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Joseph Ori
Joseph Ori
Articles (10)  | Author's Website |

Strong Buy on CBL & Associates Properties

Company is a retail REIT that owns 139 properties containing 81.1 million rentable square feet

February 16, 2017 | About:

This REIT review is an update on CBL & Associates Properties Inc. (NYSE:CBL), 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. (NYSE:LB)(3.49% of revenues), Signet Jewelers Ltd. (NYSE:SIG)(2.79% of revenue), Ascena Retail Group Inc. (NASDAQ:ASNA)(2.50% of revenue) and Foot Locker Inc. (NYSE:FL)(2.34% of revenue) and AE Outfitters Retail Co. (1.90% of revenue).

Major event

  • In January CBL closed a sale-leaseback with Sears (NASDAQ:SHLD) 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:

 

Gross Real Estate Assets

56%

Market Capitalization

212%

Enterprise Value

68%

Dividend and Yield ($1.06 per share)

10%

Valuation methodology

 

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)

 

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

 

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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About the author:

Joseph Ori
See www.paramountcapitalcorp.com

Visit Joseph Ori's Website


Rating: 4.5/5 (2 votes)

Voters:

Comments

Praveen Chawla
Praveen Chawla premium member - 3 months ago

Good idea. Will research this further. Thanks for the article.

Please leave your comment:


GuruFocus has detected 6 Warning Signs with CBL & Associates Properties Inc $CBL.
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