Seeking Alpha
Long/short equity, value, hedge fund analyst, REITs
Profile| Send Message|
( followers)  

Shortly after the crash of '08, Glimcher Realty Trust (NYSE:GRT) and its preferreds traded at absurdly low prices. This was back at a time when the preferreds not only gave enhanced yield, but a large potential for capital appreciation. Sadly, the window of opportunity has closed, with preferreds trading at or above par and many of the better yielding ones already redeemed. Another excellent source of stable income disappeared as the redemption of GRT-F was announced. While the redemption is certain, the transaction will not finalize until 9/4/12 at which point former preferred holders will receive large sums of cash in need of reinvestment.

In today's environment of mostly 6-7% preferreds a straight up transfer to a different yield stock would be rather disappointing coming from the 8.75% GRT-F. Instead, I would suggest a value play with CBL and Associates Properties (NYSE:CBL) which could easily make up for the lost yield with capital gains. Since CBL, like Glimcher, is an enclosed shopping mall REIT it would allow investors to maintain their exposure to this unique portion of the retail sector. First we will examine what makes CBL a good company, then delve into some potential concerns.

Strength & Value

The case for CBL's strength is an easy one to make.

  • Excellent performance: Between increased occupancy and improved rates on rent rollovers, CBL had a phenomenal second quarter. In fact, it was able to increase FFO guidance to $2.00-$2.10 for 2012. Same-store sales increased 4.0% which is particularly important for malls as rental rates are directly linked to sales/sq. foot.
  • Strong properties: Enclosed malls have a tendency to dominate their local markets by proximity, and the inclusion of outlet centers in CBL's portfolio allows them to have some share in the low-price portion of the market.
  • An improved debt structure: Having absorbed the mortgage maturities coming due in Q1 into its credit facility, CBL refinanced these during Q2 into new mortgages with a fixed weighted average rate of 4.97% and term of 10 years. The replaced mortgages had an average rate of 6.25%, so the savings were quite sizable.

Of course, being a great company does not necessitate being a strong stock. Determining the value of CBL as a stock is actually quite a tricky matter as the best metrics of value show conflicting results.

Metric

Numbers associated with metric

Indicated value based on metric

Price/est. FFO

9.7

Among lowest in sector shows CBL is an excellent value.

Price/book

2.56

Relatively high, indicative of poor value.

Historical market pricing

49.3% total returns over past year

Incredibly high past returns tend to indicate full or overvaluation in the market.

With these conflicting metrics in mind, we should look deeper at each one to determine its reliability in predicting the value of CBL and Associates.

Price/est. FFO: FFO directly represents the performance of a company, so this metric only fails when unsustainable. In the case of CBL, its revenues appear to be either stable or increasing as the company has had no trouble resigning expiring leases. Improving sales and a rallying economy (albeit slowly) also indicate sustainability of a mall REITs revenues. On the expenditure side of FFO, CBL is also sustainable as most of its debt is fixed and non-recourse. The ten year average term of its newly signed mortgages keeps CBL in a safe spot regardless of what the Fed does to interest rates.

Price/book: Generally, this is a very nice measure of how much bang investors are getting for their buck, but there are some factors which distort this, the largest of which is depreciation. As a fairly old REIT, many of CBLs properties are aging and have already been significantly depreciated. This on paper loss is sometimes not reflected in the actual value of the buildings which can even increase over time. I cannot speak for all of its properties, but I have been in two of CBL's enclosed malls and as far as I can tell these properties are very well-maintained, inside and out. Assuming these are representative of the rest of its portfolio, CBL's book value drastically underestimates the actual value of its assets. Furthermore, if the book value were accurate, its strong revenue stream would mean its properties are operating at unprecedented cap-rates.

Historical Pricing: Usually when a stock returns over 49% in a single year it is indicative of full valuation. However there are two factors for CBL which make this not necessarily true: the sector's performance, and its own history. Enclosed malls as a group returned 41.5% in the last year, so the extra 780 basis points of returns on CBL can easily be attributed to its exceptionally strong 2Q performance. In this sense, CBL's stock did not perform disproportionally to its sector. In terms of its own price history, CBL used to trade above $47.00 until the crash, where it dipped into the $2 range in 2009. Since the damage from the crash to CBL was actual as well as perceived, I would not suggest that CBL will be worth $47 again anytime soon, but its stock price at a mere $20.66 has a long way to go before reaching its former glory.

In summary, CBL & Associates Properties Inc. is an excellent option for reinvestment of redeemed GRT-F dollars. It also provides a good option for other investors wanting exposure to enclose mall REITs as it appears to be among the best and at a great price.

Disclaimer: This article is for informational purposes only. It is not a recommendation to buy or sell any security and is strictly the opinion of the author.

Source: CBL And Associates Properties: A Strong Substitute For Redeemed Preferreds