The owner of Philadelphia Mills is in talks to surrender the Northeast Philadelphia mall to its debtholders.
Franklin Mills Associates, an entity owned by a joint venture between Simon Property Group Inc. (NYSE: SPG) and investment firm Farallon Capital Management, is looking to hand ownership of Philadelphia Mills over to the commercial mortgage-backed securities (CMBS) trusts that hold the four notes comprising its $290 million loan on the property, according to CMBS reports. The loan matured in June.
The noteholders have ordered third-party reports and are working on the title transfer, loan servicer notes show.
Simon, which also owns the King of Prussia Mall in Montgomery County, declined to comment on its subsidiary's decision to hand over the keys to Philadelphia Mills.
The move comes as malls across the country continue to struggle with declining occupancy and low foot traffic post-pandemic, and their owners look to unload troubled properties or add non-retail elements to bring the properties back to life.
Philadelphia Mills, located off of Woodhaven Road at 1455 Franklin Mills Circle, quickly became a popular destination for outlet shopping when it first opened as Franklin Mills in 1989.Simon took over the 1.77-million-square-foot retail complex in early 2007 when the real estate investment trust partnered with Farallon to acquire the mall's previous owner Mills Corp., which now operates as a division of Simon. The property was renovated in 2014, when it was rebranded to its current moniker.
Philadelphia Mills is anchored by Burlington, a dual location of TJX retail concepts Marshalls and HomeGoods, AMC Theatres and a Walmart Supercenter.
Last year, Philadelphia Mills brought in $19.5 million in revenue, a 15% drop from nearly $23 million in 2022, CMBS reports show. The mall's net operating income fell to its lowest level under Simon's ownership in 2023 at $10.6 million, which narrowly covered the $9.7 million debt service due on the loan, the reports show.
The mall was 76% leased at the end of last year, according to the CMBS reports, down from a high of 96% when the loan was underwritten in 2007. Several retail tenants recently committed to lease renewals, including Zales Diamond Store Outlet, The Childrens' Place, American Eagle Outfitters, Off Broadway Shoes and Famous Footwear, servicer notes show.
Michael Potter
CMBS reports show Philadelphia Mills was appraised at $370 million in April 2007 after Simon took ownership, but its value plummeted to $201 million in the last listed appraisal in May 2012. The city assessed the mall's value at $101.3 million this year, according to Philadelphia property records.
The $290 million loan to Franklin Mills Associates, which CMBS reports show is sponsored by Simon and Farallon, was originated by Greenwich Capital in May 2007 and structured as a $174 million A1 note and a $116 million A2 note, servicer reports show. The notes were subsequently sold to CMBS investors and set to mature in May 2017.
According to CMBS reports, the loan was sent to special servicing for imminent default in April 2012 after the mall's occupancy fell to 82.3% in December 2011. The loan was then modified and split into four notes: a $120 million A1 note, an $80 million A2 note, a $54 million B1 note and a $36 million B2 note. The A note is the largest tranche of an asset-backed security and is senior to other notes.
Since then, both the A and B notes have gone back to special servicing twice. The notes were transferred in March 2019 for imminent default, after which the loan maturity was extended, and again in May 2020 after malls were shut down due to Covid-19. They later returned to master servicer Wells Fargo in February 2021 after Philadelphia Mills had reopened and its cashflow had begun to recover, servicer notes show.
All four notes were transferred back to special servicing in April ahead of the June 1 maturity date. CMBS reports show Franklin Mills Associates has consistently made interest payments on the A notes through June.
According to CMBS reports, a balance of $258.5 million is still owed across the four loan notes.
Simon, the nation's largest mall owner, operates several other retail properties in Greater Philadelphia in addition to Philadelphia Mills and the King of Prussia Mall. Those include the Oxford Valley Mall in Langhorne, where a more than 600-unit residential development is being constructed on the site of a former Boscov's department store as part of the evolution of the property.
Simon reported a net income of $2.3 billion in fiscal year 2023, a nearly 7% increase from the $2.1 billion it reported in 2022. In the fourth quarter of fiscal 2023, the company sold its remaining nearly 10% stake in Authentic Brands Group, the company that owns several popular apparel and footwear brands such as Reebok, Juicy Couture and Sperry. The sale generated $1.45 billion in proceeds for Simon.
