains exceedingly rare behind-the-scenes understanding of how top asset managers function. This includes discovering these firms' competitive advantages and evaluating their durability over time.

Wide Moat Publishing (parent company of iREIT and Dividend Kings) recently established a business relationship with Orbital Insight, a leader in geospatial data collection and analysis. This type of resource is often called the "secret weapon" of hedge funds and private equity firms.

We had Orbital Insight aggregate cellular data associated with 62 CBL properties. This is a well-established strategy among more sophisticated institutional investors that we now incorporate into our process to the benefit of our subscribers.

With that introduction, let's evaluate the data pertaining to CBL and incorporate that into our updated outlook on commercial real estate and REITs.

Source: Orbital Insight

Keep in mind this data is derived from CBL's 62 properties located primarily east of the Mississippi River but concentrated in more affordable markets which exclude the likes of Chicago, New York, and New Jersey. CBL also has significant exposure to Texas

Source: Orbital Insight

Despite the diversification across over a dozen states, CBL's foot traffic completely evaporated between late February and mid March. After decreasing approximately 90% over that quick period, foot traffic quickly recovered to down 25% year-to-date. The nearly real-time data showed a quick retreat to down 60%-plus from early June through July 18. Well explore that decline in more detail.

Source: Q1 Supplemental Filing

For context, CBL's portfolio of malls maintained approximately 90% occupancy at the end of Q1 2020, in line with Q1 2019's statistics and making that variable fixed for most of the period. To better evaluate the contributors to the sharp changes in foot traffic, we need to close in on where the most valuable properties are by sales per square foot.

Source: Q1 Supplemental Filing

Based on reporting by the NYT, all states where CBL has key assets were fully locked down as of April 30. Let us move to July 21 and see what has changed.

Source: NYT

Outside of Florida, Texas, and Michigan, all the states where CBL has meaningful exposure are reopened or reopening. Given the complexity and randomness associated with states' economic policies due to the coronavirus, it's necessary to identify how individual sectors are impacted.

Source: NYT

Using this more granular data, effectively all the states where CBL has properties are open for retail stores and restaurants. While the sharp drop in foot traffic at CBL's malls occurred alongside the onset of widespread state lockdowns, the recent decrease in visitation doesn't correlate well with this variable. Investors expecting a rapid recovery in CBL foot traffic strictly due to the easing of lockdowns are likely to be disappointed.

Source: Orbital Insight

Every region showed a recent collapse in visits to mall properties independent of local policies. Other factors, such as news coverage, infection rates, and treatment availability may be more important at this stage.

Source: Orbital Insight

We can rule out asset quality as foot traffic has been effectively identical across Grade A, B, and C properties.

Source: Orbital Insight

Foot traffic in the states CBL has exposure are down significantly across the board. California and New Jersey stand out with the heaviest decreases (>60%) with Michigan, Wisconsin, and Minneapolis the next worst performing group (>47.5%). Coincidently or not, New Jersey has the highest mortality rate of any U.S. state (177 per 100,000 as of July 20th) with California leading the nation in total cases at 391,538 as of July 21.

While no definitive conclusion can be reached, it appears that the hard data on coronavirus infection and mortality rates is at least as important as government policy surrounding lockdowns. In fact, some of the states with the longest and harshest lockdown policies are among the worst performing even after the lockdowns are put in place. Logical arguments can be made on both sides, but as investors, our unemotional take is to remain skeptical about any one variable saving or destroying foot traffic at retail real estate.

What CBLs One Bright Spot Tells Us

Source: Orbital Insight

This chart is year-to-date with each column representing a week's worth of data. The rows are CBL's individual properties. The chart completely changes in the second week of March as blue goes to dark orange reflecting a major drop in foot traffic from Orbital Insights cellular geospatial data. That's not too surprising but let's zoom in on that one bright spot.

Source: Orbital Insight

Interestingly, CBL's outlet centers standout as the strongest performers. These properties experienced way above average visitation rates throughout June and the first week of July. These numbers collapsed again during the second week of July but fared much better than the enclosed properties.

This suggests two potential considerations: i) There's pent-up demand for physical retail shopping and ii) outlet centers, with much lower population densities and greater separation between shoppers, seem uniquely positioned to outperform while coronavirus fears still percolate society.

We will be using Orbital Insight research for a granular research report on Tanger Outlets (NYSE:SKT) and other mall REITs - stay tuned.

This article was previously published for iREIT on Alpha members.

Author's note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.

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Disclosure: I am/we are long SPG, SKT, BPYU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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The First REIT Bankruptcy Since 2009, A New Institutional Data Source, And Our Updated Sector Outlook - Seeking Alpha