CBL & Associates Properties: The 'Bonds Vs. Preferred Shares' Challenge

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About: CBL & Associates Properties, Inc (CBL), CBL.PD, CBL.PE
by: The Owl
Summary

Mr. John Alford wrote recently two articles on the purchase of the Preferred Shares Series for CBL & Associates Properties "D" and "E".

In a series of thoughtful, provocative posts responding to that article, JBTC Capital postulated that there were two possible outcomes for CBL, transition to a sustainable, ongoing concern or bankruptcy.

Furthermore, it was stated that the common was a better security if CBL survives and the debt was a better security if CBL went into bankruptcy.

This analyst disagrees with the conclusions offered in the JBTC Capital challenge related to the "best" CBL security to hold, with the case to hold the preferred shares going forward to either case offered below.

This article is intended for investors oriented towards value-deep, value-distressed asset investing. Those seeking moderate- to high-risk value investments may have an interest in this article. Investments in this company at any level of the capital structure are unsuitable for those seeking retirement income, and I strongly discourage purchase of securities related to this company for retirement income accounts, where a focus on risk aversion should be paramount.

John Alford recently wrote two articles on why he was buying CBL & Associates Properties Preferred Shares, covering both the D Shares (CBL.PD) and E Shares (CBL.PE), while also covering a bit of information about the CBL & Associates Properties common shares (CBL). If you have not read these two articles (here and here), it would be worthwhile to do so if you have an interest or investments in CBL. In addition to the articles, the commentary following both was also very interesting, reflecting divergences in opinion about these admittedly controversial holdings.

[Full disclosure: CBL.PE shares represent a large percentage of my Risk Portfolio.]

Of special interest were the comments from JBTC Capital in responding to the first article. In a series of posts, JBTC Capital expressed thoughtful commentary, disagreeing with the conclusion of the article that the preferred shares were a preferred holding (pun intended).

So that I may not put words in the mouth of JBTC Capital, let me include sections of five posts made in succession appended to the first of the articles above that relate to whether CBL bonds or preferreds are the better choice, emboldening text which will be referred to later in the article:

thank you for the article, but you've fallen into the classic trap that many novice investors have who have looked at CBL preferreds: i.e., you've failed to look at the full capital stack and the exact probability outcomes for CBL. While the outcome for retail REITs as a whole is not binary, for CBL is absolutely is (and this is not my opinion but an indisputable fact). What I mean by CBL's future outcome is wholly binary, and what impact that has in investing in CBL securities, is that CBL will either survive or not.

Though that seems obvious enough, the implications for their capital stack are as follows. If they survive, CBL commons will rebound tremendously from current basement levels and will far outperform CBL preferreds. If CBL management is unable to navigate through the severe debt they incurred, then the commons and preferreds will be wiped out (again, not my opinion but a fact), and the remaining "carcass" will be owned by the debt holders. In either of these two scenarios, CBL preferreds under perform. If CBL survives, you are better off owning the common and riding the full upside (yes the preferreds will have upside as well in this scenario, but nowhere near that of the commons even after taking into account the current preferred dividend). If CBL does not survive, you are way better off owning the bonds and getting recourse/ownership in the surviving entity. Either way, from purely a factually indisputable standpoint, the preferreds are inferior to other portions of CBL's capital stack.

and then continued,

A desire to to receive "a cash return now versus a bet on a home run in the future" is a perfectly fair objective. If that is your desire, and you insist to achieve that via investing in CBL in some form or fashion, then CBL bonds are the superior security as compared to the preferred.

and then continued in a third post,

That is the core of my point. Regardless of what your objective is in investing in CBL, there is a superior security to CBL preferreds. If you desire safe income rather than swinging for the fences and hitting a home run to use your vernacular, then CBL bonds are the way to go as you get significantly more downside protection while still getting a high yield. If you instead are convinced that CBL will successfully navigate through the hole they dug themselves into, then CBL commons are the superior security relative to the preferreds. So regardless of your investment objectives, there is a superior CBL security than the preferreds.

a bit later

Yes there is a very minor possibility that under a potential CBL bankruptcy scenario that the preferreds would not get fully wiped out, but again the chances of such scenario playing are very very minor. Investors have to be cognizant that if CBL does go bankrupt that it is very likely that CBL preferreds will get no recovery. The outcome for CBL is in all likelihood binary at this point, as they've dug themselves into a deeper hole than some of their other Class B and C mall REITs.

and finally, "the JBTC Capital Challenge":

No one has yet been able to make an intellectually sound argument yet behind owning the preferreds, as there is a superior CBL security out there regardless of what your viewpoint is on the future outcome of CBL (i.e., bonds are the superior security if one is of the belief that CBL's risk are material and they may not make it and will be forced to file bankruptcy, and the commons are the superior security if one is of the belief that CBL will find a way out the hole they are in and will survive and one day thrive).

OK, fair enough. Since I have written several articles arguing why one ought to own the preferreds in preference to the bonds or the common shares, it appears incumbent on me to respond. This article may look to some as a "take-down" on JBTC Capital, but it is not nor is it intended to be. JBTC Capital posed an intelligent, thoughtful challenge to others for why bonds were the best bet (perhaps with an ownership position in the common for the upside optionality if CBL survives and thrives).

So to be clear, I do not believe that the bond approach is a bad one. Indeed, I believe that a CBL bond investment approach is indeed a good one compared to many alternatives not involving CBL, even if it is not the best option available for CBL. In addition, for those having a limited tolerance for risk, it would offer reasonable returns while managing the risk to a reasonably low level able to be absorbed by less risk-tolerant investors or by those having limitations on the degree of risk which can be employed. So this article is not suggesting that an alternative approach with the bonds is bad as it is probably the "go-to" choice for many.

But that was not the challenge. This is the challenge:

No one has yet been able to make an intellectually sound argument yet behind owning the preferreds, as there is a superior CBL security out there regardless of what your viewpoint is on the future outcome of CB"

The challenge was to identify and justify why owning the preferred shares is the best approach for CBL. JBTC Capital claims it is the bonds or a combination of bonds and common shares. On the other hand, I believe, have argued in several earlier articles and will do so again here that the best approach (best reward-risk and the best return on time value of money) is the preferred shares. In my view, looking across the full spectrum of possible future outcomes, as well as the likely outcome, the preferred shares are highly probable to be better than the bonds or the common shares, with either the bonds or the common besting the only preferreds in extreme, less likely scenarios.

Let's start with the first assertion: In a restructuring,

the commons and preferreds will be wiped out (again, not my opinion but a fact), and the remaining "carcass" will be owned by the debt holders.

This claim, even if stated as a fact, is not a fact. Of course, this judgment could turn out to be the case, but many factors that will impinge upon the ultimate truth of the claim have yet to be determined. There are no "future facts" yet established for this outcome which will be determined in the future.

So let's articulate the "intellectually sound argument" for JBTC Capital's challenge by using the format suggested: it's binary, with either CBL continuing as an on-going business or it ends up in a legally supervised restructuring aka bankruptcy. We can evaluate both cases to see how the three respective securities (bonds, preferred shares and common shares) come out on a total return basis in each case.

Let's start with current market prices: Here are the prices at the close of trading on August 5th, 2019 (date at which I froze prices to produce the graphics for the article) which are used throughout this article for comparison of the securities in the different capital tiers and the appropriate income interest coupon or dividend:

Securities We will now use these prices as a basis to compare the bonds, the preferred shares and the common shares in the two posed cases:

  1. Continuing as an On-Going Business" and
  2. Going into a Restructuring (Presumptively, a legally supervised restructuring or bankruptcy is implied).

CBL Continues As An Ongoing Business:

Now, let's look at the earnings power of $1,000 invested in the bonds and the preferreds, considering CBL as a going business, one of two binary outcomes.

A recent article, published on April 5th, 2019 ("I Am Buying What They Are Selling - Here's Why"), argued why CBL would pay preferred dividends through late 2023, when the next unsecured tranche matures. This explained (provided an intellectual argument for) why this analyst was buying the preferreds, given the substantial income secured (discussed in this section) and why there would be a recovery at least at current market prices (if not higher) in any bankruptcy, discussed in the next section.

One of the arguments by JBTC Capital was that:

CBL bonds are the way to go as you get significantly more downside protection while still getting a high yield.

In the view of this analyst, JBTC Capital has understated the differences in yield and overstated the difference in downside protection for the two securities. We highlight difference in yield here and will highlight differences in downside protection below.

Yes, you still get a "high yield," but the bond "cash yield" is only a third of what the preferreds will deliver, as seen in the following table, based upon $1,000 invested into the respective securities at the closing prices given above:

So, yes, the bonds offer high yields in the form of YTM which shows up with the FINRA quotes, but the cash yields are in the range of 7-8.7% at current bond pricing. These yields are about a third of those offered by the preferred shares, hovering at 25% as seen in the table. This leads to a recovery through income for the preferreds that the bonds cannot match.

I am a private investor investing my money and only my money. There is a limited amount of Risk Capital to be invested, so a short payback period is strategically important to be able to turn around the cash and redeploy it. With limited capital, payback period is extremely important as are cash returns.

Therefore, let's look at the rate of payback for the debt and preferred shares, through both interest/dividend receipt along with the opportunity to have returned face value of the security. Consider what happens to $1,000 invested in either of the preferred shares or any of the three bonds, based upon the data provided in the table above:

Payback At the start of this hypothetical investment, one starts at zero for all options, then invests $1,000 in each of the options (starting each option at minus $1,000, representing the investment). Break-even or Recovery of Original Investment is at $0, so as you reach back to the $0 line, you have recouped your investment (highlighted in dark red). Over each half year (dividends are received each quarterly, so two dividend payments are received within each semi-annual period as shown). At this time that the debt instruments are redeemed, the face value ($1,000) for the number of units originally purchased at a discount is returned along with the last interest payment.

Now, the impact of the very high yields from the preferreds is clearly seen here. Note the greenish line is a superimposition of the "D" yellow line and the "E" blue line from the two preferred shares series, essentially tracking the same path. Both lines cross the $0 point (ensuring that invested capital had been paid back completely) by the time the earliest maturity is returning face value and prior to the point at which the other bonds mature, returning their capital. Therefore, both preferred shares series return capital at or prior to the bonds and without relying on $1 of recovery on the security itself, paid only out of dividends.

Recovery of any capital for either preferred shares series represents upside for the preferred holder, recapturing the original investment simultaneous with the earliest redemption date and earlier than the others. By the end of 2027, the preferred shares will have returned more cash to the investor (without consideration of any recovery on the shares themselves) than any of the bonds, including their full recovery of face value. In this case, the "on-going scenario" case, redemption of these debt instruments would be a necessary condition for the case.

As a going concern, JBTC Capital indicated that the common was the preferable security. However, practically speaking, for the common to have the recovery suggested, the preferreds need to maintain a dividend and likely incur a substantial (although not necessarily complete) recovery towards face value. It is highly improbable to see a substantial common share recovery without the preferred shares moving back to near the $20/share range at least (if not closer to the $25 face value). From this point, this would result in a 200+% appreciation to that point, in addition, to the near-25% cash return from dividends on the original investment for either the D or E shares out to the horizon.

If this is not quite as good as the common, OK with me, as I will have secured a 200+% return on my original investment, will have recouped that investment in dividends over the first five years to cover my original investment and will continue to secure a 20% cash return on the original investment (already recouped) through perpetuity (or until they get called, unlikely to happen over the foreseeable future).

In addition, a purchaser of the preferred shares will have a vastly better idea of what income and recovery will be for the preferred relative to the common shares, making it "easier to invest" with the preferred shares. Honestly, it won't matter to this analyst that the common shares did even better since an investment in the preferred shares will produce such high returns on a security much more easily held with confidence throughout the very long period required to secure those returns.

But what if the recovery, still sufficient to avoid a restructuring, is less robust. One view is:

"If they survive, CBL commons will rebound tremendously from current basement levels and will far outperform CBL preferreds.

But this appears to require a strong recovery, beyond the trends that we have detected so far. What if CBL continues to eke along, doing enough to stay ahead of the posse and avoiding a bankruptcy but still struggling to move ssf up by another $20/sf each year, will the common shares rebound tremendously? Not only do I not think that this is a possible scenario, I think that it is by far the most likely version of the "On-Going Concern" case (indeed, the most likely future outcome of all options). It is also consistent with the trends over the past few years. In that situation, the preferred shares will continue to outperform significantly both the debt and the common out to the horizon, even after recovering all of the original investment in the shortest time.

For the Lebovitz family to realize their ambitions to rebuild the family fortune, they have to make the preferred shareholders good on their preferred shares, driving the value in the direction of face value while continuing to pay the dividend, representing a ca. 25% yield on current prices.

Takeaway: The Preferred-D and -E Shares are clearly the best choice for the "On-Going Concern" case:

a. The preferreds deliver three times the cash yield back to the investor relative to an investment in the bonds, paying back the investment faster than bonds (even without consideration of any recovery on the shares themselves).

b. A case can be made that in a spectacular recovery, not yet indicated by any current trend, then the common shares may produce a better return than the preferreds; however, in such a case, the preferreds will have delivered a cash yield on investment of 25% plus capital appreciation of 341% on the Ds and 377% on the Es if they were to return to face value, a fantastic return on the preferred shares even as the return on the common would be superior.

c. Even if the return is spectacular, creating a better return or the common, the investor will need to recognize that:

  • the dividend for the common is uncertain going forward while the dividend for either of the preferred shares series is fixed and known; and
  • the preferred shares should experience an earlier recovery, so even in the case that the common has a better return in the long run, it may take longer to achieve the return, lowering per annum returns below that of the preferred shares.

d. While the common share recovery might be superior to the preferred shares given a spectacular recovery, such a spectacular recovery is unlikely. More likely is that the preferred shares will secure the majority of the benefit in any more modest recovery, more consistent with current trends; given that the most likely scenario is a "muddle through" or "modest recovery" and the preferred shares get the benefit first of any improvement until they are essentially made "good", the preferred shares appear to this analyst to be a far superior investment relative to the other two security options for the "On-Going Concern" option.

Now let's look at the recovery in a hypothetical bankruptcy for the bonds and the preferreds.

CBL Doesn't Make It And Files For Bankruptcy:

JBTC stated that the bonds offered "significantly more downside protection" and that, in a restructuring

the commons and preferreds will be wiped out (again, not my opinion but a fact), and the remaining "carcass" will be owned by the debt holders.

Beyond the observation, yet again, that this is not a fact, but a judgement, two points need to be made before we consider this case:

  1. It depends upon when the bankruptcy takes place, clearly. As we showed above: Payback the preferred shares will repay an investment today by mid-2023; therefore, unless the bankruptcy occurs prior to that point, not only can the preferred shareholders not be wiped out, but they can, at worst, break even on a total return basis. Therefore, a bankruptcy to "wipe out" the preferred shareholders must occur before that point. In an earlier article referenced above, however, we showed the first reasonable catalyst for a bankruptcy filing would be an inability to redeem the 2023 maturity in December of 2023; therefore, the preferred shareholder would be made whole prior to any reasonable filing for bankruptcy protection. Indeed, the pricing of the preferred shares seem to indicate a filing in 2023, pricing the security so that this price will be returned prior to the filing.

2. Let me remind the reader of the following, pulled from the Prospectus of the Preferred E Shares:

The Series E preferred stock underlying the depository shares will rank senior to our common stock and on a parity with... our 1,815,000 outstanding shares of 7.375% Series D preferred stock, represented by 18,150,000 outstanding depository shares ($250.00 liquidation preference per share of Series D preferred stock, or $25.00 per depository share), which we refer to as our Series D preferred stock and (III) any other parity securities that we may issue in the future. Such ranking applies to the payment of distributions and amounts upon liquidation, dissolution or winding up.

That is, the two preferred share series represent securities senior to the common shares; therefore, in any bankruptcy, preferred shares must recover, in principle if not completely in practice, full value prior to the common shares incurring any recovery whatsoever.

Let's take a look at the capital structure to see how the respective CBL securities "stack" up relative to each other. Please find the capital "stack" below using the most current data (an analysis for which could also be found in earlier articles for earlier reports). Please consider the freshly minted, consolidated balance sheet issued recently for Q2'2019 (from the CBL & Associates Properties Website - SEC 10-Q Filing for Q2'2019, downloading and reformatting the balance sheet from the XLS download available):

Balance Sheet Detailed including a tier for the preferred shares at liquidation value and the monies remaining for the common shares after all senior claims (debt, preferred shares) have been satisfied. The simplified version of this same sheet can be found here:

Simplified Sheet If the presumed bankruptcy were to occur today, one would find that there is an excess of book assets net of liabilities of about $921M, covering the senior claims for the preferred shares of $626M, leaving nearly $300M in assets for the common shares.

But, of course, the current market value of the real estate "won't be close" to net book value, will it? While I tend to view real estate as coming closer to book value than most, convincing anyone of that for a company under pressure is always difficult. It is only known after the fact.

There appears, for one thing, to be a general view of CBL that all of their properties are bad. I borrow a chart from an earlier article, referenced above, which shows the distribution of properties within the tiers typically used for retail REITs, showing the percentage of Gross Leased Area by tier:

Tiers Compare the valuation of CBL to SPG. Of course, SPG properties are viewed, understandably, as superior or even markedly superior. However, the last time I checked, SPG was selling for thirteen times net book assets while CBL is selling for a fraction of net book assets. I understand that there is a difference between the quality of the properties, but at some point, valuation counts. If instead of thirteen times, CBL's Tier One properties sold for three times book value (one-fourth of SPG's valuation), assets from just the Tier One category would be enough to cover the face value of the preferreds, with something left over for the common.

But of course, the rejoinder is that many of the Tier One properties are encumbered. However, so are many of the SPG properties, which still doesn't prevent them from selling at an astronomical valuation. I understand that SPG sells at a premium and agree that it should sell at a premium, even a sizable premium; however, it is the combination of the staggering premium for which SPG sells and the depths of the discounts that CBL sells that raises reasonable questions about just how far fundamentals will allow the size of this gap to exist reasonably.

So let's look at the book value of the properties to see by how much they would need to be reduced as a portfolio to see the preferred shares wiped out. Let's start with the latest profile of the Operating Partnership debt from the most recent, Q2'19 10Q (p. 28) as compared to the debt levels at the end of 2018:

OP Debt Please note that "Mortgages and Indebtedness" in the balance sheet above aligns with this total of Operating Partnership debt for June 2019, seen in the lower right corner.

Now, we can compare the latest stack, plus "cash liabilities" (into which I lump liabilities other than the indebtedness), against available assets to determine potential recovery by capital tier level, excluding equity investments at this point:

Compare Assets and Liabilities For the preferred shares to have no recovery, the actual market values for the entire portfolio, not just individual properties but the entire portfolio in aggregate, must sell at a twenty percent discount to book value, in order to just equal the total liabilities, back down to the ca. $4B level for total liabilities. This would represent a compression of about $1B in market value versus depreciated book value. This can be easily visualized using this chart.

Now let's add an approximation of the current value of the preferred shares to see how much less of a discount would be needed to recapture current market value and add that to the liabilities, as shown here, to illustrate how much higher the market value would have to be to recover today's prices:

Recover Current This represents a discount to book value of 16% to recover current preferred market value as opposed to the 20% compression required to "wipe out the value" of the preferreds. That is, market value would only need to be less discounted by $200M for there to be full recovery for the preferred shares of their current market value.

Also note in the "Payback" chart above that the bonds would deliver a return of capital plus about 80-110% of the original investment. If this bankruptcy were indeed to take place in four years and the preferreds recovered just their current market value, the returns for the preferred in this relatively negative scenario would equal the best returns available for the bonds, about a 100% return (100% from income to that point plus the recovery of 100% of the investment in this scenario of recovering current market price). So, even in this relatively negative case, the preferreds are securing more in gain than the bonds even as the bankruptcy case is presumed to be the bonds "advantageous case".

A 12% discount to book value across the entire portfolio would allow the value of the preferred shares to double from current value, yet would still leave a substantial room for discounts of market to book value across the portfolio, as shown here:

Double Keep in mind that this would still allow a decline in market value of $600M relative to book value, again with weak properties selling below book value being netted out against gains for more attractive properties.

In other cases, specifically Supertel Hospitality where the properties were arguably more distressed than in this case, the value of the portfolio trended towards book value even as some properties were sold at steep discounts. Others compensated for discounts on some by going out at steep premiums to book, based upon a variety of factors. This netted out to a sufficiently high recovery rate that the preferred shares ultimately received full face value recovery, having traded at 50% or below face value for an extended period of time (ca. two years) while also being fully repaid all cumulative dividends.

Also note that it is highly unlikely that, simultaneously, the preferreds would get zero recovery and the unsecured debt would fully recover the value. Please note that the unsecured bonds and preferred shares represent securities "adjacent" in seniority; therefore, the chances that the recovery on properties would be exactly 80%, allowing full recovery on the debt but no absolutely no recovery on the preferred shares is highly unlikely. Either the debt would take some kind of hit or the preferred shares will get some recovery. In fact,the first penny after the unsecured debt have been fully covered goes to the preferred share recovery as they are "adjacent" in the seniority stack.

I do buy that, in the case of a presumed bankruptcy, that the preferreds may not fully recover face value as that would require market prices approaching book value. It is possible that the Retail Apocalypse has taken a toll on retail properties and that CBL will not recoup full book value, given substantial uncertainty around real estate prices.

A full recovery would look like this:

Full Recovery This scenario would require market prices for the portfolio of 94% of book value which may or may not be reasonable, given the challenge to some of the properties owned by CBL. However, recovering 84% or 88% on the portfolio does not appear to me to be far-fetched. It is certainly not obvious to me how one states, at this moment as a fact, that CBL has a zero chance to recover more than 80% on their properties. It would not take much of a change in market prices across the portfolio to generate a double or triple of the current market price; in addition, if this presumed filing did not take place within the next four years, any recovery would represent additional upside for the preferred shares as the original investment would have already been recovered through the income stream.

Takeaways:

1. For the owner of the CBL preferred shares to be hurt substantially due to a bankruptcy filing, this filing would need to take place within the next four years to prevent a buyer on August 5th to have already recouped their investment. Indeed, these securities now appear to be priced for a mid-2023 bankruptcy filing. I happen to believe that this is less rather than more likely, but we will see how things evolve over the next four years.

2. Even in the case of a legally-supervised reorganization, it appears to me that there will be some recovery for the preferred shares, especially against the current low market price and a likelihood that the preferred owner's basis would continue to decline rapidly, given a 25-ish% yield at this point. An analysis in an earlier article showed that it was very likely that CBL would get through at least the next three years without the need for a filing; in addition, it appeared likely that it would make it to late 2023, with the first potential catalyst being the need to redeem a nearly $0.5B unsecured debt tranche at that point. Some question the ability to do it, but CBL has four years to figure it out, which in my view will be long enough for the leadership of CBL to develop a plan to respond.

3. If the bankruptcy filing occurred at the earliest point reasonably anticipated point (mid-2023), a modest recovery of current market prices of the preferred shares plus the dividend income to that point would result in a higher return than the best return available from the bonds. So assuming a more negative case for the preferreds like this one, they not only are not "wiped out" but they still deliver better returns than the bonds. Only the most negative scenarios would deliver worse returns than the bonds; in turn, these more negative scenarios depend upon future trends being significantly more negative than what we have seen to date.

Concluding Observations:

1. This analyst confirms JBTC Capital's postulated outcomes for a very strong recovery where the common stock can do the best of all securities (even where the preferred shares do incredibly well) and in a "nuclear winter" scenario where real estate prices are immediately and dramatically pressed downward where only the debt has a recovery, leaving the common and preferred no claims on remaining assets. In addition, the selection of bonds to play CBL is not necessarily a bad one, just not the best one to play across the entire spectrum of possible outcomes.

2. This analyst believes that the actual course of a recovery will occur something in between these relative extreme alternatives. In a more moderated recovery, still maintaining an "On-Going Concern," it is likely that the preferred shares would continue to do well, perhaps nearly as well as the common or perhaps even better. In addition, recovery will come first to the preferred shares, so the earlier recovery will impact "time value of money" returns positively for the preferreds relative to the common.

3. The future of the preferred shares is much more clear than the future of the common, making it a much more easily "held" investment over the extended time necessary to reach the point where one has resolution and clarity about final outcomes, applying to both security valuation and probability of continuing income. This makes the preferred shares better instruments to hold in lieu of the common and it makes the preferred a selection in which one can secure substantial gains while holding security for which the future is clearer, continuing income more likely and in which one can have incrementally better confidence.

4. Unless the bankruptcy occurs within the next four years, not only will be preferred shares not be 'wiped out" by that presumed bankruptcy, but the full investment will have been recouped in the form of income. In addition, it would not require much of a recovery, certainly not outside a reasonable expectation, to secure a superior return for the preferred shares as compared to the bonds, even as the real estate portfolio may still be valued at 84% of book value (a relatively drastic discount across the entire portfolio, not individual names). Another small increment of recovery would ensure a substantial gain for holders of the preferred shares.

5. For this analyst, the most likely future scenario is an extension of what we have witnessed to date: a "moderate" or "muddle through" scenario where recovery is secured, albeit at a very limited pace. In this case, the preferred shares will represent, by far, the superior CBL security to own through the next five to ten years.

6. Management and the board (i.e., the Lebovitz family) are assuredly well aware that their family fortune and the legacy of Mr. Charles Lebovitz (pere') will depend upon re-establishing some stability in CBL going forward, even if this requires reducing the size of the company. To secure their own interest, management will be working hard and will be substantially incentivized to secure the preferred-holders interests as well. There can be no meaningful recovery in the common until the preferred shares have experienced a meaningful recovery. At current market prices, this will result in 25% dividends on capital invested going forward and potentially a three- to four-fold capital appreciation in the value of the shares.

7. So this analyst disagrees strongly with the JBTC Capital conclusion that:

Either way, from purely a factually indisputable standpoint, the preferreds are inferior to other portions of CBL's capital stack.

Far from being either factual or indisputable, the preferreds are likely to represent the superior choice to the alternatives rather than being the inferior selection. This article has attempted to illustrate the basis for that view, showing how the preferreds will likely surpass both of the alternative securities across a broad spectrum of possible future outcomes, yielding to one or the other in only less probable, more extreme cases not indicated by current trends.

This analyst believes in "eating one's own cooking." As such, I have added about 40% in share count over the past four months to my already large Preferred E position at attractive prices. Even so, I remain underwater to this point on my CBL.PE position with a current basis of $11.23/share (and it will take me longer than four years to recoup that investment), resulting in "mark to market" loss of about 40% as of this writing (using the $6.63/share value employed throughout this article, even if current pricing is higher). However, given the view articulated above and the belief in CBL likely "muddling through" at a minimum, continues to allow me to hold these shares while collecting my 14.7% yield on basis. This analyst continues to expect substantial gains on this security as years go by.

Many others disagree which is what makes the market. We will know who was right in five years.

Disclosure: I am/we are long 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.

Additional disclosure: No guarantees or representations are made. The Owl is not a registered investment adviser and does not provide specific investment advice. The information is for informational purposes only. You should always consult an investment adviser.