CBL & ASSOCIATES PPTYS INC CBL
September 15, 2017 - 12:27pm EST by
Chandragupta
2017 2018
Price: 8.52 EPS 0 0
Shares Out. (in M): 199 P/E 0 0
Market Cap (in $M): 1,699 P/FCF 0 0
Net Debt (in $M): 4,220 EBIT 0 0
TEV ($): 6,665 TEV/EBIT 0 0

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  • Terminal Zero
 

Description

CBL: An Underappreciated Opportunity

 

Introduction and Thesis:

          Over the last several years CBL & Associates LP (NYSE: CBL, “CBL” or the “Company”) has witnessed a plummet in the value of its stock, even as the fundamentals at the business have improved. With dividends reinvested investors have lost over 30% over the past year and 46% over the last five years. The decline in price does not make sense based on the fundamentals at the company, or as compared to comparable public or private companies. This dynamic has created one of the most attractive risk-reward opportunities on the market.

History and Company Overview:

          CBL has been written up twice in the last several years, once in 2014 when it was trading around $18, and once in 2016 when it was trading at $9.50. Interested parties should read both those articles and the subsequent messages as there are some interesting points brought up throughout the threads.

          CBL is a mall REIT focused on properties at the lower end of the quality spectrum compared to its public comps. Sales per square foot, one of the key metrics used to measure mall quality, for the twelve months ended 6/30/2017 were $373 across the portfolio. This compares with $465 at Pennsylvania Real Estate Investment Trust (“PEI”) and $368 at Washington Prime Group Inc. (“WPG”), two of the most comparable lower end mall REITs. By contrast, Simon Property Group (“SPG”), one of the highest end mall REITs, averaged $618 sales psf over the same time.

          Although CBL has traditionally been focused on low end (B & C class malls), it has made a concerted effort over the last several years to improve the quality of its malls. As of June 2017, 43% of its operating income over the preceding 6 months came from Tier 1 malls (those with over $375 in sales psf), with those malls averaging $435 in sales psf over the previous year. This compares with Tier 1 malls generating just 33.9% of NOI in 2014. NOI from Tier 3 malls (those generating under $300 in sales psf) has dropped from 11.3% to 5.3% over the same period.

          Note that the absolute worst malls usually are not owned by public REITs. The picture one should get is of a REIT with middle to low tier mall assets in mostly rural locations. Oftentimes CBL malls are the only mall in town.

Short View Reasoning and Responses:

          CBL short sellers are anchoring to several ideas, some of which have more validity than others. Below are some of the most common points made, as well as some responses.

1.       Physical retail is dead. E-commerce is going to take over the world leaving a wake of devastated and closed malls.

a.       For many CBL bears the consideration of its value ends at this point. We need go no further in discussing its merits. Online retailers will win because they have lower operating costs, are more convenient, are more dynamic, etc. Mall REITs like CBL are corporate versions of the walking dead. On a philosophical level, people propagating this narrative would probably not meet Benjamin Graham’s definition of ‘investor’. Buying into and spreading a narrative requiring prediction about an unknowable and distant future seems to perfectly illustrate the type of speculation Graham warned about in his last articles. Does it seem likely that online retail will grow significantly in the next 5/10/15/20 years? Absolutely! Does that mean physical retail is dead? Of course not. Physical retail composes over 90% of sales in a US market where consumers can already shop for virtually anything online. This is NOT to say that one shouldn’t consider the impact of online retail on malls. Obviously evaluating the competitive landscape is part of the calculus that goes into the calculation of intrinsic value. However, if you are reading this and believe you can respond to every qualitative and quantitative argument put forward by shouting “Online retail”, you will not get much out of reading further. To quote Howard Marks, “In the end, trees don’t grow to the sky, and few things go to zero.” The online vs. physical retail world will almost certainly conform to this maxim.

b.       The expansion of online retail at the expense of physical retail has been exaggerated. Online sales were just 8.4% of total sales in 2016 with pure play online comprising only 3.7% of the total. Physical retail has continued to grow even as online has taken market share. To the extent retailers have struggled to compete, it usually comes down to company specific errors and too much leverage, not a complete inability for physical sales to compete with online.

c.       Most retailers, including ones that started as online only, are giving more mouth service to the omnichannel concept. Companies that close physical locations lose not only the direct business from that location, but see their online sales in the surrounding region decline. When Amazon is buying or building physical supermarket and bookstores, you know that even the biggest bull for online retail sees a real future ahead for the omnichannel.

d.       To the extent there are stores that struggle to compete with online retailers, new stores with more competitive concepts will replace them. If Wet Seal is no longer a competitive market player, perhaps replacing it with more relevant retailers will improve the quality of the mall! This is a natural part of an evolving market and will make tenants stronger over time.

2.       CBL has significant exposure to Sears, JC Penney, and Macy’s, all of which are systematically shutting down locations. If/when these companies go bust or shut down more CBL locations it is likely the associated malls will plummet in value.

a.       The market has built up some cognitive dissonance on this issue. Whereas the market views the potential collapse of these retailers as a mortally threatening issue for CBL, it takes the view that the redevelopment of these locations will be a panacea for Seritage Growth Properties (“SRG”), a REIT composed mostly of Sears locations that is rapidly closing the Sears stores and redeveloping them for alternative uses. Based on SRG’s most recent presentation, they anticipate earning roughly $100mm in NOI from the 50 stores that they are currently renovating at a cost of $625 million. They have completed or are working on 65 projects to date and plan to eventually work through most if not all their existing store base. Let’s assume that they can generate another $400 million in NOI from their other roughly 200 stores, and that to redevelop the lot will cost roughly $2.5 billion. They will need to raise this cash, so assuming they take on more debt and their market capitalization doesn’t change, we are left with a company generating roughly $500 million in NOI with an enterprise value of nearly $6 billion. So SRG, a company currently almost completely exposed to Sears, which would likely need to either restructure debt or raise new capital at what would be the most inopportune moment imaginable in the case of a Sears bankruptcy, is trading at a 8.3% cap rate off of a best case scenario for the redevelopment of its properties and a 6.7% cap rate off its current unimproved NOI (which has not grown for 3 quarters), while CBL, where Sears, JC Penney, and Macy’s COMBINED make up at most 2.5% of revenue (probably less than 2.0%) trades at a cap rate approaching 12%. Does this pass the smell test for sensible investing? Does it make sense that the company with a higher cost of debt, a higher leverage ratio, less operational certainty, and dramatically less (actually negative) cash flow trades at this kind of premium compared to CBL? It seems clear that both theses cannot be accurately reflected in the market. We believe, given the history of successful redevelopment of fading department stores by literally every mall REIT in the country, that CBL is the one being misjudged here.

b.       In fact, the potential to redevelop struggling department stores is one of the best opportunities for growth from CBL. One of the most consistent themes across both high and low-quality mall REITs is that redeveloping struggling department stores can be a boon for malls if done correctly. With most projects expected to generate somewhere between 7 and 11% ROIC, and the cost of debt substantially below that, the redevelopment of these locations generates value for investors. Historically CBL’s redevelopment projects have generated an 8.5% ROIC. Even in a world where CBL is trading at a cap rate above the cost of capital for the project, it is probably still a good idea to execute these projects because 1) they enhance foot traffic in the mall, 2) they prevent the breaking of leases from other tenants, 3) they may be generating returns in malls that have a lower cost of capital than CBL does as a whole, and 4) because CBLs cap rate right now is too high and doesn’t reflect intrinsic value.

c.       Finally, of all the department stores that have closed over the last several years, CBL has seen relatively few anchor closings, and has been able to successfully rent out the vacancies that have been created. At year end CBL had just one vacant anchor that was not already under redevelopment. Since 2013 CBL has seen just eight JC Penney closures and five Sears closures. It has redeveloped or sold 12 of those locations and generated an 8.6% ROIC on the redeveloped location. The narrative that CBL malls are getting crushed by anchor vacancies is simply not true.

3.       Malls and retail space in the US are overbuilt compared to other countries. A significant number will need to close to make the rest sustainable.

a.       Although it is true that the US has substantially more square feet dedicated to retail per capita than much of the rest of the world, analysts often miss that this retail is concentrated in urban environments with class A malls. Rural America, where CBL maintains most of its properties, sees far fewer retailers. There exists more GLA in the top 12 MSAs than the rest of the United States put together. On a per capita basis, those markets have 45.4 GLA per capita as opposed to 17.2 in the rest of the US. Moreover, class A malls are concentrated in those 12 MSAs, meaning CBL and other rural competitors face less effective competition in their markets. 93% of CBLs NOI comes from malls that are either market dominant or the only game in town. These stores are on average 23 miles away from the closest competition. Additionally, the ability for online retailers to do things like same day delivery should be much harder to accomplish in spread out rural areas than compact cities. It isn’t clear why the threat of online seems to be most reflected in the stock prices of the companies who it might logically stand to impact the least. Despite the narrative surrounding the future success of class A malls in large cities and failure of class B malls in smaller ones, if one of these two is overbuilt it’s the larger malls in the bigger cities.

b.       Even if some rural malls need to close, for the most part they won’t be ones operated by CBL. To start, there are much worse malls in the hands of private investors, with much lower sales PSF and far lower occupancy rates. Those malls will close first. This should be a positive for CBL as these customers are driven to the next closest retail locations. The few malls that CBL has given over to lenders have 1) not shut down for the most part, but were simply over levered compared to operating income, and 2) do not reflect the quality of the majority of CBLs remaining assets. With 93% of NOI coming from Tier 1 & 2 malls CBL malls should not be among the first to go.

4.       CBL management is poor. They continue to invest in capital projects with rates of return significantly below the cap rate of the overall business. Good managers would have bought back stock or paid down debt instead.

a.       The managers of CBL deserve the opprobrium they have brought down upon themselves. It is hard to explain the lack of significant stock buy backs given the prevailing stock price over the last several months. This should not have taken management by surprise. People have been making this argument for years. Management has done little to prove that it cares about the stock price. On the other hand, when the only thing stopping the realization of a sizeable amount of value is a poor management team, that creates opportunity for a positive catalyst to revalue the stock. If management decides to 1) sell the company, 2) sell additional assets and use the proceeds to pay down debt and buy back shares, or 3) use excess cash flow to buy back shares, we could see a major revaluing of the stock. Even if all three of these ideas seem beyond the current team, it does not seem farfetched to think that a savvy activist will pounce on this and push for changes that will unlock value.

Financial Analysis:

          For a value investor, security of principal is paramount when selecting an investment. One of the chief concerns for CBL raised by those shorting the stock is its capital structure and ability to survive in the medium to long term. Those concerns are materially overstated and miss a bit of helpful nuance in the way debt has been structured at the Company.

          To start, note that the Company has issued new long-term debt in the last month with a yield of 5.95%. Those notes are now trading above par, and all three note issues are trading with yields slightly above 5%. Insofar as debt now makes up roughly two thirds of the enterprise value of the Company, it seems strange that the debt would trade for such a low yield given a cap rate for the entire business approaching 12%. Given all the rhetoric surrounding the imminent demise of physical retail and the mall, it also seems strange that a company exposed to medium tier malls would be able to issue debt going out ten years at such a modest rate. The conclusion one is drawn to is that debtholders have a fundamentally different view of the risk profile of this business than equity holders. With an investment grade credit rating, low yielding and long-term debt trading around par, and a proven ability to raise capital at a time when the rhetoric surrounding their business could not be worse, the debtholders understand this story much better than the equity investors.

          Comparing relevant metrics with investment grade peers makes CBL’s credit profile appear even better. Below are graphs showing where CBL stands compared to its closest competitors on both debt/EBITDA and EBITDA/interest metrics. It stands out as one of the least levered of the mall REITs currently trading, and its EBITDA/interest fits in around the average of the group. Ironically it does not have a better interest coverage profile because it pays a higher interest rate than some companies with much higher leverage ratios. It is important to note that the decline in sales PSF during the financial crisis at CBL were comparable or better than many of its peers. CBL saw a decrease in sales PSF of around 10% from peak to trough, whereas Simon saw a 12% decline. Higher quality malls are not significantly less cyclical in economic downturns.

          Not only does CBL have credit metrics that are among the best in the industry, but management has also placed a concerted emphasis on improving the credit quality of the Company over time. Below is a chart showing LTM interest coverage for CBL over the last ten years.

          The Company maintained a steady coverage ratio throughout the worst of the downturn and has dramatically improved its ability to cover interest payments since then. Although this metric has weakened slightly in the last 6 months, it is still up dramatically from just a year or two ago. Does it make sense to be more concerned with credit quality now when credit metrics are near a long term high than two years ago when the ability to weather a downturn was lower and the stock price was twice as high?

          Furthermore, this high-level analysis of debt coverage misses some attractive optionality present from the non-recourse mortgage debt that covers many the Company’s malls. The ability to dispose of properties that are not covering interest payments out of NOI effectively allows the company to dispose of those assets at a cap rate slightly lower than that interest rate. Given interest rates for this debt average below 5%, every time the Company turns a mall back over to a lender they are creating a tremendous amount of value for the rest of the Company by boosting net income and removing a liability at a huge premium to the markets current value of that asset.

          Finally, on the question of credit, it is important to remember just how much operational flexibility CBL has. The chart below shows total corporate capex, as well as capex psf over the last ten years. Note that the company dramatically curtailed capital expenditures during the downturn, and keep them low for a long period of time as it worked to boost its credit metrics. In a downside case, we believe a similar curtailment of expansion plans would enable the company to generate even more cash to boost credit metrics (which are already starting from a much better place).

          Moving now to equity metrics, it is on its face obvious that this is one of the cheapest and least loved REITs on the public market. Price / AFFO is below 4, less than half its historical level, less than half the average compared to its comps, and nearly 20% below the next closest player. This despite having a dividend yield (~13%) that is nearly twice the industry average, and is the best covered (in comparison to FFO) compared to all its comps. CBL is projected to pay out less than 50% of AFFO as dividends in 2017 as compared to an industry average of around 60%. At the opposite end of this extreme, take Macerich, which yields around 5%, is levered nearly 8x, and pays out over 70% of AFFO as dividends. Which of these two companies seems more likely to cut its dividend, particularly in a downturn? Does it make sense for the quantitatively stronger company to sell with a dividend yield 2.5x as high as the weaker one? Have the managers at Macerich proven they are willing to take down debt, even if it means shrinking the company, in the way that CBLs have?

          While undoubtedly cheap based on financial metrics, critics might counter that these hide fundamental problems in the operations of the business. This is not true. Below you will see charts showing leasing spreads, portfolio occupancy, and sales per square foot over the last 10 years.

          Up until last quarter leasing spreads had been positive for 25 straight quarters. Last quarter they were down 0.8%, a blip compared to spreads in the high single or low double digits that have been the norm over the last 6 years. Moreover, remember that last quarters spread, which was essentially flat, took place against a backdrop of one of the worst quarters for retail bankruptcies since the recession. In other words, it took one of the worst quarters in the last ten years to drop rates from high single digits to flat. A flat projection for the next several years would imply a significant appreciation of the stock price though!

          Perhaps more impressive is the consistency of the occupancy rate. Average second quarter mall occupancy rates over the last 10 years have been 91%. Average occupancy rates for all quarters have been 92%. The latest quarter saw a 90.2% rate, just 0.8% off the average, despite one of the worst quarters for retail in recent history. Moreover, the Company believes it will get back to that 92% occupancy rate by the end of the year. These are not the metrics of a dying company! The fourth quarter of 2016 had the fourth highest occupancy rate of any quarter in the last 10 years. That is not the metric of a dying company! Second quarter overall retail portfolio occupancy is over 0.2% better than the average Q2. That is not the metric of a dying company!

          Finally, and most damagingly for those who are currently dumping on CBL while simultaneously fetishizing sales PSF numbers, are the dramatic increase in sales PSF that CBL has seen over the past decade. From a bottom around $315 that metric has grown to around $375, over 20% from trough to peak. Certainly this has been in part driven by the disposal of several lower quality assets, but that doesn’t change the fact that the Company had a dramatically higher value / lower cap rate back when it had those crumby assets and had a lower sales PSF metric. It’s hard to square the fact that financial risk and leverage has come down, average asset quality has gone up, yields have remained relatively flat, and yet equity multiples have plummeted. Either the market was wrong in how it valued CBL for 10 years, or the market is way off now.

Conclusion:

          The arguments above all point to an undervalued CBL. It is now time to consider a proper value. For a downside case, let’s set appropriate cap rates for Tier 1, 2, 3, and excluded malls at 9%, 11.5%, 15%, and 20%. Then let’s group other retail together and set 10% as a conservative cap rate. The tier 1 and 2 values are based on Penn REIT and Washington Prime respectively, which have similar sales psf and cap rates around there. The rest are guesses at fair value based on conservative estimates and private market transactions. The other retail cap rate is particularly conservative. Using those assumptions, the implied enterprise value is roughly $500 million higher than today, generating a stock price increase of roughly 35%.

          On the upside, note that all the equity research we’ve seen puts the NAV of the mall portfolio more than twice as high as the current price implies. Grant’s Interest Rate Observer wrote up this idea twice a couple years ago, once when it was trading at an 8.6% cap rate, once when it was trading at a 9.3% cap rate, both times arguing the rate should drop down to a more normal 7.6%. At those three rates, the stock would be up around 130%, 90%, and 205% respectively. Although we think getting down to the mid-7s may be a bit aspirational at this point, we wouldn’t view those prices as out of the question given prevailing interest rates. All the while an investor is paid around 13% (a dividend that should increase the next couple years). That is a risk/reward tradeoff we like!

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

- Market realizes extent of misvaluation of underlying assets

- Management moves to realized value of underlying assets

- Activist pushes for changes to unlock value of underlying assets

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    Description

    CBL: An Underappreciated Opportunity

     

    Introduction and Thesis:

              Over the last several years CBL & Associates LP (NYSE: CBL, “CBL” or the “Company”) has witnessed a plummet in the value of its stock, even as the fundamentals at the business have improved. With dividends reinvested investors have lost over 30% over the past year and 46% over the last five years. The decline in price does not make sense based on the fundamentals at the company, or as compared to comparable public or private companies. This dynamic has created one of the most attractive risk-reward opportunities on the market.

    History and Company Overview:

              CBL has been written up twice in the last several years, once in 2014 when it was trading around $18, and once in 2016 when it was trading at $9.50. Interested parties should read both those articles and the subsequent messages as there are some interesting points brought up throughout the threads.

              CBL is a mall REIT focused on properties at the lower end of the quality spectrum compared to its public comps. Sales per square foot, one of the key metrics used to measure mall quality, for the twelve months ended 6/30/2017 were $373 across the portfolio. This compares with $465 at Pennsylvania Real Estate Investment Trust (“PEI”) and $368 at Washington Prime Group Inc. (“WPG”), two of the most comparable lower end mall REITs. By contrast, Simon Property Group (“SPG”), one of the highest end mall REITs, averaged $618 sales psf over the same time.

              Although CBL has traditionally been focused on low end (B & C class malls), it has made a concerted effort over the last several years to improve the quality of its malls. As of June 2017, 43% of its operating income over the preceding 6 months came from Tier 1 malls (those with over $375 in sales psf), with those malls averaging $435 in sales psf over the previous year. This compares with Tier 1 malls generating just 33.9% of NOI in 2014. NOI from Tier 3 malls (those generating under $300 in sales psf) has dropped from 11.3% to 5.3% over the same period.

              Note that the absolute worst malls usually are not owned by public REITs. The picture one should get is of a REIT with middle to low tier mall assets in mostly rural locations. Oftentimes CBL malls are the only mall in town.

    Short View Reasoning and Responses:

              CBL short sellers are anchoring to several ideas, some of which have more validity than others. Below are some of the most common points made, as well as some responses.

    1.       Physical retail is dead. E-commerce is going to take over the world leaving a wake of devastated and closed malls.

    a.       For many CBL bears the consideration of its value ends at this point. We need go no further in discussing its merits. Online retailers will win because they have lower operating costs, are more convenient, are more dynamic, etc. Mall REITs like CBL are corporate versions of the walking dead. On a philosophical level, people propagating this narrative would probably not meet Benjamin Graham’s definition of ‘investor’. Buying into and spreading a narrative requiring prediction about an unknowable and distant future seems to perfectly illustrate the type of speculation Graham warned about in his last articles. Does it seem likely that online retail will grow significantly in the next 5/10/15/20 years? Absolutely! Does that mean physical retail is dead? Of course not. Physical retail composes over 90% of sales in a US market where consumers can already shop for virtually anything online. This is NOT to say that one shouldn’t consider the impact of online retail on malls. Obviously evaluating the competitive landscape is part of the calculus that goes into the calculation of intrinsic value. However, if you are reading this and believe you can respond to every qualitative and quantitative argument put forward by shouting “Online retail”, you will not get much out of reading further. To quote Howard Marks, “In the end, trees don’t grow to the sky, and few things go to zero.” The online vs. physical retail world will almost certainly conform to this maxim.

    b.       The expansion of online retail at the expense of physical retail has been exaggerated. Online sales were just 8.4% of total sales in 2016 with pure play online comprising only 3.7% of the total. Physical retail has continued to grow even as online has taken market share. To the extent retailers have struggled to compete, it usually comes down to company specific errors and too much leverage, not a complete inability for physical sales to compete with online.

    c.       Most retailers, including ones that started as online only, are giving more mouth service to the omnichannel concept. Companies that close physical locations lose not only the direct business from that location, but see their online sales in the surrounding region decline. When Amazon is buying or building physical supermarket and bookstores, you know that even the biggest bull for online retail sees a real future ahead for the omnichannel.

    d.       To the extent there are stores that struggle to compete with online retailers, new stores with more competitive concepts will replace them. If Wet Seal is no longer a competitive market player, perhaps replacing it with more relevant retailers will improve the quality of the mall! This is a natural part of an evolving market and will make tenants stronger over time.

    2.       CBL has significant exposure to Sears, JC Penney, and Macy’s, all of which are systematically shutting down locations. If/when these companies go bust or shut down more CBL locations it is likely the associated malls will plummet in value.

    a.       The market has built up some cognitive dissonance on this issue. Whereas the market views the potential collapse of these retailers as a mortally threatening issue for CBL, it takes the view that the redevelopment of these locations will be a panacea for Seritage Growth Properties (“SRG”), a REIT composed mostly of Sears locations that is rapidly closing the Sears stores and redeveloping them for alternative uses. Based on SRG’s most recent presentation, they anticipate earning roughly $100mm in NOI from the 50 stores that they are currently renovating at a cost of $625 million. They have completed or are working on 65 projects to date and plan to eventually work through most if not all their existing store base. Let’s assume that they can generate another $400 million in NOI from their other roughly 200 stores, and that to redevelop the lot will cost roughly $2.5 billion. They will need to raise this cash, so assuming they take on more debt and their market capitalization doesn’t change, we are left with a company generating roughly $500 million in NOI with an enterprise value of nearly $6 billion. So SRG, a company currently almost completely exposed to Sears, which would likely need to either restructure debt or raise new capital at what would be the most inopportune moment imaginable in the case of a Sears bankruptcy, is trading at a 8.3% cap rate off of a best case scenario for the redevelopment of its properties and a 6.7% cap rate off its current unimproved NOI (which has not grown for 3 quarters), while CBL, where Sears, JC Penney, and Macy’s COMBINED make up at most 2.5% of revenue (probably less than 2.0%) trades at a cap rate approaching 12%. Does this pass the smell test for sensible investing? Does it make sense that the company with a higher cost of debt, a higher leverage ratio, less operational certainty, and dramatically less (actually negative) cash flow trades at this kind of premium compared to CBL? It seems clear that both theses cannot be accurately reflected in the market. We believe, given the history of successful redevelopment of fading department stores by literally every mall REIT in the country, that CBL is the one being misjudged here.

    b.       In fact, the potential to redevelop struggling department stores is one of the best opportunities for growth from CBL. One of the most consistent themes across both high and low-quality mall REITs is that redeveloping struggling department stores can be a boon for malls if done correctly. With most projects expected to generate somewhere between 7 and 11% ROIC, and the cost of debt substantially below that, the redevelopment of these locations generates value for investors. Historically CBL’s redevelopment projects have generated an 8.5% ROIC. Even in a world where CBL is trading at a cap rate above the cost of capital for the project, it is probably still a good idea to execute these projects because 1) they enhance foot traffic in the mall, 2) they prevent the breaking of leases from other tenants, 3) they may be generating returns in malls that have a lower cost of capital than CBL does as a whole, and 4) because CBLs cap rate right now is too high and doesn’t reflect intrinsic value.

    c.       Finally, of all the department stores that have closed over the last several years, CBL has seen relatively few anchor closings, and has been able to successfully rent out the vacancies that have been created. At year end CBL had just one vacant anchor that was not already under redevelopment. Since 2013 CBL has seen just eight JC Penney closures and five Sears closures. It has redeveloped or sold 12 of those locations and generated an 8.6% ROIC on the redeveloped location. The narrative that CBL malls are getting crushed by anchor vacancies is simply not true.

    3.       Malls and retail space in the US are overbuilt compared to other countries. A significant number will need to close to make the rest sustainable.

    a.       Although it is true that the US has substantially more square feet dedicated to retail per capita than much of the rest of the world, analysts often miss that this retail is concentrated in urban environments with class A malls. Rural America, where CBL maintains most of its properties, sees far fewer retailers. There exists more GLA in the top 12 MSAs than the rest of the United States put together. On a per capita basis, those markets have 45.4 GLA per capita as opposed to 17.2 in the rest of the US. Moreover, class A malls are concentrated in those 12 MSAs, meaning CBL and other rural competitors face less effective competition in their markets. 93% of CBLs NOI comes from malls that are either market dominant or the only game in town. These stores are on average 23 miles away from the closest competition. Additionally, the ability for online retailers to do things like same day delivery should be much harder to accomplish in spread out rural areas than compact cities. It isn’t clear why the threat of online seems to be most reflected in the stock prices of the companies who it might logically stand to impact the least. Despite the narrative surrounding the future success of class A malls in large cities and failure of class B malls in smaller ones, if one of these two is overbuilt it’s the larger malls in the bigger cities.

    b.       Even if some rural malls need to close, for the most part they won’t be ones operated by CBL. To start, there are much worse malls in the hands of private investors, with much lower sales PSF and far lower occupancy rates. Those malls will close first. This should be a positive for CBL as these customers are driven to the next closest retail locations. The few malls that CBL has given over to lenders have 1) not shut down for the most part, but were simply over levered compared to operating income, and 2) do not reflect the quality of the majority of CBLs remaining assets. With 93% of NOI coming from Tier 1 & 2 malls CBL malls should not be among the first to go.

    4.       CBL management is poor. They continue to invest in capital projects with rates of return significantly below the cap rate of the overall business. Good managers would have bought back stock or paid down debt instead.

    a.       The managers of CBL deserve the opprobrium they have brought down upon themselves. It is hard to explain the lack of significant stock buy backs given the prevailing stock price over the last several months. This should not have taken management by surprise. People have been making this argument for years. Management has done little to prove that it cares about the stock price. On the other hand, when the only thing stopping the realization of a sizeable amount of value is a poor management team, that creates opportunity for a positive catalyst to revalue the stock. If management decides to 1) sell the company, 2) sell additional assets and use the proceeds to pay down debt and buy back shares, or 3) use excess cash flow to buy back shares, we could see a major revaluing of the stock. Even if all three of these ideas seem beyond the current team, it does not seem farfetched to think that a savvy activist will pounce on this and push for changes that will unlock value.

    Financial Analysis:

              For a value investor, security of principal is paramount when selecting an investment. One of the chief concerns for CBL raised by those shorting the stock is its capital structure and ability to survive in the medium to long term. Those concerns are materially overstated and miss a bit of helpful nuance in the way debt has been structured at the Company.

              To start, note that the Company has issued new long-term debt in the last month with a yield of 5.95%. Those notes are now trading above par, and all three note issues are trading with yields slightly above 5%. Insofar as debt now makes up roughly two thirds of the enterprise value of the Company, it seems strange that the debt would trade for such a low yield given a cap rate for the entire business approaching 12%. Given all the rhetoric surrounding the imminent demise of physical retail and the mall, it also seems strange that a company exposed to medium tier malls would be able to issue debt going out ten years at such a modest rate. The conclusion one is drawn to is that debtholders have a fundamentally different view of the risk profile of this business than equity holders. With an investment grade credit rating, low yielding and long-term debt trading around par, and a proven ability to raise capital at a time when the rhetoric surrounding their business could not be worse, the debtholders understand this story much better than the equity investors.

              Comparing relevant metrics with investment grade peers makes CBL’s credit profile appear even better. Below are graphs showing where CBL stands compared to its closest competitors on both debt/EBITDA and EBITDA/interest metrics. It stands out as one of the least levered of the mall REITs currently trading, and its EBITDA/interest fits in around the average of the group. Ironically it does not have a better interest coverage profile because it pays a higher interest rate than some companies with much higher leverage ratios. It is important to note that the decline in sales PSF during the financial crisis at CBL were comparable or better than many of its peers. CBL saw a decrease in sales PSF of around 10% from peak to trough, whereas Simon saw a 12% decline. Higher quality malls are not significantly less cyclical in economic downturns.

              Not only does CBL have credit metrics that are among the best in the industry, but management has also placed a concerted emphasis on improving the credit quality of the Company over time. Below is a chart showing LTM interest coverage for CBL over the last ten years.

              The Company maintained a steady coverage ratio throughout the worst of the downturn and has dramatically improved its ability to cover interest payments since then. Although this metric has weakened slightly in the last 6 months, it is still up dramatically from just a year or two ago. Does it make sense to be more concerned with credit quality now when credit metrics are near a long term high than two years ago when the ability to weather a downturn was lower and the stock price was twice as high?

              Furthermore, this high-level analysis of debt coverage misses some attractive optionality present from the non-recourse mortgage debt that covers many the Company’s malls. The ability to dispose of properties that are not covering interest payments out of NOI effectively allows the company to dispose of those assets at a cap rate slightly lower than that interest rate. Given interest rates for this debt average below 5%, every time the Company turns a mall back over to a lender they are creating a tremendous amount of value for the rest of the Company by boosting net income and removing a liability at a huge premium to the markets current value of that asset.

              Finally, on the question of credit, it is important to remember just how much operational flexibility CBL has. The chart below shows total corporate capex, as well as capex psf over the last ten years. Note that the company dramatically curtailed capital expenditures during the downturn, and keep them low for a long period of time as it worked to boost its credit metrics. In a downside case, we believe a similar curtailment of expansion plans would enable the company to generate even more cash to boost credit metrics (which are already starting from a much better place).

              Moving now to equity metrics, it is on its face obvious that this is one of the cheapest and least loved REITs on the public market. Price / AFFO is below 4, less than half its historical level, less than half the average compared to its comps, and nearly 20% below the next closest player. This despite having a dividend yield (~13%) that is nearly twice the industry average, and is the best covered (in comparison to FFO) compared to all its comps. CBL is projected to pay out less than 50% of AFFO as dividends in 2017 as compared to an industry average of around 60%. At the opposite end of this extreme, take Macerich, which yields around 5%, is levered nearly 8x, and pays out over 70% of AFFO as dividends. Which of these two companies seems more likely to cut its dividend, particularly in a downturn? Does it make sense for the quantitatively stronger company to sell with a dividend yield 2.5x as high as the weaker one? Have the managers at Macerich proven they are willing to take down debt, even if it means shrinking the company, in the way that CBLs have?

              While undoubtedly cheap based on financial metrics, critics might counter that these hide fundamental problems in the operations of the business. This is not true. Below you will see charts showing leasing spreads, portfolio occupancy, and sales per square foot over the last 10 years.

              Up until last quarter leasing spreads had been positive for 25 straight quarters. Last quarter they were down 0.8%, a blip compared to spreads in the high single or low double digits that have been the norm over the last 6 years. Moreover, remember that last quarters spread, which was essentially flat, took place against a backdrop of one of the worst quarters for retail bankruptcies since the recession. In other words, it took one of the worst quarters in the last ten years to drop rates from high single digits to flat. A flat projection for the next several years would imply a significant appreciation of the stock price though!

              Perhaps more impressive is the consistency of the occupancy rate. Average second quarter mall occupancy rates over the last 10 years have been 91%. Average occupancy rates for all quarters have been 92%. The latest quarter saw a 90.2% rate, just 0.8% off the average, despite one of the worst quarters for retail in recent history. Moreover, the Company believes it will get back to that 92% occupancy rate by the end of the year. These are not the metrics of a dying company! The fourth quarter of 2016 had the fourth highest occupancy rate of any quarter in the last 10 years. That is not the metric of a dying company! Second quarter overall retail portfolio occupancy is over 0.2% better than the average Q2. That is not the metric of a dying company!

              Finally, and most damagingly for those who are currently dumping on CBL while simultaneously fetishizing sales PSF numbers, are the dramatic increase in sales PSF that CBL has seen over the past decade. From a bottom around $315 that metric has grown to around $375, over 20% from trough to peak. Certainly this has been in part driven by the disposal of several lower quality assets, but that doesn’t change the fact that the Company had a dramatically higher value / lower cap rate back when it had those crumby assets and had a lower sales PSF metric. It’s hard to square the fact that financial risk and leverage has come down, average asset quality has gone up, yields have remained relatively flat, and yet equity multiples have plummeted. Either the market was wrong in how it valued CBL for 10 years, or the market is way off now.

    Conclusion:

              The arguments above all point to an undervalued CBL. It is now time to consider a proper value. For a downside case, let’s set appropriate cap rates for Tier 1, 2, 3, and excluded malls at 9%, 11.5%, 15%, and 20%. Then let’s group other retail together and set 10% as a conservative cap rate. The tier 1 and 2 values are based on Penn REIT and Washington Prime respectively, which have similar sales psf and cap rates around there. The rest are guesses at fair value based on conservative estimates and private market transactions. The other retail cap rate is particularly conservative. Using those assumptions, the implied enterprise value is roughly $500 million higher than today, generating a stock price increase of roughly 35%.

              On the upside, note that all the equity research we’ve seen puts the NAV of the mall portfolio more than twice as high as the current price implies. Grant’s Interest Rate Observer wrote up this idea twice a couple years ago, once when it was trading at an 8.6% cap rate, once when it was trading at a 9.3% cap rate, both times arguing the rate should drop down to a more normal 7.6%. At those three rates, the stock would be up around 130%, 90%, and 205% respectively. Although we think getting down to the mid-7s may be a bit aspirational at this point, we wouldn’t view those prices as out of the question given prevailing interest rates. All the while an investor is paid around 13% (a dividend that should increase the next couple years). That is a risk/reward tradeoff we like!

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    - Market realizes extent of misvaluation of underlying assets

    - Management moves to realized value of underlying assets

    - Activist pushes for changes to unlock value of underlying assets

    Messages


    Subjectwpg pei and cbl?
    Entry09/15/2017 05:12 PM
    Membersurf1680

    Hi, Thanks for the great writeup.


    I was thinking about looking at WPG since there was likely selling pressure from it being part of the SPG spinoff but on the surface both CBL and PEI look cheaper.   Why did you specifically go with CBL and not a basket of the 3 or one of the others in particular?


    SubjectRe: wpg pei and cbl?
    Entry09/16/2017 05:56 PM
    MemberChandragupta

    CBL's equity has always looked the cheapest to me, but honestly I think the "online kills physical" narrative has probably driven prices down on almost all of the mall REITs to unduly low levels. A basket weighted toward the lower quality REITs, which in my mind will have the largest bounce-back if the market revalues the industry as a whole, could be a good approach, just not the one I decided to write up here. CBL has stood out in my mind as one of the REITs that has done the most to improve their fundamentals, and gotten no credit for it in the market. 


    SubjectUpdate?
    Entry11/04/2017 05:25 PM
    Memberele2996

    Any further thoughts after reviewing the latest quarter?

    Thanks


    SubjectRe: Update?
    Entry11/06/2017 03:26 PM
    MemberChandragupta

    In my mind this quarter was unfortunately close to a worst case scenario in terms of operational performance. If you think that kind of operational pressure is likely to continue for the next several quarters / years I think this stock potentially becomes uninvestable. If you think that operations will stabilize, even at FFO / NOI levels 10-20% below the current level, I think this is one of the cheaper stocks out there. I can't say I have a crystal ball, so your guess is probably as good as mine here (maybe better given the poor timing on this writeup). In the downturn leasing spreads were as bad as the latest quarter for a couple years, so this isn't unprecedented, but I'd also say it's hard to extrapolate based on results 10 years ago, particularly given the change in the portfolio.

    I do think that a good management team, or an activist that was able to gain control here could fairly easily double the value of the stock. I think that the disconnect on the value of these properties in the public market vs. the private market is huge, and has grown bigger as the stock has declined post-earnings. Unfortunately management doesn't seem to care about the stock price, and seems to have it's head buried in the sand when it comes to the question of "redevelopment at 7% yield" vs. "buyback stock at 13% cap rate". Given my perception of this disconnect, I'm still long. But as Emerson tells us, "A foolish consistency is the hobgoblin of little minds." In other words I'm certainly more open to the bear case here and would be interested in others' perspectives.


    SubjectRe: Re: Update?
    Entry11/08/2017 08:45 AM
    Memberhkup881

    I'd like to start by saying that anyone wondering why CBL's quarter sucked, should read or re-read my last 2 notes on my original VIC write-up (77 and 80) https://valueinvestorsclub.com/idea/CBL_and_ASSOCIATES_PPTYS_INC/138552#messages 

    I've continued to do work on the sector (visiting with mall managers and property brokers) and increasingly think that CBL is going to be terminal or at the very least, massively dilutive to equity holders. There is too much of a funding gap between what they need to spend to re-structure their boxes and inline space vs. what they produce in cash flow and they have substantial financial leverage and declining rents. If they don't spend, they blow the cross-tenancy clauses or end up with D level tenants paying much lower rents (think $5/ft vs $20/ft) on a fixed cost structure with fixed CAM and debt service cost. This is all at a time when most tenants are down-sizing to begin with.

    Since then, the story has migrated towards moving the malls to a collection of F&B (they already tried that and called it a food court) and entertainment. Let me ask, with mall traffic in collapse and most restaurants pulling back on growth, who's going to fill this space anyway? If they go over 30% non-retail tenance (many malls are in the 20's today) they bump up on the COREA and cross-tenancy clauses. DDS and SHLD are also increasingly militant in demanding cash for 1-time abatement on these clauses--even though it helps the mall survive.

    If you look at successful mall pivots, these usually go in 2 directions.

    -One is where you spend substantial capital to re-invent the mall, retain existing tenants at reduced rents and bring in new destination tenants. This works at A malls and a few B's.

    -Other is where you bite the bullet, don't spend much money and bring in local tenants. Think of it like a high class flea market. National mall REITs are not set up for this sort of local leasing work and this is better suited to local property developers anyway.

    I think the 2nd model is the desirable one for CBL. Unfortunately, CBL seem to keep thinking they're Taubman and are dumping cash into dying B malls.

    I think many malls ultimately survive, but need to be 100% re-invented and re-thought. CBL doesn't have the liquidity to do this at a time when retailers are all struggling and cutting back, while the middle class is getting squeezed and moving disposable income into health care spend instead of retail/food/entertainment.

    Right now, you can justify owning CBL due to the NAV as the B malls still trade at good cap rates. When people realize how much capital must be spent to retain rents, I think the cap rates will widen and the NAV will be shot. What happened at C & D malls is creeping into B's and there are surprisingly fewer true A malls in the US than most malls REITs would have you think.

    Will GGP bail you out? Maybe, but I'm not sure that's an investment thesis.

     

    I do think that a good management team, or an activist that was able to gain control here could fairly easily double the value of the stock. I think that the disconnect on the value of these properties in the public market vs. the private market is huge, and has grown bigger as the stock has declined post-earnings. Unfortunately management doesn't seem to care about the stock price, and seems to have it's head buried in the sand when it comes to the question of "redevelopment at 7% yield" vs. "buyback stock at 13% cap rate". Given my perception of this disconnect, I'm still long. But as Emerson tells us, "A foolish consistency is the hobgoblin of little minds." In other words I'm certainly more open to the bear case here and would be interested in others' perspectives.

    An activist will hit a wall against the COREA and cross-tenancy just as soon as CBL has. This isn't a redevelop at 7% vs something else argument. It's a redevelop or die argument. They really have no choice but to keep dumping money in, they just don't want to tell you this and no other property developer will develop these boxes for them at a 7% (or propbably the real number is much lower) yield.

    In my mind, the only option at CBL is to blow out their 10 best malls ASAP, retire debt, build liquidity and then deal with their 2nd tier malls from a position of strength. Until CBL does that, I'm not interested.

     


    SubjectRe: Re: Re: Update?
    Entry11/08/2017 04:50 PM
    MemberChandragupta

    Thanks hkup, appreciate the thoughts. I also enjoyed rereading your old posts. I agree with many of your thoughts and criticisms, but differ in a couple respects and did have some questions I'd be interested to get your thoughts on.

     

    First, I'd be interested to hear more about your explanation for the bad Q3. My impression is that the primary dagger in Q3 was tied to releasing spreads, which in turn were driven by renegotiated leases for bankrupt tenants (as well as a couple other renegotiations). I don't think the focus was on either of the two primary points you are bringing up as part of the bear thesis (lack of funding for redevelopment & inability to change tenant mix). Am I misunderstanding the thrust of your argument or are you saying those two factors are what drove Q3 performance instead of bankruptcy renewals?

     

    Second, on the redevelopment point, I'd be interested if you have any numbers you can share with respect to the hole you see in their funding? Although I certainly see your point here, and it does concern me, particularly in the event of a department store bankruptcy, my point was the market seems to be acting as if this is the Sword of Damocles for CBL and the opportunity of the century for Seritage. Something seems off there. I would also point out that since 2015 CBL has completed "Redevelopment" projects totaling $134mm, and in the same time period has spent $230mm on "New or Expansion" projects. So although you may be right going forward (we'll see) historically management actually has been going for the 7% new project vs. the 13% buyback. Historically redevelopment expenses have been pretty limited, so we would need to see a massive ramp up for your concern here to play out. Furthermore, if you go back to the financial crisis, capex dropped dramatically, despite the fact that vacancy rates were far higher back then. Is it your understanding that lease terms are that much more onerous now? If you look at projects under construction now, they have come down dramatically in size and scope, so it seems like management may finally be cutting back a bit on the wasted reinvestment. Ultimately I'm not sure the data is there to support this "they must continue to pump money into B malls to survive" narrative. You may be right going forward, particularly in the event of a large bankruptcy, but I'd be interested in how you contrast that with the last 10 years. Remember also that sales PSF has come up dramatically in the last ten years, was stable from last quarter to this quarter, and is only down a couple percent from their all-time high last year. So I think there is limited evidence as of today that retailers in CBL malls are seeing a dramatic falloff in sales.

     

    On the inability to change tenant mix, do you have any numbers you are able to share to provide some more detail on this concern? How much are DDS and SHLD charging for these abatements? Have you heard of cases where malls went under as a result of an inability to find common ground on this issue? On the vacancy waterfall side, this seems like a bit of a stretch to me at this point. CBL's 93.1% portfolio occupancy in Q3 is well above the lows in the financial crisis, and actually above average for Q3's over the last 10 years. I'm sure some of their malls are challenged and will face pressure here, but jumping to the conclusion that 75% discounts on rent on a large scale is impending seems like a pretty big leap.

     

     

    On the NAV discount idea and the activist thought, I'm not sure I understand your argument. Are you saying that CBL is trading at a premium / in line / discount to your estimate of NAV? If your answer is discount, do you think there are no steps an activist could take to realize that discount? In your final sentence it seems like you are laying out the steps you would take (and I agree with you on those steps) to better position the company. I would also say that if the company executed on those steps I would not be surprised to see the stock double or triple from here. Put another way, are you saying that good management doing the right thing for a year could put the company in a much better spot and get the stock up, or that the company is structurally hosed no matter what they do?


    SubjectRe: Re: Re: Re: Update?
    Entry11/09/2017 11:33 AM
    Memberele2996

    Thanks chandragupta and hkup881 for your updated thoughts.

    The mall business is very interesting. Although CBL is in one line of business, the business is conducted through about 119 discreet and unrelated assets of varying quality. Can they make deals to maximize the value of these assets? The Lebovitz family has a good sized equity interest in CBL. Are they committed to maximizing the value of their equity or even rescuing some value? I don't know for sure, and I have some doubts.

    I was looking at the directors of CBL and WPG. The oldest member of the board of WPG looks to be about 52. The youngest member of the board of CBL is 55 and the average age is about 66. Charles Lebovitz is 80 and the 2nd highest paid executive. There appear to be 4 Lebovitz's being paid by CBL - Charles, Stephen, Michael & Alan. In addition, there are several long time employees who might be past their prime. Ben S. Landress, EVP of Management, is 89 years old. 89! Augustis Stephas, EVP & COO, is 74 years old. Don Sewell, VP of mall management, has been at CBL since 1973. This is not a dynamic roster. Perhaps, the Lebovitz family is indifferent to the value of the equity.

    WPG, also a total market turkey, seems to me to be the better of these two turkeys based on a more energetic management.


    SubjectRe: Re: Re: Re: Update?
    Entry11/09/2017 11:46 AM
    Memberhkup881

    Thanks hkup, appreciate the thoughts. I also enjoyed rereading your old posts. I agree with many of your thoughts and criticisms, but differ in a couple respects and did have some questions I'd be interested to get your thoughts on. I'll reply in bold. I also am really fascinated with this sector so happy to continue the conversation. I think it's worth noting that I am CEO of a real estate company with ~150 tenants and we have owned a few "retail centers" over the years, the largest of which is about 60 tenants (call it a mini-mall) so I have a lot of perspective on how these things play out as I'm living through all of this myself--particularly on the capital spending needs of these beasts (which seem to be in-exhaustable) at terrible returns.

     

    First, I'd be interested to hear more about your explanation for the bad Q3. My impression is that the primary dagger in Q3 was tied to releasing spreads, which in turn were driven by renegotiated leases for bankrupt tenants (as well as a couple other renegotiations). I don't think the focus was on either of the two primary points you are bringing up as part of the bear thesis (lack of funding for redevelopment & inability to change tenant mix). Am I misunderstanding the thrust of your argument or are you saying those two factors are what drove Q3 performance instead of bankruptcy renewals? Q3 results were weak for the reasons that you mentioned. However, it was the first time that re-leasing spreads were weak (though Q2 wasn't too hot either). It also shows the AFFO de-leverage that happens when you have a few BKs simultaneously. More importantly, it shows the negotiating power of tenants when it comes to re-leasing class B malls. Specifically on the CC they mention some larger national tenants pressuring them on re-leasing spreads going forward. This then sets the tone for future re-leasing. Previously, bulls could say that despite retail headwinds, AFFO was constant and leasing spreads were comping low single digit positive and bears were wrong (hell--I said that myself). Suddenly, they're comping negative and there's no end in sight to how bad this will go as you have a fixed cost structure and high operating costs along with high financial leverage, and not a lot of tenants looking for space. This is also before Q4 when you're sure that a few more tenants will miss numbers and likely go BK in early 2018 and no color on who'll take up that space. Seriously, which concept is growing outside of a few QSR brands that cluster on high streets and strip malls. I've been on lots of retail and F&B cc's this Q, they're all talking about cutting growth/shrinking/renegotiating leases to lower costs in response to persistant negative revenue comps. That's not exactly bullish for 2018 re-leasing spreads.... One quarter doesn't make a trend, but it does make an inflection point on a trend that's likely been in motion for a few years, which CBL has deferred by fire-selling C/D malls and reducing the numerator for total GLA.

     

    Second, on the redevelopment point, I'd be interested if you have any numbers you can share with respect to the hole you see in their funding? Although I certainly see your point here, and it does concern me, particularly in the event of a department store bankruptcy, my point was the market seems to be acting as if this is the Sword of Damocles for CBL and the opportunity of the century for Seritage. Something seems off there. I would also point out that since 2015 CBL has completed "Redevelopment" projects totaling $134mm, and in the same time period has spent $230mm on "New or Expansion" projects. So although you may be right going forward (we'll see) historically management actually has been going for the 7% new project vs. the 13% buyback. Historically redevelopment expenses have been pretty limited, so we would need to see a massive ramp up for your concern here to play out. Furthermore, if you go back to the financial crisis, capex dropped dramatically, despite the fact that vacancy rates were far higher back then. Is it your understanding that lease terms are that much more onerous now? If you look at projects under construction now, they have come down dramatically in size and scope, so it seems like management may finally be cutting back a bit on the wasted reinvestment. Ultimately I'm not sure the data is there to support this "they must continue to pump money into B malls to survive" narrative. You may be right going forward, particularly in the event of a large bankruptcy, but I'd be interested in how you contrast that with the last 10 years. Remember also that sales PSF has come up dramatically in the last ten years, was stable from last quarter to this quarter, and is only down a couple percent from their all-time high last year. So I think there is limited evidence as of today that retailers in CBL malls are seeing a dramatic falloff in sales. I don't know how CBL defines "redevelopment" vs "expansion"  I guess "expansion" means you have more sq ft than you started with?? However, on these malls, you have to keep spending. I would call this spending basic cap-ex, which means that shareholder returns have been understated for years as they pull out "redevelopment" and act like it's a growth driver when in reality that's basic TI for new tenancy. I know this b/c we capitalize this TI, but it CERTAINLY IS A CASH EXPENSE that seems to RECUR ALMOST EVERY QUARTER at a HIGHER RATE THAN DEPRECIATION COST as tenants leave before their leases end due to economic issues (sorry for caps).

    The issue is that the box stores are all failing and downsizing. The pace of returning space to malls is accelerating. I don't know how to build a cash flow bridge as I don't know how fast this pace goes. Will ESL dump more $$$ into SHLD? Will JCP be around in 2 years? I just know that AFFO will keep getting dumped into 7% returns, except these aren't 7% returns. You then need to add in fixed overhead staff, wasted mgmt. time, leasing commissions, etc. We have built these models to justify spending money, and we get to some teens ROA and then when the project is done, you wonder why you wasted your time on it b/c your overall return is much less, plus it wasted 6 months of your life that could have been spent on something more productive, but then you realize that if you didn't do it, you'd be even worse off b/c the rest of your tenants would be rolling off. You're on a never-ending conveyer belt of crappy AFFO that goes into even crappier projects that you have no choice but to undertake.

     

    On the inability to change tenant mix, do you have any numbers you are able to share to provide some more detail on this concern? How much are DDS and SHLD charging for these abatements? Have you heard of cases where malls went under as a result of an inability to find common ground on this issue? On the vacancy waterfall side, this seems like a bit of a stretch to me at this point. CBL's 93.1% portfolio occupancy in Q3 is well above the lows in the financial crisis, and actually above average for Q3's over the last 10 years. I'm sure some of their malls are challenged and will face pressure here, but jumping to the conclusion that 75% discounts on rent on a large scale is impending seems like a pretty big leap. This is based on conversations with brokers and facility managers. I'd rather not share names of facilities as they spoke on confidentiality. I heard of abatement costs as high as $100,000 to change floor tiles and $250,000 to put in sky-lights. One mall had to pay a fine and remove a carnival from the parking lot on 2 hours notice. These are all beneficial to the mall, but SHLD and DDS are using this to extort money to offset otherwise underperforming boxes. Many of these malls have cross-tenancy issues where if occupancy is under 80%, it then kicks in on some tenants, which then snowballs the 75% and 70%, etc cross-tenancy clauses. I was at one mall where they had a 3,000 store where kids could pay $1/hr to play with over-sized stuffed animals. You cannot make this up!!! They were paying 50% of revenue in rent and total rent collected with like $3,000 for the year. It was simply a way to stuff the occupancy % higher and avoid the cross-tenancy. This is a mall owned by a public REIT and classified as Class B (not C).  There's also caps on all sorts of tenancy type. I know of one mall where one anchor wouldn't allow an exemption for a fitness center in a box without a 7-figure pay-off, even though it would have brought constant mall traffic.

    Do some quick math and you'll know why re-leasing is so hard. Let's say you're at a strip box across the street from the mall as a QSR concept. You're paying $15/ft + $3/ft in CAM so $18/ft all in. Now the mall wants you to come to them and they give you a sweet-heart deal of $10/ft when their other fashion tenants still pay $25/ft. After your CAM of $10 now, you're at $20/ft. So you are paying more for the space but are you getting more foot traffic? Will your re-model be more expensive as it's inside of a mall instead of an open-access strip center front? I think most tenants will realize that they need <$5/ft basic rent to come out ahead vs the strip and that's before taking into account foot-fall. With mall traffic down mid-single digit annual comps, it's not as easy to assume the mall has more bodies either. This is why they are struggling to re-lease. Who the hell wants the space?? You can take down CAM by reducing interior upkeep/security/cleaning/AC & Heat/etc (think high-end flea market), but that then eats into your inline fashion and your boxes have COREAs to stop you from doing that. These COREAs are nasty and not appreciated by the market. Get your hands on one and read through it. It's like 200 pages. You'll realize that these mall CEOs are full of it when they talk about re-tenanting, b/c they cannot re-tenant to anything except national fashion tenancy and those guys are shrinking.

      

    On the NAV discount idea and the activist thought, I'm not sure I understand your argument. Are you saying that CBL is trading at a premium / in line / discount to your estimate of NAV? If your answer is discount, do you think there are no steps an activist could take to realize that discount? In your final sentence it seems like you are laying out the steps you would take (and I agree with you on those steps) to better position the company. I would also say that if the company executed on those steps I would not be surprised to see the stock double or triple from here. Put another way, are you saying that good management doing the right thing for a year could put the company in a much better spot and get the stock up, or that the company is structurally hosed no matter what they do? CBL is at a NAV discount today. They need to move ASAP to close that gap by blowing out the "A" malls they have at a cap-rate that is acceptable as it is about to also blow out. CBL doesn't own any true A malls that are immune to retail trends like most Taubman facilities. I don't think current management can or will do what's needed and they're too entrenched for an activist to push them out. CBL really needs to be private and I think a smart private player would cut all distributions, and pay through the nose to get out of COREAs and then make draconian changes to the malls so that they look like high-end flea markets with local tenants. This will take HUGE change over 3-5 years and lead to such awful metrics in the interim that it cannot stay public. There's a clear road-map as I've seen malls that did it correctly (I've probably visited 50 class B/C malls this year). They just all happen to be privately owned...

     

     


    SubjectRe: Re: Re: Re: Re: Update?
    Entry11/09/2017 11:53 AM
    Memberhkup881

    I vote for WPG. Say what you will about the challenges of B/C malls (I've said a lot already) at least WPG talks on every call about driving foot-traffic, new retailers that they're recruiting to drive interest, bringing in entertainment and young people, etc. Basically what you need to do to survive in a 500k+/ft retail facility.

    CBL talks about margins and financials. It sounds like it's lead by a bunch of actuaries with no interest in each individual asset (partly b/c for 40 years, you could build these things, gather any 100 random national tenants and coin money so there was no need to think).

    These aren't NNN leases like O and NNN own. These are individual businesses with individual demand structures and communities that need to be supported and pushed towards your tenants and CBL certainly doesn't treat them as such.

    Want a fun exercise, find 2 similar CBL/WPG malls and compare how many likes the 2 malls have on facebook. I wonder if CBL even has facebook pages for all of their malls...


    SubjectAre Sears and JCP really less than 2% of rent?
    Entry11/21/2017 01:46 PM
    Memberxds68

    I see on page 31 of the q3 supplemental Sears and JCP are listed at 1.8% of revenue combined. But they also represent 12.3 mil sq ft of rentable space. With annual revenue of $900 mil, that implies about $16 mil of revenue from Sears and JCP, or about $1.30 per square foot. Are they really at such low rents? In Rickey824's February writeup on SRG, he puts Sears rent at $4.30 per square foot - how is it possible there is such a discrepancy?

    Thanks


    SubjectRe: Are Sears and JCP really less than 2% of rent?
    Entry11/28/2017 04:57 PM
    MemberChandragupta

    Yes, I think your math is correct. As I point out in my writeup it seems strange that Seritage gets credit for potential future redevelopments on all those properies whereas CBL does not. In terms of the differential, I'm not as familiar with Seritage so I can't say for sure what's driving rents there. I'd imagine it's some combination of 1) CBL has the right to terminate a bunch of leases from properties they recently bought from Sears so long as they give 6 months notice, so they may have had less incentive to push for higher initial rents or may have had to accept below normal rents to get that provision, 2) Seritage may have properties in higher quality locations (I think they generally do, but probably not enough to justify the delta in stock prices), and/or 3) Seritage is a spinoff, so terms on rents may have been set above market to extract more value from stores before they close. Would be interested in the perspective of others who follow Seritage closer than I do though.


    Subject4Q17
    Entry02/09/2018 09:40 AM
    Memberagape1095

    Using $1.75 FFO as starting point, minus $1/share ($200mm of capex), I FCF/share is still $0.75 and stock is at $4.3 as we speak. 

    Results were disastrous, fundamentals are trending the wrong way with no-end insight.  But the intrinsic value is not zero.   Is this over-sold or a value - trap?  what's the right price?

     


    SubjectRe: 4Q17
    Entry02/09/2018 03:00 PM
    Memberaagold

    Intrinsic value of real estate assets is clearly not zero, but what makes you so sure intrinsic value of levered equity isn't zero?

     

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