- Over the last several weeks, I have walked around Westgate Mall attempting to rationalize the new reality in which the word apocalypse seems appropriate.
- CBL expects to collect a "significant" portion of April and May rents later in 2020 and into 2021, but can't estimate a recovery.
- It's hard to see more than a dime in recovery rate once the firm eventually runs out of cash and defaults on its bonds and credit facilities.
- This idea was discussed in more depth with members of my private investing community, iREIT on Alpha. Get started today »
This article was co-produced with Williams Equity Research and edited by Brad Thomas.
Since mid-March, I have woken up almost every single day at 5:30 am to go walking around my local mall, owned by CBL & Associates Properties (NYSE:CBL). This massive parking lot, filled with mostly vacant stores has become my all new gym - replacing my Anytime Fitness with my "anytime mall REIT apocalypse".
Along these same lines, a few weeks ago I wrote an article titled, The Retail Apocalypse Is Knocking At Our Door, that generated over 600 comments. The article was actually published on April Fool's Day, but it's clearly no laughing matter that "given the stream of bad news, we’ve become increasingly defensive in our portfolio positioning."
Over the last several weeks, I have walked around Westgate Mall attempting to rationalize the new reality in which the word apocalypse seems appropriate. A quick search on Merriam-Webster.com offers the following synonyms for the word apocalypse:
A full circle around the Westgate Mall is around one mile, so my daily workout consists of a glimpse of the dark Sears and J.C. Penney stores, while Dillard's and Belk recently opened.
Recently, Penney said that it had "reopened 304 stores during the COVID-19 crisis" with plans to open "nearly 500 shops by June 3rd". That means that if my local J.C. Penney store does not open by June 3rd, it will most likely be on the store closure list.
Note: The closest J.C. Penney store in Greenville, SC (owned by SPG) is open.
That's definitely something to watch for, as the struggling department store said earlier "this month that it plans to permanently shut almost 30% of its 846 stores, as part of its restructuring."
In addition to the two closed department stores, Westgate Mall also has a Regal theater that will likely be closed for an extended period due to COVID-19. As of 12-31-19, the mall was 83% occupied (based on GLA) with debt of $32.77 million with a loan maturity date of July 2022.
As a real estate developer (for over 20 years), my daily walk around the Westgate Mall makes me feel as though I'm a shark circling the beaten down prey in hopes of capitalizing on the opportunity at hand.
Now that COVID-19 has taken most of all of the life out of my hometown mall, it's now just a matter of time before other sharks begin to circle the gloomy sea of asphalt. For now, though, it's just a waiting game...
The Music is Almost Over
CBL fell 8.3% in after-hours trading after disclosing it collected 27% of April's billed cash rents and estimates collection rate for May at 25%-30%. These are not unheard of for the sector but are likely in the bottom quartile of REIT rent collections.
That said, several retail-oriented firms, including Simon Property Group (SPG), did not disclose rent collection statistics at all. The real question is what portion of deferred or past-due rent will eventually be collected, and if so, will it be timely enough to keep CBL solvent.
The majority of the REIT's tenants requested rent relief, either in the form of rent deferrals or abatements. CBL expects to collect a "significant" portion of April and May rents later in 2020 and into 2021, but can't estimate a recovery. Depending on how things play out, current weakness could extend into Q3, though that's looking less likely with all 50 states slowly opening up.
Let's explore the capital stack and see what we find. This will help guide us toward what elements of CBL's business and finances are most relevant. Starting at the bottom of the capital stack, we have common equity.
Source: Yahoo! Finance
CBL's common stock is down ~95% in the past two years. It currently trades ~$0.45 from all-time lows.
Source: Yahoo! Finance
CBL's preferred stock (CBL.PD) (CBL.PE) is down ~96% over the same period. All issuances trade near or at all-time lows. This indicates we should expect the bonds to trade below par value. If that isn't the case, at least the preferred would have value.
CBL's bonds come due in 2023, 2024, and 2026. The best indication of its near-term solvency are the 2023 bonds given they mature soonest. These securities are mentioned often by management for that reason.
Now yielding ~56%, CBL's 2023 bonds are trading at 25 cents on the dollar. They traded as low as 18.0 in mid-March of 2020.
The discussion around if CBL is priced for bankruptcy ended when the coronavirus-led crisis started. The preferred stock teeter-tottered between "most likely going bankrupt" and "definitively going bankrupt" until late 2019 when the latter won the battle. If CBL were to survive without a restructuring, at lows, preferred holders would earn a 2,500%+ return at par value. This gives us a clear picture of CBL's difficult situation.
One of the primary objectives when analyzing a distressed company is the same as a healthy one: does the valuation align with the fundamentals?
The process of determining this is usually different. Our going-in assumptions are very different. In the case of CBL, we should expect a company with decreasing cash flow, major liquidity issues in the next 24 months, and minimal, perhaps even negative, net equity.
If any of those variables are better than hopeless, there could be good risk-adjusted return opportunities in the bonds. If we think there is a 50/50 chance the bonds do make it, even the preferred could make sense for those comfortable with a high probability of total loss. To determine if this is the case, we need to have a thorough understanding of the firm's portfolio, operations, balance sheet, and liquidity.
Let's zoom in on the Texas properties to better understand CBL's strategy.
Texas is home to four major markets: Austin, Houston, San Antonio and Dallas/Fort Worth. CBL has zero direct exposure to these cities and little to no indirect exposure. Instead, their properties are in Brownsville, Laredo, El Paso, Pearland, Waco, Beaumont, and College Station, Texas. Pearland is approximately 20 miles from downtown Houston.
Only one of these cities has a population above one million and several have less than 200,000. Institutional investors will not allocate meaningful, if any, capital to these cities. There are several reasons, but the chief is the lack of liquidity and price durability in those commercial real estate markets.
Occupancy across the real estate portfolio is provided above. CBL's portfolio consists of 59 malls, 5 outlet centers, 23 associated centers, 6 community centers, 6 office buildings, and 9 properties managed for 3rd parties for a total of 108.
CBL has placed several tenants in default for non-payment of rent. As of May 25th, 66 of CBL's 68 owned or managed malls have reopened to some extent. This is attributable to CBL's concentration outside core markets where lockdowns, social distancing enforcement, and reported infection rates are lower.
Total portfolio same-center NOI declined 8.7% for the three months ended March 31, 2020 compared to the same period in 2019. Portfolio occupancy as at the end of Q1 was 89.5% or a 180-basis point decline compared to Q1 2019's figure. Same-center mall occupancy was 87.8% as of March 31, 2020, or a 200-basis point decline compared to Q1 2019. These are "moderate" reductions and not severe, so let's move on to individual property type performance.
We highlighted the performance by property type, with Malls and Associated Centers experiencing sharp declines in net operating income. The firm's six community centers performed well at +8.3% NOI while Office was approximately flat.
Balance Sheet & Liquidity
The firm's adjusted EBITDAre, or Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate, has been 2.2x for most of the last 12 months. That's unfavorable but consistent; a quality REIT will be 4.0x or higher.
CBL successfully addressed all unsecured maturities through December 2023 by closing on a $1.185 billion secured facility in January of 2019 at LIBOR + 225 basis points. CBL's fate would be much grimmer if they hadn't secured this funding prior to the coronavirus's implications.
More recently, CBL drew down $280 million on its line of credit. Leverage has come down to debt-to-EBTIDA of 7.7 times as of the end of 2019 compared to 8.5 times in 2008. Both of these levels are still about two turns too high relative to peers.
Property-level mortgage debt is $149 million for 2020 and $442 million in 2021. CBL's CEO discussed this concern directly.
"We have addressed nearly all of our major debt maturities for 2020 and are in discussions with existing lenders for certain 2021 secured loan maturities," said CEO Stephen D. Lebovitz.
Provided those assets perform adequately, it should not negatively impact CBL. If they perform sufficiently poorly, CBL can walk away. It cannot walk away from its $450 million and $776 million in senior unsecured bonds and credit facility maturities, respectively, in 2023. Management is trying to shore up its liabilities short term while also working toward a solution for the 2023 maturities it must refinance or pay off with cash.
This table outlines CBL's covenants as of the end of 2019 and how they've stood over time. Total Debt/Gross Book Value and Secured Debt/Gross Assets at Book Value were trending in the right direction heading into 2020.
This chart is as of March 31st. All the firm's ratios have deteriorated and three are now within rounding errors of violating covenants. Based on the firm's own projections for May, it's likely that both of the total assets based covenants will be breached if they have not already. Let's explore that last covenant as it's less intuitive.
The lowest debt yield most lenders will agree to is 10.0%, which is applicable to CBL. While we do not know the exact terms, the industry standard is that the properties' net operating income is divided by the loan amount to generate a debt yield. For example, a commercial property generates NOI of $500,000 each year. That figure divided by 0.10 (10%) results in a maximum loan amount of $5,000,000. The lender periodically checks to verify that the NOI doesn't drop below the 10% limit.
Through WER's experience in institutional real estate investing and due diligence, he's seen lenders agree to 9% and even 8% debt yields on trophy assets backed by top global asset managers.
On the other side of the spectrum, B+ and lower malls (think of Simon's top quality urban malls as A+ and the run-down but still mostly occupied rural malls as C-) are often required to maintain 12% or higher. This makes CBL's terms better than they'd probably achieve in the current market, even if their personal financial situation was improved.
A debt yield ratio of 10% usually produces a loan-to-value ("LTV") ratio between 62% and 70%. That corresponds with the maximum leverage permitted by the typical buyers of most tranches of mortgage-backed securities (the top or "A" tranche may allow higher and the lower than B tranches may necessitate lower leverage).
Cash Flow & Dividend
Now that we have a good grasp of CBL's financial position, let's focus on cash flow.
Q1's reported adjusted FFO per share of $0.26 surpassed the average analyst estimate of 21 cents but declined from $0.30 per share in Q1 of 2019. We have to be extra careful when applying non-GAAP figures on distressed companies' financials.
Starting with revenues of $167.6 million (down from $198.0 million in Q1 2019), we need to subtract $25.7 million in property operating expenses, $18.5 million in real estate taxes, $11.2 million in maintenance and repairs, and $17.8 million in General and Administrative ("G&A"). This gives us a good estimate of operating cash flow of $94.4 million.
From here, we need to subtract interest expense of $47.0 million and preferred dividends of $11.2 million for cash flow before capital expenditures of $36.2 million. Against 179.133 million shares outstanding, that's $0.20 per share in cash flow theoretically available for common distributions, growth CapEx, and to build reserves to pay off debt. For comparison, CBL stated that funds from operations ("FFO") totaled $51.621 million in Q1.
This includes funding a lot of portfolio activity. Within the Q4 conference call (Q1 2020's isn't fully available to our knowledge), management stated that projects under construction or agreement include two multifamily projects, 14 entertainment operations, including two casinos, nine hotels, 28 restaurants, eight fitness center, nine medical uses, three self-storage facilities and several other non-retail uses.
More recently, management stated the following regarding their project plans:
“We have been successful in deferring or halting approximately $60-$80 million in planned capital expenditures, including redevelopment investments, for 2020. While we have paused several major projects, we are pursuing capital lite solutions for backfilling our remaining available anchors, including joint venture partnerships, favorable lease structures and third-party arrangements”
Based on our prior assessments, we already know CBL doesn't have the cash or cash flow to fund these projects without external financing. It makes sense that management is "pausing" on its development plans as it doesn't have a choice.
In recent quarters, 100% of common and preferred dividends have been return of capital and not income. CBL suspended dividends in 2019 due to a class action lawsuit involving a tenant. The initial proclamation was the dividend would return after two quarters which has not taken place.
Valuation & Insider Activity
In terms of insider buying or selling, CBL's Chairman and founder recently sold a significant number of shares at $0.2018 per share. Compared to his overall holdings, however, the number is small.
That same Chairman took a 50% reduction in pay as did the CEO and President. Independent directors took a 50% reduction as well while other officers took a 20% reduction. A broad-based temporary furlough program impacted approximately 300 employees or 60% of CBL’s workforce.
Typically, we start the valuation process by calculating cash flow ourselves and determining how a REIT's market multiple compares to peers. In CBL's case, its cash flow multiple is below 1.0x as its market capitalization has declined to $60.3 million as of Friday's close. While that may look positive on the surface, the reason is because the firm's solvency is in serious question.
Given its portfolio construction and financials, we don't see any reasonable outcome where CBL lasts through 2023. In the near-term, it's theoretically possible for CBL to survive 2020 if occupancy declines stabilize and its aggressive cost-cutting program meets expectations. Other major issues are CBL's properties and tenants are hard hit by the coronavirus, the decline in many brick-and-mortar retail industries, and the fact there are few to no buyers for many of CBLs tertiary properties in non-core markets.
If you believe that CBL can overcome these challenges, including negotiating forbearance on its breached covenants, the bonds around 25 cents on the dollar might make sense. It's hard to see more than a dime in recovery rate once the firm eventually runs out of cash and defaults on its bonds and credit facilities. For those reasons, we do not recommend the bonds unless CBL demonstrates a realistic plan to solve the covenant violations.
I'll keep iREIT on Alpha members updated as to my new daily exercise routine and whether J.C. Penney opens the local store this week. I don't see our local paper providing too much coverage on the mall as they obtain significant advertising from the department store chains.
Nonetheless, I will forgo my Anytime Fitness membership for at least a few more weeks, so that I can conduct necessary due diligence on the mall and to get in a free workout. As always, thank you for reading and commenting.
Author's note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: written and distributed only to assist in research while providing a forum for second-level thinking.
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This article was written by
Brad Thomas is the CEO of Wide Moat Research ("WMR"), a subscription-based publisher of financial information, serving over 175,000 investors around the world. WMR has a team of experienced multi-disciplined analysts covering all dividend categories, including REITs, MLPs, BDCs, and traditional C-Corps.
Thomas has also been featured in Barron's, Forbes Magazine, Kiplinger’s, US News & World Report, Money, NPR, Institutional Investor, GlobeStreet, CNN, Newsmax, and Fox.
He is the #1 contributing analyst on Seeking Alpha in 2014, 2015, 2016, 2017, 2018, 2019, 2020, 2021, 2022 and 2023 (based on page views) and has over 111,000 followers (on Seeking Alpha). Thomas is also the author of The Intelligent REIT Investor Guide (Wiley) and is writing a new book, REITs For Dummies (Wiley/Amazon).Thomas received a Bachelor of Science degree in Business/Economics from Presbyterian College, and he is married with 5 wonderful kids. He has over 30 years of real estate investing experience and is one of the most prolific writers on Seeking Alpha. To learn more about Brad visit HERE.
Analyst’s Disclosure: I am/we are long SPG. 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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