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This month's REIT Focus is on CBL & Associates Properties, Inc. (CBL), a publicly traded, self-managed real estate investment trust that owns malls, shopping centers and office buildings in 27 states primarily in the Southeast and Midwest. CBL owns an 84.5% general partner interest in CBL & Associates Limited Partnership, its UpReit general partnership. As of 12/31/12, CBL owned a controlling interest in 111 and noncontrolling interest in 15 malls and shopping centers, a controlling interest in 13 and noncontrolling interest in seven office buildings, a controlling interest in the development of an outlet shopping center and a mortgage on six other properties. CBL also has unconsolidated investments in 16 retail joint ventures of which it owns an approximate total of 50% interest. CBL's portfolio contains 82.3 million square feet plus 9.4 million square feet managed for third parties. Major tenants include Limited Brands, LLC, Foot Locker, Inc., JC Penney Company, Inc. and Dicks Sporting Goods, Inc. The average occupancy, annual base rental rate and mall sales per square foot of CBL's portfolio as of 12/31/12 were 95%, $20 and $354 respectively. CBL was incorporated in the State of Delaware in 1993, is traded on the NYSE and is based in Chattanooga, TN.

CBL has 161.5 million common shares outstanding and a market capitalization of approximately $3.7 billion. CBL has a very experienced and well regarded management team that includes Charles B. Lebovitz, Chairman, Steven B. Lebovitz, President and CEO and Thomas J. DeRosa, Vice Chairman and CFO.

Select financial data for CBL as of the 12/31/12 10K and for the period 1/1-12/31/12 is as follows (in millions where applicable):

Real Estate Assets, Gross (excluding investments in unconsolidated affiliates)$8,301
Total Assets$7,089
Mortgages and Other Indebtedness (excluding unconsolidated debt)$4,746
Stockholders' Equity$1,328
Revenue$1,034
Net Income$84
Net Income Per Share$.54
Cash Flow from Operations$481
Unsecured Credit Facility ($1,200 with $476 used)$724
Market Capitalization$3,700
Debt to:
Gross Real Estate Assets57%
Market Capitalization128%
Real Estate Assets Per Sq. Ft.$101
Dividend and Yield ($.92/sh.)4%
Valuation Methodology:
2012 Revenue Per Above$1,034
Less: Operating Expenses (excluding depreciation, amortization, interest expense, gains/losses plus other income)386
Projected Net Operating Income 2012$648
Projected Inflation Rate at 3.5%x103.5%
Projected Forward NOI for Next Year$671
Projected Cap Rate7.5%
Projected Value of Real Estate Assets$8,947
Add: Net Operating Working Capital141
Add: Investment in Unconsolidated Affiliates (projected NOI of $182M at a 7.5% cap rate times 50% interest less CBL portion of debt plus Jinsheng note)521
Total Projected Asset Value$9,609
Less: Total Debt Per Above(4,746)
Less: Redeemable Noncontrolling Interests in Consolidated Subsidiaries(487)
Less: Series D Preferred Stock(453)
Less: Series E Preferred Units(172)
Projected Net Asset Value$3,751
Shares Outstanding (common stock, 161.5M shares plus operating partnership units, 29.5M shares)191
Projected NAV Per Share$20
Closing Market Price Per Share on 3/15/13$23

As shown above, our net asset value per share for CBL is $20 versus a market price of $23 per share. Current average cap rates for retail and office properties per CBRE are in the 5.5% to 9% range, depending on the location, tenancy and quality of the property. We have used a cap rate of 7.5% due to CBL's portfolio being primarily Class A&B mall properties and located in cities and metropolitan statistical areas with attractive demographic growth.

CBL's strengths include solid and experienced management team, attractive dividend yield of 4%, attractive equity valuation, high mall occupancy of 95% and strong mall sales per square foot of $354. Weaknesses include; higher than normal leverage at 128% of market capitalization, although only 57% of asset cost and no asset growth since 2010.

We highly recommend the purchase of this stock as the current price is very attractive and think CBL is one of the best retail REIT values on the market. Most of the retail REIT competitors to CBL are trading at cap rates in the 5% area. CBL is also trading at a current FFO multiple of only 11, well below the average REIT multiple of 16-19 times. CBL would be a good acquisition candidate for a retail REIT that does not have a large presence in the Midwest and Southeast. Management also recently stated that they are seeking an investment grade debt rating by 2014. This will be a very positive event that will lower CBL's cost of capital and increase investor return.

The gross real estate assets, net income and funds from operations for 2010 to 2012 are shown in the table below:

(millions)201020112012
Gross Real Estate Assets$8,611$7,768$8,301
% ChangeNA(10%)7%
Net Income$98$185$174
% ChangeNA89%(6%)
Funds from Operations$288$304$336
% ChangeNA6%11%

A five year price chart of CBL is shown below:

(click to enlarge)

Source: REIT Focus: CBL & Associates Properties