CBL - The Lipstick Fades

Summary

• CBL's earnings are out - they are not PREIT.
• Just about everything is worse and they cut the dividend.
• We aren't happy and we feel duped by management.

Rubicon Associates helped me write this article. I am pleased to announce that he will also be joining me as Senior Analyst on REIT Beat, the #1 REIT Investment site on Seeking Alpha. In October, REIT Beat was ranked as the #1 Marketplace channel and with the addition of Rubicon, REIT Beat will be re-branded The Intelligent REIT Investor (also the name of my book; co-written by Stephanie Krewson-Kelly).

This article and idea was discussed in more depth with members of my private investing community, REIT Beat. Become a member today >>

A picture is worth one-thousand words...

Need I say more by way of introduction?

The lipstick is beginning to fade and the silk purse has become a dog treat.

All you are left with is a...

CBL & Associates (NYSE:CBL) released third quarter earnings that surprised me. Let me just jump right in with this from their earnings release:

“The dividend is an important way that we return value to our shareholders,” commented Lebovitz. “Our approach has been to set the dividend at a level that maximizes available cash flow for investing in our properties and debt reduction, while also maintaining consistency. As one of the largest shareholders of CBL, management and the Board are fully vested in maximizing shareholder value. It is with that perspective that we made the difficult decision to reduce the common dividend to an annualized rate of $0.80 per share from $1.06 per share. Based on our updated projections of taxable income, the common dividend is being re-set to a rate that will preserve an estimated $50 million of cash on an annual basis. This enhanced liquidity will help to fund value-adding redevelopment activity and debt reduction.”

This was somewhat unexpected as many investors see a dividend payout ratio of 55%:

A low payout ratio is not a guarantee that the dividend will be maintained - blowing a hole in the argument of many investors.

But wait, the hits just keep on coming.

Sales per square foot are lower (unlike PREITs):

Leasing activity was worse:

Guidance was down across the board:

Okay, not everything was absolutely horrible.

Debt is well laddered:

And the debt is within covenant limits:

It is getting a little tight relative to assets, which is not a good sign.

Unfortunately, that is the only good news I could find.

One of the only ways to "more" safely play this name is the preferred stock (wait for the price to shake out, although I don't expect it to be significantly lower, the market will have its way with it).

CBL's outstanding preferred stock is:

Pricing on the outstanding preferred stock:

While the Series D will be easier to call for the company, it doesn't appear that they will redeem it and the yield to call looks like the only way to put capital gains on in the name.

The highest yielding preferred stocks are the three you would expect: PREIT (PEI), Washington Prime Group (WPG) and CBL.

The cost of stability (equity yield less the preferred yield) is the following:

This will change with CBL's new - lower - dividend.

Bottom Line (Rubicon): The earnings stunk and CBL is showing itself to be a pig in a poke. I don't like these earnings and I believe it will get worse - one of the only rationales for cutting the dividend. The stock is going to get hammered. At closing price it trades at 3.8x 2017 full year FFO, I expect it will be closer to (or below) 3x.

Excuse me while I (Rubicon) call myself out:

8/11/17:

Bottom line: While times continue to be tough in the mall space (especially tier 2), I continue to believe that the REIT owned mall sector has been adapting to the change in habits of consumers and the reduction in store count. This change has manifested itself in these REITs adding dining, entertainment and personal fitness among other things. I continue to believe that brick and mortar is viable and that CBL & Associates will continue to be part of the retail landscape. While the REIT is not poised to grow in the near term, I believe it will strengthen its balance sheet and continue to offer investors a significant yield.

Total Return -2.12% since publication (Holding period) and destined to be much worse at the open.

3/23/17:

CBL Bottom Line: I believe that CBL has been punished since allegations of improper loan document data (investigation closed) last year and has been pushed down even further in the retail rout we have witnessed this year. At current multiples, I also believe it has been pushed down too far and this has created both an income and a total return opportunity for investors willing to defy market "logic." This investment is appropriate for investors with a greater risk tolerance and those that can handle the constant bombardment of negative news on the sector.

Both the common and preferred appear attractive at current levels.

Total Return -7.53% since publication and destined to be much worse at the open.

Bottom Line (Brad Thomas): Admittedly, I did not go for the sucker yield bet like so many yield-chasing writers on Seeking Alpha. I know the difference between a "speculative" BUY and a "strong" BUY. I wrote:

"You will not see CBL in my Durable Income Portfolio and the only place you will see me recommend this REIT is in my High Alpha Portfolio. I am maintaining a speculative BUY."

I also want to give credit to Michael Boyd who seemed to be one of the few bears on the name, he wrote, "I see some concepts that are alluring to short side investors." As I have argued from day one, avoid the C Malls and focus on the higher quality names like Simon Property Group (SPG) - recent article HERE, Tanger Factory Outlet (SKT) - recent article HERE, and Taubman Centers (TCO) - recent article HERE. As Rubicon so eloquently wrote, "the lipstick fades."

Seeking Alpha articles on CBL:

Julian Lin 11/2/17 CBL: I Would Not Buy The Preferreds At These Prices

Julian Lin 10/30/17 CBL: Wall Street Isn't Stupid

***Shout out to Julian for messaging about the dividend cut after conversations about this REIT. If you don't already, go to one of his articles and click follow, you won't regret it.

Colorado Wealth Management Fund 10/19/17 Strong Portfolio Offers 1 Good And 1 Bad Preferred Share

Dividend Sensei 10/15/17 Greedy When Others Are Fearful: Why One Of These 3 High Yield Dividend Stocks

Brad Thomas 10/9/17 Unlocking The Secrets Behind This Beaten Down Mall REIT

****Brad's Daughter Lauren Thomas on CNBC here.

Thanks for reminding me you said speculative Brad (he has been telling me this for a while - especially when we talk about WPG!)

Norman Roberts 10/4/17 A Closer Look At Potential Preferred Investments In Mall REITs

CBL Links:

The earnings release.

Q3 supplemental

Final Note: I will be traveling to Florida on Friday morning and unable to moderate the message board. I can't wait for your comments when I get back to my laptop.

Analyst’s Disclosure: I am/we are long APTS, ARI, BRX, BXMT, CCI, CHCT, CIO, CLDT, CONE, CORR, CUBE, DLR, DOC, EPR, EXR, FPI, GMRE, GPT, HASI, HTA, IRM, JCAP, KIM, LADR, LAND, LMRK, LTC, MNR, NXRT, O, OHI, OUT, PEB, PEI, PK, QTS, RHP, ROIC, SKT, SPG, STAG, STOR, STWD, TCO, UBA, UNIT, VER, VTR, WPC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.