This REIT review is an update on CBL & Associates Properties Inc. (CBL, Financial), a publicly traded REIT that is engaged in the ownership, acquisition, development, leasing, management and operation of regional shopping malls, retail centers, outlet centers and office properties. CBL owns 139 properties containing 81.1 million rentable square feet, of which 7.1 million rentable square feet are managed for third-party owners.
Property information
CBL’s properties are located in 31 states, primarily in the Southeastern and Midwestern U.S. As of 2016, portfolio occupancy was 94.8%, the same-store year-over-year NOI increase was 2.3%, year-over-year gross rent per square foot increased 7.6%, and average sales per square foot was $376. CBL’s largest tenants include L Brands Inc. (LB, Financial)(3.49% of revenues), Signet Jewelers Ltd. (SIG, Financial)(2.79% of revenue), Ascena Retail Group Inc. (ASNA, Financial)(2.50% of revenue) and Foot Locker Inc. (FL, Financial)(2.34% of revenue) and AE Outfitters Retail Co. (1.90% of revenue).
Major event
- In January CBL closed a sale-leaseback with Sears (SHLD, Financial) for five stores and two auto centers for $72.5 million and 10-year lease terms.
- As of third-quarter 2016, CBL had 13 properties under development containing 852,000 square feet with total costs of $145 million and $48 million incurred to date.
Corporate data
CBL went public in 1993, is incorporated in Delaware and located in Chattanooga, Tennessee. CBL’s debt is rated BBB- by Fitch and BBB- by Standard & Poor’s. CBL has 170.7 million common shares outstanding and a market capitalization of approximately $2.1 billion. CBL owns an 85.8% general and limited partnership interest in its UpReit general partnership, CBL & Associates LP.
Management
Charles B. Lebovitz, 79, chairman of the board
Charles B. Lebovitz is also chairman of the Executive Committee of the board of directors. Lebovitz served as CEO until December 2009 and president until February 1999. Prior to the company's formation, he served in a similar capacity with CBL’s predecessor. Lebovitz has been involved in shopping center development since 1961 when he joined his family's development business. Lebovitz has three sons, Stephen D. Lebovitz, Michael I. Lebovitz and Alan L. Lebovitz, all executive officers of the company.
Stephen D. Lebovitz, 55, president and CEO
Stephen D. Lebovitz serves as president and CEO of CBL. Since joining CBL's predecessor in 1988 and founding the regional office in Boston, Lebovitz has served as executive vice president – Development/Acquisitions, executive vice president – Development, senior vice president – New England Office, senior vice president – Community Center Development and treasurer of the company and as president and secretary of the company. Lebovitz has also served as a director of the company since the completion of its initial public offering in November 1993. He holds an M.B.A. from Harvard University and a bachelor’s degree from Stanford University.
Farzana Khaleel, 64, executive vice president and chief financial officer
Farzana Khaleel serves as executive vice president – chief financial officer and treasurer, a position she has held since September 2012. Khaleel joined the company in September 2000 as senior vice president – Finance and was promoted to executive vice president – Finance in January 2010. Prior to joining the company Khaleel was vice president of Equitable Real Estate (successor to Lend Lease Real Estate Investments prior to its acquisition by Morgan Stanley). Khaleel received her B.B.A. in economics, M.B.A. in accounting and M.S. in real estate and urban affairs from Georgia State University. She is a certified public accountant licensed in Georgia.
Ownership
| Top institutional holders | Shares | % |
| The Vanguard Group Inc. | 31,539,000 | 18.47 |
| Brookfield Asset Management Inc. | 12,770,000 | 7.48 |
| AJO LP | 6,870,000 | 4.02 |
| Morgan Stanley | 6,558,000 | 3.84 |
| Blackrock Institutional Trust Co. | 6,041,000 | 3.54 |
| Ownership breakdown | |
| % of Shares Held by All Insiders and 5% Owners | 1.98% |
| % of Shares Held by Institutional & Mutual Fund Owners | 95.7% |
| Number of Institutions Holding Shares | 260 |
All amounts above per Yahoo Finance
| Financial analysis and valuation Select financial data for CBL per the third-quarter 2016 10Q, unaudited 2016 financial data and supplemental information (in millions where applicable): |
| Financial data | Amounts |
| Real Estate Assets, Gross | $7,941 |
| Total Assets | $6,104 |
| Property Debt (at a weighted average interest rate of approximately 4.54%) | $4,465 |
| Common Stockholders’ Equity | $1,228 |
| Revenue | $1,028 |
| Net Income | $127 |
| Net Income Per Share | 75 cents |
| Cash Flow from Operations | $468 |
| Senior Unsecured Credit Facility ($1.1 billion with $439 million used) | $661 |
| Market Capitalization | $2,100 |
| Property Debt to: | Â |
| Gross Real Estate Assets | 56% |
| Market Capitalization | 212% |
| Enterprise Value | 68% |
| Dividend and Yield ($1.06 per share) | 10% |
| Valuation methodology | Â |
| 2016 Real Estate Revenue | $1,028 |
| Less: 2016 Real Estate Operating Expenses (excluding depreciation, amortization, interest expense and plus G&A expenses) | 366 |
| 2016 Net Operating Income | $662 |
| Projected Inflation Rate at 3.5% | x1.035 |
| Projected Forward Year NOI | $685 |
| Projected Average Cap Rate | 7.5% |
| Projected Value of Real Estate Assets | $9,133 |
| Add: Net Operating Working Capital (at book value) | 38 |
| Developments in Progress (at book value) | 167 |
| Investments in Unconsolidated Affiliates (at book value) | 266 |
| Total Projected Asset Value of Company | $9,604 |
| Less: Total Debt Per Above | (4,465) |
| Series D Cumulative Preferred Stock (at $25 per share liquidation value) | (453) |
| Series E Cumulative Preferred Stock (at $25 per share liquidation value) | (172) |
| Projected Net Asset Value of the Company | $4,514 |
| Common shares outstanding – 199.9 million shares (170.7 million common shares and 29.2 million partnership units) | Â |
| Projected NAV Per Share | 22 |
| Market Price Per Share on Feb. 15 | 10 |
| Premium (Discount) to NAV | (54%) |
Financial metrics
The gross real estate assets, property debt, revenues, net income, funds from operations, return on invested capital and dividends per share for the years 2011 through 2016 are shown in the table below:
| (millions except per share amounts) | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 Q3 2015 2015 |
| Gross Real Estate Assets | $7,767 | $8,300 | $8,123 | $8,187 | $8,239 | $7,941 |
| Property Debt | $4,489 | $4,745 | $4,857 | $4,700 | $4,710 | $4,465 |
| Revenues | $1,051 | $1,034 | $1,053 | $1,060 | $1,055 | $1,028 |
| Net Income | $91 | $84 | $40 | $174 | $58 | $127 |
| Funds from Operations (FFO) | $329 | $372 | $370 | $387 | $395 | $410 |
| Return on Invested Capital (1) | 12.4% | 12% | 11.2% | 11.6% | 12.1% | 12% |
| Dividends Paid Per Share | $.84 | $.88 | $.935 | $1.00 | $1.06 | $1.06(2) |
(1) This is the ratio of cash provided by operations plus interest expense divided by stockholder’s equity plus property debt, less cash and measures the return the REIT is earning on its invested capital.
(2) Dividend is 26.5 cents per quarter.
The total return of CBL year to date and through five years is shown in the chart below per NAREIT:
| CBL Total Return | 2016 | 1-year | 3-year | 5-year |
| Â | 2.41% | 2.41% | -7.23% | -.01% |
As shown above, our net asset value per share for CBL is $22 per share, compared to a market price of $10 per share. Current average cap rates for retail properties per our industry experience and CBRE’s Cap Rate Survey are in the 5% to 8% range, depending on the location, quality of the property and credit of the tenant. We have used an average cap rate of 7.5% due to CBL’s portfolio being well-diversified Class B retail assets.
Valuation analysis
CBL’s strengths, concerns and recommendations are as follows:
Strengths
- Diversified regional portfolio of Class B retail properties.
- Investment grade credit rating.
- High dividend yield of 10%.
- High return on invested capital.
- Large discount of 54% to net asset value.
- Solid occupancy at 94.8% and year-over-year rent increase of 7.6%.
- Very attractive stock price at only $10 per share and five times FFO.
Concerns
- Gross assets have grown only 2.2% since 2011.
- No growth in revenue since 2011.
Recommendations
CBL has a solid portfolio of Class B retail assets and our recommendations are as follows:
- This is an update to our valuation analysis of CBL completed in July 2016, in which we had a strong buy recommendation when the stock was $10 per share. The stock ran up to over $14 per share and then retreated to the current price, mainly due to unrealistic hysteria that internet sales will make brick-and-mortar stores obsolete and force many out of business. We still have a very strong buy on CBL.
- CBL has been criticized for its portfolio of Class B retail assets, the sales per square foot of $376 and that owning these types of assets is a poor real estate investment strategy. There is nothing wrong with owning Class B retail assets if they are purchased at appropriate cap rates and managed well, and there is a growth, investment and capital allocation strategy properly executed by management. As stated above, the investment community is extrapolating short-term weakness in a few department store operators, which is due to poor operational and merchandising management decisions, to the destruction of entire retail real estate store industry.
- Our recommendation is for CBL to further execute its mall disposition and repositioning strategy and should consider taking the REIT private at this large discount to NAV.
A five-year price chart of CBL is shown below.
Disclosure: Author is long this stock in an REIT ETF.
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