The Shopping Mall Is Not What It Used To Be - CBL Properties Can Make It

Marel profile picture


  • Retail is going through a massive transformation; many shopping malls are converting into mixed-use town centers.
  • Despite fears of the 'retail apocalypse', around 90% of sales still occur in physical/B&M stores.
  • Both winners and losers will emerge; the outcome will be an omni-channel model that requires both 'clicks' and 'bricks'.
  • B&M retailers are increasing online presence whilst e-tailers are increasing physical presence; click & collect is the fastest growing online segment and it requires physical stores.
  • Only a handful of investors seem to be appreciating this healthy transition. Even CBL has a realistic path towards recovery. Be wary of generalizations and binary views.

First off, I never imagined writing an article on CBL, let alone a positive one, but I am always open to new challenges. I find the negativity in the mall space extreme, similar to the energy and shipping (marine transportation) space. Those of us familiar with shipping are accustomed to hectic and unusual situations, with bears often making doom and gloom predictions (trade war certainly does not help), which results to dangerous generalizations, binary views and deep value situations (share prices trading well below, in many cases, conservatively calculated NAVs for a prolonged period). In my view, the outcome in the mall space is not binary and there seems to be a clear path towards recovery, backed by a strategy that, so far, seems to be working (converting traditional enclosed malls into town centers). It goes without saying that some outcomes in the investment world are indeed binary such as bankruptcy versus non-bankruptcy, paying preferred dividends versus suspending them, etc. In general, I feel many are getting ahead of themselves, especially on the negative front, with shorts making catastrophic statements and comments.

To put things into perspective, until late 2016 mall REIT valuations were satisfactory, despite pressure from e-commerce. Some struggling retailers and department store chains such as Sears and Bon Ton, with outdated business models, filed for bankruptcy. This in turn created numerous problems for mall landlords such as co-tenancy issues and high redevelopment CAPEX budgets, in order to replace vacant department store boxes. Sentiment quickly turned sour, with investors wondering which department store is next? Share prices quickly collapsed, also limiting the ability to raise equity at rock bottom prices (to avoid massive dilution) in order to fund redevelopment CAPEX. Many rushed to conclude it's 'game over', 'B&M retail is dead'. 'Amazon will rule the world', etc. In short, in a matter of just 3 years, we went from one extreme to the other. I don't think its game over. Even lower quality mall companies can survive, especially those with dominant secondary retail assets. In my view, it's much more than whether a mall is classified as A, B or C. For example, many argue that only the best, A-Malls will survive. I find this to be a dangerous generalization. Rural small town malls cannot have sales psf similar to those situated in densely populated urban locations, and rents are therefore lower. What matters is occupancy cost, which is still healthy across the board. For example, WPG's occupancy cost decreased to 11.7% as reported in Q1 2019 results. This is a healthy number and one of the many signs that dominant secondary retail assets are still relevant.

For the record, I am a long term shareholder in SPG and increasing my positions in PEI and TCO. What's more, I recently invested in SKT, MAC and CBL preferreds, knowing the risks and negative arguments very well, especially for CBL preferreds. Out of the names mentioned above, PEI is my favorite for the reasons I outlined in my PEI article. As you can see, I have invested in all categories (A, B and C). Everything is on the table at the right price, especially since I believe the strategy of converting traditional malls into mixed-use destinations is working.

CBL made the difficult decision to opportunistically cut the common dividend (some will argue out of necessity or to avoid massive common equity dilution) and is now effectively financing its transformation program via a self-funded model (i.e. retained operating cash flow/FCF from dividend savings complemented with additional borrowings). Critics will argue it's not enough, others will argue it might be enough but what if a recession emerges before they manage to complete all redevelopments?, others will focus on the tight loan covenants citing the recent refinancing package and limited number of unencumbered properties, others will criticize the management team, others will argue that only A-Malls will survive, others will simply say all malls are dead due to the ecommerce. One thing is for sure; there is a lot of fear and confusion. In any case, time will tell (as always). Note that CBL will reinstate the common dividend in Q1 2020, and the magnitude will depend on taxable income projections. I would be afraid shorting a stock knowing the common dividend will be reinstated. As a preferred holder, besides the very high preferred dividend coverage, I also find comfort that dividends must be paid in order to maintain REIT status, that preferred dividends must be paid before common dividends (due to hierarchy), and that preferred dividends are cumulative in nature. I view CBL preferreds as a speculative buy.

Changing retail landscape

Retail is going through a massive transformation. Shopping malls are transforming into town centers. Despite the rise in online shopping and fears of the so-called 'retail apocalypse', around 90% of sales still occur in-store (physical/B&M locations). Shifts in the retail landscape have occured in the past and will occur again in the future. It's definitely not the first time the space has been disrupted. However, this time fear has gone to the next level, reaching paranoia levels in some cases.

Many mall companies have occupancy levels in the 95% region with improving metrics such as sales psf and tenant occupancy cost. A good example is MAC's operating performance, as illustrated below.

Operating metrics MACSource: MAC company presentation March 2019, slide 15

I believe the trend is self-explanatory. Growth since 2009 has been significant. MAC's tenants are generating higher sales per square foot and MAC is enjoying higher rents per square foot.

MAC occupancy metricsSource: MAC company presentation March 2019, slide 16

Again, I believe the above graph is self-explanatory. MAC's occupancy rate is consistently at high levels, demonstrating resilience to the changing retail landscape.

Looking at the above metrics, one would wonder where is the retail apocalypse? Not only that, one would assume that MAC's share price should be close to a record high, supported by rising sales psf, rising rents, increased traffic and high occupancy levels. However, in reality the opposite is occuring. Share prices across the board are at extremely depressed levels. In a way, mall REITs have suffered another 2007/2008 moment. Is this justifiable? In MAC's case, if one digs deeper, MAC has shed lots of underperforming, lower quality, assets via a multi-year transformation program, and is close to completing a number of large growth projects such as Fashion District Philadelphia, a 50-50 JV with PEI. This multi-year transformation program is exactly what PEI, WPG, CBL and others are implementing, albeit at different starting points with different requirements. What people are missing, in my view, is that this transition program has disrupted the smoothness and linearity of the REIT model, putting cash flows under pressure and putting redevelopment CAPEX needs above dividends, until all redevelopments projects are addressed. REIT investors are predominantly income investors and don't like dividend cuts. It's understandable. For example, CBL became a serial dividend cutter, and the market punished them severely. Note, I am an investor in CBL preferreds, so my perspective is different from that of common shareholders.

Winners and losers are emerging

Both winners and losers are emerging in this new retail landscape. The winners know their customers very well (e.g. from superior online data collection) in each market and offer them personalized services, seamless omnichannel experiences and exceptional in-store services that build brand loyalty etc. For example, UNTUCKit is opening stores whilst Payless Shoes filed for bankruptcy. As a matter of fact, a large number of retailers, restaurants and service providers (malls don't just focus on apparel stores anymore!) are doing extremely well, but little media attention is provided on these positive and noteworthy achievements. Most headlines/articles in mainstream media tend to focus on the negatives, adding another dimension to the notion of the retail apocalypse. However, what about all the emerging retailers, many of which are digital native brands, which are growing at a fast pace and opening B&M stores? Why is there less focus on them? One reason is because when a retailer goes bust it leads to job losses. Another reason is that many of us can relate to these brands as we constantly see them, so it's a catchy headline. In any case, one could write many articles about companies that are doing very well and growing very fast (or at least are not in crisis), but this is not the scope of this article, so I will just name a few that are relevant to the mall space; Cheesecake Factory, Yard House (Darden Restaurants), Ulta Beauty, Von Maur (department store chain), Five Below, Burlington Stores, Industrious (coworking), Dave & Buster's Entertainment, etc. Many of the these companies are publicly traded, check out their share prices! Many are close to all time highs, and rapidly expanding with physical locations, offsetting store closures from old-school, legacy retailers that the media loves talking about.

Malls are proving to be resilient

Even though mall owners are in the real estate business, and many mall properties have alternative use potential (i.e. non-retail), many tend to associate the performance of retailers with that of malls, close to a one-to-one basis. Even though there is undoubtedly a strong correlation, it's not that simple, unless many retailers collapse simultaneously (it is important to note the new mall model is increasingly mixed-use, focusing less on traditional retail as part of the overall tenant mix). For example, if JCP goes under that doesn't mean the mall is doomed except if a replacement tenant cannot be found within a reasonable timeframe. We have gone through this exercise several times with Sears, Bon Ton, Toys "R" Us, etc, with a high degree of success. It is noteworthy that PEI has no more unleased anchor/department stores in its core portfolio. WPG has addressed more than 50% of its department stores. SPG, MAC, TCO and BPY are also extremely successful in redeveloping anchor spaces. CBL has also successfully addressed many department store vacancies over the past few years, with tenants such as Burlington and Ross Dress for Less replacing Sears. CBL is continuing its efforts with more than 15 locations already committed for 2019/2020, expected to deliver unlevered yields in excess of 10% in many instances.

The result? Malls are still relevant. Many mall REITs are producing record sales psf, record traffic, etc. For example, PEI reported traffic up more than 7% at properties that have undergone remerchandising. Below is a nice infographic summary recap of PEI's Q1 2019 earnings.

Source: PREIT website:

Note PEI's results are reflective of the company's financials after many years into the so-called retail apocalypse era. Where is the collapse in their business model? Where is the crisis? Note, the above accomplishments are achieved by other mall companies as well. Again, no doubt, mall companies are in transition mode and their model has been disrupted, but we need to read between the lines. It is also important to reiterate that malls owners are landlords, not retailers. If one tenant goes bust and replaced by another tenant that shouldn't make a big difference to the landlord, unless the void period is large and the new tenants on average pay much lower rents.

It's not just about the A-Malls everyone is talking about

Malls are becoming social hubs of their community with differentiated offerings (for example food and beverage make up c.30% of the modern center's tenant mix), in many instances in smaller towns that tend to have secondary assets. I encourage you to read Washington Prime's (WPG) research in defense of dominant secondary retail assets, updated on June 2019. The conclusions support the viability of the assets owned by companies like CBL and WPG, in terms of their relevance. Putting a label on mall categories - A, B and C - is useful to a certain extent. However, in a small rural town, where rents and sales are lower than downtown/densely populated urban locations, by definition the mall cannot be an A mall, as defined by sales psf, but rather a dominant secondary retail asset. What's so bad about this? A-Malls can survive but so can dominant secondary retail assets, many of which are B and C malls. As such, one has to analyze everything on a case by case basis. C-Malls are not automatically junk-malls. It really depends on the mall in question, local competitive advantages etc. If an A-Mall is not run properly etc it can end up in trouble. Note there exist D-Malls as well, the vast majority of which are not owned by the public mall REITs.

CBL's Strategy

CBL, just like all other listed mall REITS, is responding to the evolving retail market, transforming its properties from traditional, enclosed malls into suburban town centers. In particular, they are shrinking the retail footprint and adding new, market-driven uses that resonate with the local community. During the US shopping mall boom of the 80s and 90s, most malls followed a cookie-cutter design (formulaic approach) that included several department store anchors, in-line mix of retail tenants, a food court and lots of parking. This model is now outdated and the new approach is redeveloping properties by following a tailor-made, location-specific, approach. Anything but a cookie-cutter model. In CBL's case, a good example is the redevelopment of a former Sears at Brookfield Square in Milwaukee, which has been replaced by Movie Tavern by Marcus, Orangetheory Fitness and additional dining options. In addition, a portion of the Sears parcel is intended for a 168-room hotel and 54,000 square foot conference center, which will drive further traffic to Brookfield Square mall by bringing in a new customer base. Another good example is CoolSprings Galleria in Nashville where the Sears building and its parking field were redeveloped into a mixed-use dining, entertainment and retail destination including Kings Dining and Entertainment, American Girl, H&M, Rock/Creek (regional outdoor outfitter), Ulta Beauty as well as other dining options. The redevelopment, which took place in 2013, has not only benefited the former Sears wing, but also the entire property, increasing small shop sales psf by 30%.

Diversification includes digital native brands

CBL is diversifying its properties to include more food, entertainment, fitness, service, experiential retailers as well as non-retail uses such as hotels and even casinos. By doing so, CBL is also accommodating new retail concepts including digital native brands looking to break into brick-and-mortar and introduce physical locations. Digital native brands are to a large extent the face of the retail's transformation. Many, once-online-only brands, are changing course and opening B&M locations. Perhaps we will soon be talking about the B&M retail resurrection. You never know! In fact, e-commerce retailers plan to open 850 stores in the next 5 years, and this number is set to grow further. Some e-commerce retailers include UNTUCKit, Casper, chubbies and allbirds. CBL is establishing relationships with over 25 digital native brands and creating incubators. For example, last year CBL partnered with Rachel Roy to launch the brand's first pop-up shop in a mall, which generated sales 65% higher than their historical department store average. CBL is active in deploying pop-up shops at some of their top performing properties like CoolSprings Galleria, which enables emerging as well as established concepts build brand awareness and test concepts in high-traffic areas of the mall.

Leveraging data

These initiatives, including emphasis on digital native brands, enables CBL to leverage data and better understand consumer patterns/behaviors. For example, digital native brands have grown up with a wealth of information/data about their customers and their decisions to expand into a particular market and physical store is largely data driven. With this in mind, CBL is expanding its data capabilities with its new retailer services platform, by expanding partnerships with RetailNext, Meraki and powerful SMMS tools. Like this, CBL is able to gain valuable insights into many of aspects of the customer journey such as dwell times, traffic flow patterns, loyalty data, sentiment and demographic information. The same applies to other mall companies. Perhaps one day we will be talking about how malls form an important part of the retail data economy in a way we cannot imagine now? The irony us that data is leading the way to once-online-only brands to expand into B&M stores, whilst investors are fleeing B&M retail stocks, including malls.

Mixed-use platform

In Q1 2019 , 80% of CBL's new leases were with non-apparel tenants. Note, in the past, apparel tenants constituted a major part of new leases. These new leases provide unique offerings and generate demand from a wider customer base. CBL goes as far as stating:

Store closures create a once-in-a-generation opportunity to transform our properties with innovative new uses that will draw more people to our properties and add value for our retailers. This includes unexpected categories like coworking, self-storage, grocery stores, hotels, multifamily, casinos

I strongly believe this is a strategy in the right direction. Whether it will work or not in the long run remains to be seen. Time will tell. In the short run, the transformation strategy results have been positive, not just for CBL but also WPG, PEI, TCO, SPG, MAC, BPY...virtually all mall companies. It seems to be a strategy that is working and to a large extent internet-resistant. What is causing the problems such as declining NOI at CBL is not the strategy itself but whether more legacy retailers will struggle, which will mean more disruptions and more CAPEX requirements. Timing matters. Note MAC, SPG, TCO and PEI are producing positive adjusted NOI growth, even WPG is predicting NOI growth to turn positive in 2020.


CBL and other mall companies are investing in redevelopments, anchor replacements and modernizing centers with emphasis on hospitality, entertainment, traffic-driving events and local marketing, to improve the guest experience, deepen the connection with the local community and add value to retailers. In 2018 CBL completed 9 redevelopment projects totalling 260,000 square feet and is expecting to break ground on 5 additional redevelopment projects in 2019. No doubt, there is still a long way to go. I have to admit, I never imagined writing a positive article on CBL, but I am open to new challenges. I recently invested in CBL preferreds knowing very well the risks. In any event, time will tell. Note that CBL will reinstate the common dividend in Q1 2020, and the magnitude will depend on taxable income projections. I would be afraid shorting a stock knowing the common dividend will be reinstated soon. As a preferred holder, besides the high preferred dividend coverage, I also find comfort that dividends must be paid in order to maintain REIT status, that the preferred dividends will continue being paid since preferreds have priority over common dividends, and that preferreds are cumulative in nature. I view CBL preferreds as a speculative buy.

This article was written by

Marel profile picture
Value-oriented investor focusing on marketable securities, real estate as well as early-stage companies.

Disclosure: I am/we are long CBL.PD, CBL.PE. 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.

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