CBL & ASSOCIATES PPTYS INC CBL
January 03, 2014 - 3:37pm EST by
agape1095
2014 2015
Price: 18.20 EPS na na
Shares Out. (in M): 200 P/E na na
Market Cap (in M): 3,636 P/FCF 10.7x 0.0x
Net Debt (in M): 6,200 EBIT 680 0
TEV: 9,836 TEV/EBIT 14.4x 0.0x

Sign up for free guest access to view investment idea with a 45 days delay.

  • REIT
  • Commercial Real Estate (CRE)
  • Discount to NAV
 

Description

Investment Thesis

Mr Market is temporary offering investors an opportunity to invest in a partially monopolistic business with stable cash flow.  I believe a long position in CBL at current levels represents 40 – 50% upside with minimal downside risk.

 

Business Overview

CBL is a US REIT that owns 79 regional shopping malls with about 68.2m sf of gross leasable area (GLA).  A majority of the malls are located in the Midwest and Southeast part of the US.  It also owns a small portfolio of offices and community shopping centers.

 

Why does the opportunity exist?

  • Interest rate has gone up since May 2013.  The US 10 year treasury is now at 3% compared with 1.65% 7 months ago.  US REITs were sold off given its bond-like characteristic.
  • CBL missed its earnings and lowered guidance in 3Q13, citing weak SS NOI.  The stock is down another 10% since the call.

 

Malls 101

  • Generally, malls depend on anchors to drive foot traffic.
  • Higher foot traffic = higher sales by tenants; Malls with no traffic are worthless.
  • Higher sales by tenants = higher rents for the landlord
  • Malls in prime locations (i.e. affluent neighbourhood, high population density) are not beholden to the strengths or weaknesses of its anchors.  Any anchor is replaceable because traffic at these malls is strong.  The Bal Harbour Shops in Miami and The Grove in LA are two examples of what I call “super A malls”.
  • Contrary to general opinion, mall stores and online retail can co-exist.  Retailers need a physical store to “showroom” the merchandise and build brand awareness.

 

CBL’s mall portfolio

To understand CBL’s portfolio, it helps to describe what it is not.  SPG (post spin-off), MAC, TCO and GGP utilize a high quality mall strategy.  They invest in malls with high sales/sf, affluent neighbourhoods, metropolitan locations and upscale tenants.  CBL invests in an opposite way; its malls are located in rural, less populated areas like Minot, ND and Laredo, TX.  None of malls it owns are of “super A” quality.  A typical CBL mall is likely to be anchored by a JCPenney or Sears vs a Saks or Neiman Marcus in a high quality mall.  Low quality comparables are RSE (spun off from GGP) and PEI.

 

The Hidden Gem

What makes CBL standout among its low quality mall peers is “only game in town” malls.  As the name implies, these malls are located in small rural cities/towns and generates about 50 % of NOI.  They are monopolistic in nature because the economics of the surrounding radius cannot support another mall.   The unattractive economics has created a barrier to entry.  An example will be the Fayette Mall in Lexington, KY where it is the only mall within a 60 mile radius.

 

sales / sf

FY 2004

FY 2005

FY 2006

FY 2007

FY 2008

FY 2009

FY 2010

FY 2011

FY 2012

Avg

CBL

314

331

341

346

331

310

310

336

353

 

Yoy growth%

 

5.4%

3.0%

1.5%

-4.3%

-6.3%

0.0%

8.4%

5.1%

1.6%

 

Growth is not spectacular but CBL should be able to grow earnings at 2 – 3% range given operating and financial leverage.

 

Valuation

CBL is attractive on a relative and absolute basis.

 

 

RSE

PEI

CBL

Shares outstanding

50.50

71.16

199.80

Price

22.00

19.20

18.20

Market cap

1,111

1,366

3,636

Debt

1,530

2,227

6,679

Tangible Assets

164

160

432

EV

2,477

3,433

9,883

NOI

176

260

810

Implied Cap Rate

7.1%

7.6%

8.2%

 

CBL

     

Cap Rate

6.5%

7.0%

7.5%

NAV

$31.11

$26.65

$22.79

 

Due to the superior economics of its “only game in town” portfolio, CBL should trade at a premium to PEI and RSE.

 

On an absolute basis, in my normal case I assume 1% growth in revenue, 56% operating FCF margins (avg from 2004 – 12), 5.5% cost of debt (including the preferred), and that equals $1.70 FCF/share.  Applying a 15x multiple the stock is worth $25.5.

 

Worst case, 5% drop in revenue, 53% operating margins translate into $1.32/share.  Applying a 13x multiple is worth $17.16.

 

* Operating FCF defined as cash revenue – real estate operating expense – G&A – maintenance capex,

 

Catalyst

  • Private market cap rate for asset of the same calibre as CBL is trading at low 7% cap rate, even after the rise in bond yield.  Recently announced deals (i.e. BRE, CWH) have shown that there is ample liquidity for REIT assets regardless of quality.  The significant discount to NAV will attract bids.
  • SPG will spin off its lower quality portfolio later this year.  By then there will be 4 low quality mall REIT in the space.  I believe longer term there will be 2 players or less in the space.  If CBL’s discount to NAV still exists after SPG’s spin-off, SpinCo or RSE may make a bid for CBL

 

Risks

  • Interest rate continues to go up, causing increase of cap rate
  • High leverage : CBL is vulnerable to fundamental downturn or stress in the bond market
  • Online Retail; this risk is somewhat offset by the retailers’ need to have a show room.  Nonetheless, it does have an impact on the mall’s sales/sf number.
I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Potential M&A transaction
    sort by   Expand   New

    Description

    Investment Thesis

    Mr Market is temporary offering investors an opportunity to invest in a partially monopolistic business with stable cash flow.  I believe a long position in CBL at current levels represents 40 – 50% upside with minimal downside risk.

     

    Business Overview

    CBL is a US REIT that owns 79 regional shopping malls with about 68.2m sf of gross leasable area (GLA).  A majority of the malls are located in the Midwest and Southeast part of the US.  It also owns a small portfolio of offices and community shopping centers.

     

    Why does the opportunity exist?

    • Interest rate has gone up since May 2013.  The US 10 year treasury is now at 3% compared with 1.65% 7 months ago.  US REITs were sold off given its bond-like characteristic.
    • CBL missed its earnings and lowered guidance in 3Q13, citing weak SS NOI.  The stock is down another 10% since the call.

     

    Malls 101

    • Generally, malls depend on anchors to drive foot traffic.
    • Higher foot traffic = higher sales by tenants; Malls with no traffic are worthless.
    • Higher sales by tenants = higher rents for the landlord
    • Malls in prime locations (i.e. affluent neighbourhood, high population density) are not beholden to the strengths or weaknesses of its anchors.  Any anchor is replaceable because traffic at these malls is strong.  The Bal Harbour Shops in Miami and The Grove in LA are two examples of what I call “super A malls”.
    • Contrary to general opinion, mall stores and online retail can co-exist.  Retailers need a physical store to “showroom” the merchandise and build brand awareness.

     

    CBL’s mall portfolio

    To understand CBL’s portfolio, it helps to describe what it is not.  SPG (post spin-off), MAC, TCO and GGP utilize a high quality mall strategy.  They invest in malls with high sales/sf, affluent neighbourhoods, metropolitan locations and upscale tenants.  CBL invests in an opposite way; its malls are located in rural, less populated areas like Minot, ND and Laredo, TX.  None of malls it owns are of “super A” quality.  A typical CBL mall is likely to be anchored by a JCPenney or Sears vs a Saks or Neiman Marcus in a high quality mall.  Low quality comparables are RSE (spun off from GGP) and PEI.

     

    The Hidden Gem

    What makes CBL standout among its low quality mall peers is “only game in town” malls.  As the name implies, these malls are located in small rural cities/towns and generates about 50 % of NOI.  They are monopolistic in nature because the economics of the surrounding radius cannot support another mall.   The unattractive economics has created a barrier to entry.  An example will be the Fayette Mall in Lexington, KY where it is the only mall within a 60 mile radius.

     

    sales / sf

    FY 2004

    FY 2005

    FY 2006

    FY 2007

    FY 2008

    FY 2009

    FY 2010

    FY 2011

    FY 2012

    Avg

    CBL

    314

    331

    341

    346

    331

    310

    310

    336

    353

     

    Yoy growth%

     

    5.4%

    3.0%

    1.5%

    -4.3%

    -6.3%

    0.0%

    8.4%

    5.1%

    1.6%

     

    Growth is not spectacular but CBL should be able to grow earnings at 2 – 3% range given operating and financial leverage.

     

    Valuation

    CBL is attractive on a relative and absolute basis.

     

     

    RSE

    PEI

    CBL

    Shares outstanding

    50.50

    71.16

    199.80

    Price

    22.00

    19.20

    18.20

    Market cap

    1,111

    1,366

    3,636

    Debt

    1,530

    2,227

    6,679

    Tangible Assets

    164

    160

    432

    EV

    2,477

    3,433

    9,883

    NOI

    176

    260

    810

    Implied Cap Rate

    7.1%

    7.6%

    8.2%

     

    CBL

         

    Cap Rate

    6.5%

    7.0%

    7.5%

    NAV

    $31.11

    $26.65

    $22.79

     

    Due to the superior economics of its “only game in town” portfolio, CBL should trade at a premium to PEI and RSE.

     

    On an absolute basis, in my normal case I assume 1% growth in revenue, 56% operating FCF margins (avg from 2004 – 12), 5.5% cost of debt (including the preferred), and that equals $1.70 FCF/share.  Applying a 15x multiple the stock is worth $25.5.

     

    Worst case, 5% drop in revenue, 53% operating margins translate into $1.32/share.  Applying a 13x multiple is worth $17.16.

     

    * Operating FCF defined as cash revenue – real estate operating expense – G&A – maintenance capex,

     

    Catalyst

    • Private market cap rate for asset of the same calibre as CBL is trading at low 7% cap rate, even after the rise in bond yield.  Recently announced deals (i.e. BRE, CWH) have shown that there is ample liquidity for REIT assets regardless of quality.  The significant discount to NAV will attract bids.
    • SPG will spin off its lower quality portfolio later this year.  By then there will be 4 low quality mall REIT in the space.  I believe longer term there will be 2 players or less in the space.  If CBL’s discount to NAV still exists after SPG’s spin-off, SpinCo or RSE may make a bid for CBL

     

    Risks

    • Interest rate continues to go up, causing increase of cap rate
    • High leverage : CBL is vulnerable to fundamental downturn or stress in the bond market
    • Online Retail; this risk is somewhat offset by the retailers’ need to have a show room.  Nonetheless, it does have an impact on the mall’s sales/sf number.
    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Potential M&A transaction

    Messages


    SubjectRe: WSJ Article U.S. Probes Real-Estate Firm With Ties to Sen. Bob Corker
    Entry05/25/2016 05:11 PM
    Memberele2996

    I think that CBL will survive and pay me a high current yield. One day the stock might go up. I bought shares today. Shares might, therefore, be weaker tomorrow.

    On a topic related to A malls versus all the rest, in the future will everyone be living in NYC, LA, SF, Chicago and Miami? Is there a future for non-urban center America?

     


    SubjectRe: Re: Re: WSJ Article U.S. Probes Real-Estate Firm With Ties to Sen. Bob Corker
    Entry05/25/2016 05:48 PM
    Memberele2996

    Thanks for the reply. What kind of returns can private owners get on a Bonita Mall purchased for $36/sq ft? When a railroad ceases to operate, you tear up the tracks and sell the rails, ties and ballast. Bonita Mall is, evidently, still operating. It might be bad, but it is not yet an abandoned property. Is there a public company which specializes in this type of activity?

    Thanks

    About the dividend - I think that it can be paid for quite a while, but I am not highly confident of that (or anything else).

      Back to top