CBL- CBL Properties

[DTEJD1997]

Hey all:

 

Anybody have a position or opinion of CBL Properties?

 

I have a very small position.

 

I am somewhat surprised that they cut their dividend.

 

If they can HOLD the new dividend rate, CBL is trading for an almost 14% yield.

 

Question is...is price reflection of people getting out in a panicked rush, OR, does the market not expect even the new dividend rate to hold?

 

If CBL is going to get wiped out, or very nearly so...a lot of other retail REITs are going to get hurt too.

[heth247]

I don't think CBL will be wiped out. They will survive. But the transformation will take multiple years to complete. The yield will remain 10%+ for a while. I am waiting to buy CBL when SHLD files.

[rogermunibond]

I don't think it's a wipe out either but entry is like a limbo dance at a rum soaked bar in Jamaica before last call.

 

How low can you go?

[thepupil]

The callable 7 3/8% pref's @ 22.45 ($90, 8.3% yield) look like an interesting short...not sure if I want to be long the common against that, but 11% of appreciation potential plus 8.3% of yield is not enough compensation.

 

the equity looks like a zero or multi-bagger, so I think going long $1 of common and shorting $1 of pref could create a pretty nice payoff profile. The equity is at <3x FFO. The prefs are paying you 8.3% and are negatively convex.

 

Even the 2026 unsecured's @ 435 over look like a good short, but you have event risk if a really high quality borrower comes in and buys it and they rip. that's mitigated with the callable prefs.

 

 

[peridotcapital]

I like the preferreds as a way to play the company's survival. Get paid nicely and avoid having to worry about the common dividend and the share price volatility that comes with it. They haven't covered the common dividend with free cash flow in years and probably won't even at the new 80-cent payout level.

[thepupil]

I like the preferreds as a way to play the company's survival. Get paid nicely and avoid having to worry about the common dividend and the share price volatility that comes with it. They haven't covered the common dividend with free cash flow in years and probably won't even at the new 80-cent payout level.

 

I disagree. Why would you lend to a company facing existential* risk when you only have 10 pts of upside and are getting paid 8.3%?

 

If things deteriorate more then they'll cut the common and pref and the illiquid pref's (and common) will collapse, no?

If they get better the common will rip by far more than 11%.

 

The only way the prefs beat the common is if things get better but they issue a ton of equity and dilute the hell out of the common (improving the credit quality of the pref's). the pref's are short volatility in a situation where intrinsic value is very volatile/uncertain. the common is long vol to the upside. you get lots of leverage.

 

The pref's are behind $4.2B of debt ($1.8B of is non-recourse) and will be behind more if they need to draw from their line. I'd argue they have all the almost all downside of the common and but a smidge of the upside. I like prefs a lot in general.  I invested in BAC prefs on this thesis at ~6.2% http://www.philosophicaleconomics.com/2017/03/a-value-opportunity-in-preferred-stocks/, just a few months ago, but lending to  CBL at 8.3% with no duration/ tightening upside is really unattractive to me (and attractive as a short, if there's cheap borrow).

 

if the pref's had some nice duration to them, I could see it to express a moderately bulled up view, but they're callable so you have no upside on the tightening / improving.

 

*we can debate whether or not the company is facing that risk, but an 80% peak to trough drawdown in the stock is sufficient evidence that things aren't going great.

 

EDIT: The 7 3/4% preferreds traded to $5.90 (23.6% of par) in the financial crisis,  and have never traded above $26.25 ($105). That's negative convexity at work, low upside, high downside.

 

I have no position, btw, just coming in from 20K feet and observing.

 

 

[peridotcapital]

I like the preferreds as a way to play the company's survival. Get paid nicely and avoid having to worry about the common dividend and the share price volatility that comes with it. They haven't covered the common dividend with free cash flow in years and probably won't even at the new 80-cent payout level.

 

I disagree. Why would you lend to a company facing existential* risk when you only have 10 pts of upside and are getting paid 8.3%?

 

If things deteriorate more then they'll cut the common and pref and the illiquid pref's (and common) will collapse, no?

If they get better the common will rip by far more than 11%.

 

The only way the prefs beat the common is if things get better but they issue a ton of equity and dilute the hell out of the common (improving the credit quality of the pref's). the pref's are short volatility in a situation where intrinsic value is very volatile/uncertain. the common is long vol to the upside. you get lots of leverage.

 

The pref's are behind $4.2B of debt ($1.8B of is non-recourse) and will be behind more if they need to draw from their line. I'd argue they have all the almost all downside of the common and but a smidge of the upside. I like prefs a lot in general.  I invested in BAC prefs on this thesis at ~6.2% http://www.philosophicaleconomics.com/2017/03/a-value-opportunity-in-preferred-stocks/, just a few months ago, but lending to  CBL at 8.3% with no duration/ tightening upside is really unattractive to me (and attractive as a short, if there's cheap borrow).

 

if the pref's had some nice duration to them, I could see it to express a moderately bulled up view, but they're callable so you have no upside on the tightening / improving.

 

*we can debate whether or not the company is facing that risk, but an 80% peak to trough drawdown in the stock is sufficient evidence that things aren't going great.

 

EDIT: The 7 3/4% preferreds traded to $5.90 (23.6% of par) in the financial crisis,  and have never traded above $26.25 ($105). That's negative convexity at work, low upside, high downside.

 

I have no position, btw, just coming in from 20K feet and observing.

 

It depends on your thesis, right?

 

If you think they will survive but that the equity is not super cheap (because of the high debt load and the fact that B malls are going to keep shrinking) and that the common dividend could be cut further (this is my personal view), the preferred makes a lot of sense. In that scenario, it could easily outperform both the debt and equity on a risk-adjusted basis. In fact, it is entirely possible that it does so on an absolute basis as well in a case where the business keeps shrinking but they continue to service their debt and preferred equity.

 

 

 

 

 

 

[thepupil]

I don't really have an actual view on the company/assets (yet), but really fail to see the appeal of the pref's versus the debt in a muddle along and survive scenario that is your thesis.

 

So let's say the pref's benchmark is the 30 year tsy since they are perpetual.

 

The pref's yield 8.21%, The 30y = 2.87%, so the pref's trade 530 over. If they went to par tomorrow, they'd be at (7.375 - 2.87) = 450 bps over. so you only have 80 bps of tightening potential (unless you think they can get above par and trade at a negative YTC, which they have before)

 

the 5.95% of 2026's @ $93.26, 6.96% YTM according to last trade  (structurally ahead of the pref's and not the red headed stepchild of the capital structure), 6.96% - 2.35% (interpolated 9 year in absence of readily accessible 9 year tsy) = 4.61% credit spread.

 

the credit spread pick up of a meager 70 basis points to go down capital structure and be aligned with a bunch of retail yield pigs in the preferreds, is in my opinion, inadequate. On an absolute yield basis, not taking into account the difference in maturity, it's not that much either, 1.3%. 

 

To quantify it a bit let's say everything muddles along and spreads tighten by 100 bps (holding rates constant) over the next year.

 

Your prefs go to par (+11%) and you make your current yield (+8.2%) for total return of 19%. If you think they can trade to $105, add on another 5.5%. So the pref's will earn 19-24% (24.5% being the absolute max 1 year return).

 

The 2026's in a 100 bp tightening would trade to a 3.6% spread on an 8 year (since they'll roll down the curve over the year), at today's rates that'd be just above par. Let's call it $100.5, so you make 7.3% from capital appreciation and 6.4% from your coupon, call it a 14% total return.

 

So in a muddle along scenario where credit improves, the preferreds will beat the bonds by about 10% in a year (if they went to $105), 5% if they went to par. If credit REALLY improves the bonds have more upside. The bonds have less duration risk (being 9 years versus perpetuals), but almost as much duration upside since the prefs are callable (they go up 7.3% instead of 11% in our hypothetical)

 

Now if your thesis is wrong and CBL goes to shit, the bonds will definitely outperform the prefs.

 

In short, I think the scenarios where the prefs are better than the bonds are pretty narrow and in the end you're talking a difference that will be in the single digits in percentage terms, for a BIG step up in credit risk (no covenants, dividends can just get shut off,  preferreds get f'd over all the time). 

 

Another way to look at it is a waterfall

 

$1.8B Non-Recourse Single Asset Debt

$2.4B unsecured debt <--bonds here

$600mm preferred

$1.0B common

$5.8B rough, simplified cap structure

 

So the equity is the 100 - 83 tranche, the prefs are the 83 - 73, the unsecured are the 73-33 (much thicker and more protected, though the 2026's are last to mature) and then you have the mortgage debt which is in some ways senior but in other ways not since you can just hand back the keys.

 

Are the prefs really all that different than the common in terms of leverage / riskiness?

 

 

 

 

 

 

[RadMan24]

That was an enjoyable read I must say.

[peridotcapital]

Are the prefs really all that different than the common in terms of leverage / riskiness?

 

I surely think so...

 

What have the average annual total returns been for each over the last 5 years? What about the standard deviations during that time period?

 

Seems like the next five years could be very similar from an operational perspective.

[thepupil]

Are the prefs really all that different than the common in terms of leverage / riskiness?

 

I surely think so...

 

What have the average annual total returns been for each over the last 5 years? What about the standard deviations during that time period?

 

Seems like the next five years could be very similar from an operational perspective.

no doubt that looking back the common has way underperformed the pref's but the pref's are writers of out of the money puts on the value of these malls and the more the common goes down the closer to the money that put becomes.

 

I guess I have a more binary view of the story going forward. Perhaps I'm overly alarmist but I'm thinking about this on a liquidation/potential credit situation.

 

Either these assets' deterioration in value continues (perhaps accelerates) and I don't want to be the most junior mezz lender (the 70-83 tranche, the pref) or the assets stabilize and you own this thing at an unlevered 13% cap rate or whatever the current NOI and EV backs into (and a giant levered yield to the common equity).

 

you've probably done 10x the work on this and have strong reasoning for why they'll limp along and make their obligations. I think the 2026's are the better risk/reward to express that view, but agree to disagree.

[rogermunibond]

IMO it might be a few years too early to do a liquidation scenario.  Rather look at the unencumbered properties, haircut the AFFO from those properties for continuing retail BKs and negative lease renewal spreads and then see if the equity has value.

 

Remember they can and have turned the keys over on the encumbered properties that lose so much value that they cannot be redeveloped/repositioned.

 

They can improve their overall portfolio but selectively cutting these properties loose.

 

[thepupil]

Common      : 2.5x 2018 Guidance FFO , ~40% levered yield,  ~12% cap rate, according to sell side.

Prefs          : ~$69                              ~9.6% yield, 645 bps above 30 yr

Unsec's '26  : ~89 5/8                          ~7.6% yield, 477 bps above 9 yr

 

is it cheap yet?

 

EDIT:

Common 4.14: 42% FFO yield

Pref        ~$65  ~10.2%

 

 

[DTEJD1997]

Hey all:

 

I continue to hold my small position in CBL.  I forgot to post that I had been to a few of their malls over the holidays.

 

I generally liked what I saw.  Occupancy levels were VERY high (95%+).  However, at one of the malls that I went to, it is obvious that they are letting in almost anybody who will "sign on the line which is dotted".  This mall also had a Sears & JC Penney's in it.  There was a good amount of foot traffic and it appeared that people were buying things.  Finally, this mall was the ONLY enclosed shopping mall in that town.  It was also very centrally located for shopping.  It seems that almost everything retail, radiated out from the mall.  There was Sam's Club, Costco, and all the other strip mall denizens within 1/8 to 1/2 mile from the mall.  The tenants may turnover, and rent rates may go down, but I simply can't see that town losing it's only enclosed mall.

 

The other mall was in a reasonably upscale section of Metro Detroit.  It was more upscale than the prior location I visited.  It also had many more restaurants inside/attached to the mall.  No Sears or Penney's, but it had some upscale department stores that I am not familiar with "Von Maur".  There were some "local" merchants, but they were generally more upscale than the ones in the 1st mall.  This mall has plenty of other competitors within a 15-30 minute drive, but it is in a MUCH larger metropolitan area.  I can see this mall maybe losing some tenants and rates going down (maybe?), but it would truly have to be a complete retail apocalypse for it to close.

 

Both locations were reasonably clean, not run down at all.  Management seemed to be doing a reasonably good job given the circumstances.

 

Of course these two locations are just a very limited view of the company, but if they are representative of the company as a whole....there is no way these guys are closing down in the next few years.  Will rent rolls contract somewhat?  Maybe yes, but it appears to be a viable business.

[gokou3]

From an EV/EBITDA perspective, it is not cheap.  From the recent FY2017 earning report:

 

https://finance.yahoo.com/news/cbl-associates-properties-reports-results-211500504.html

 

Income from Operations: $232,562 ($k, 2017 full-year)

D&A: $299,090

Loss on impairment: $71,401

Est. EBITDA = sum of above = $603,053

 

Total market capitalization (common + preferred + debt) =  $ 6,518,702

 

EV/EBITDA = 10.8... not cheap for a company expecting another 10% decline in FFO next year and facing general interest rate increases on its heavy debt load.

 

 

[CorpRaider]

This is a couple of months old now, but I didn't see any discussion of this on the board.  Ashner has filed reporting a 5.7% interest in CBL common/units according to WSJ. 

 

https://www.wsj.com/articles/activist-investor-known-for-debt-restructuring-targets-mall-owner-cbl-11569322801

 

EDIT: Seems earlier this month Ashner and co reached a standstill agreement with management and Ashner and Carolyn Tiffany were appointed to board.  Also formed "capital allocation subcommittee" with Ashner and CEO and another dude from existing board.

 

Have to wonder if he has a big position in the debt.

[BG2008]

From an EV/EBITDA perspective, it is not cheap.  From the recent FY2017 earning report:

 

https://finance.yahoo.com/news/cbl-associates-properties-reports-results-211500504.html

 

Income from Operations: $232,562 ($k, 2017 full-year)

D&A: $299,090

Loss on impairment: $71,401

Est. EBITDA = sum of above = $603,053

 

Total market capitalization (common + preferred + debt) =  $ 6,518,702

 

EV/EBITDA = 10.8... not cheap for a company expecting another 10% decline in FFO next year and facing general interest rate increases on its heavy debt load.

 

I hate to do this, but I keep wondering why value investors are so attracted to the mall business.  I have commented on B/C malls in the past and I have avoided them like the plague.  I still think that it's easier to just buy the stuff that is trending in the right direction.  It's tough to fight Amazon and it's tough to buy more when you know you're in structural decline. At $1.48/share, CBL maybe interesting.  But I just can't seem to make money with retail or retail real estate.  So you can buy CBL for almost 10.8x EV/EBITDA or you can buy GRIF for 18.6x EV/EBITDA but you get 2,300 acres of land for free.  The EV/EBITDA metric is kind of unfair as GRIF is subscale so GRIF has much higher G&A as a % of revenue.  If you strip it out, you buy CBL at 12x NOI and you buy GRIF at 13x NOI. With GRIF, you get 2,300 acres of land for free.  The right EV/NOI (inverse of cap rates) is probably 9% for B&C malls.  The right EV/NOI for Class A warehouses is probably closer to 18-20x.  I get the appeal of a tiny equity stub up against a big debt stack.  But I think that works better if you have a better business. 

 

I am probably going to get yelled at now, via a message board.     

 

[CorpRaider]

Maybe they need to change name to CBL Industrial Properties and reverse the flow of schmucks from home to the mall to a flow of junk from mall/industrial retail distribution center (and drone mother ship landing pad) to the home.

[BG2008]

You need to somehow wrangle a cannabis angle in there.  Look at Innovative Industrial Properties. 

[thepupil]

https://seekingalpha.com/news/3523216-cbl-suspends-dividends-expects-drop-2020-income

 

There go the common and preferred dividends!

[BG2008]

The best thing that I learned 11 years ago was how difficult it was to sell malls that David Simon doesn't want.  Keep in mind, we are also in a period of unusually low unemployment.  Staying away from this mess has saved me a lot of sanity and money.

[Spekulatius]

The best thing that I learned 11 years ago was how difficult it was to sell malls that David Simon doesn't want.  Keep in mind, we are also in a period of unusually low unemployment.  Staying away from this mess has saved me a lot of sanity and money.

 

Yes, that applies to WPG. Some value folks get screwed there. I suspect that BPY will regret their purchase of GGP as well. Note that Sandeep Mathrani just left.

[thepupil]

I don't really have an actual view on the company/assets (yet), but really fail to see the appeal of the pref's versus the debt in a muddle along and survive scenario that is your thesis.

 

So let's say the pref's benchmark is the 30 year tsy since they are perpetual.

 

The pref's yield 8.21%, The 30y = 2.87%, so the pref's trade 530 over. If they went to par tomorrow, they'd be at (7.375 - 2.87) = 450 bps over. so you only have 80 bps of tightening potential (unless you think they can get above par and trade at a negative YTC, which they have before)

 

the 5.95% of 2026's @ $93.26, 6.96% YTM according to last trade  (structurally ahead of the pref's and not the red headed stepchild of the capital structure), 6.96% - 2.35% (interpolated 9 year in absence of readily accessible 9 year tsy) = 4.61% credit spread.

 

the credit spread pick up of a meager 70 basis points to go down capital structure and be aligned with a bunch of retail yield pigs in the preferreds, is in my opinion, inadequate. On an absolute yield basis, not taking into account the difference in maturity, it's not that much either, 1.3%. 

 

To quantify it a bit let's say everything muddles along and spreads tighten by 100 bps (holding rates constant) over the next year.

 

Your prefs go to par (+11%) and you make your current yield (+8.2%) for total return of 19%. If you think they can trade to $105, add on another 5.5%. So the pref's will earn 19-24% (24.5% being the absolute max 1 year return).

 

The 2026's in a 100 bp tightening would trade to a 3.6% spread on an 8 year (since they'll roll down the curve over the year), at today's rates that'd be just above par. Let's call it $100.5, so you make 7.3% from capital appreciation and 6.4% from your coupon, call it a 14% total return.

 

So in a muddle along scenario where credit improves, the preferreds will beat the bonds by about 10% in a year (if they went to $105), 5% if they went to par. If credit REALLY improves the bonds have more upside. The bonds have less duration risk (being 9 years versus perpetuals), but almost as much duration upside since the prefs are callable (they go up 7.3% instead of 11% in our hypothetical)

 

Now if your thesis is wrong and CBL goes to shit, the bonds will definitely outperform the prefs.

 

In short, I think the scenarios where the prefs are better than the bonds are pretty narrow and in the end you're talking a difference that will be in the single digits in percentage terms, for a BIG step up in credit risk (no covenants, dividends can just get shut off,  preferreds get f'd over all the time). 

 

Another way to look at it is a waterfall

 

$1.8B Non-Recourse Single Asset Debt

$2.4B unsecured debt <--bonds here

$600mm preferred

$1.0B common

$5.8B rough, simplified cap structure

 

So the equity is the 100 - 83 tranche, the prefs are the 83 - 73, the unsecured are the 73-33 (much thicker and more protected, though the 2026's are last to mature) and then you have the mortgage debt which is in some ways senior but in other ways not since you can just hand back the keys.

 

Are the prefs really all that different than the common in terms of leverage / riskiness?

 

Prefs down 77% in price, maybe about -60% or so total return since this post

Common stock -67%

longest unsecureds down 32%, maybe about -17% or so total return since this post

 

all returns approximate and assume no reinvesting of divvies/coupon. I declare an early victory that a) the prefs were terrible risk reward relative to the unsecured bonds b) the prefs had just as much downside as common stock with little upside.

 

 

Is anyone looking at any part of the capital structure? I don't see enough juice in the unsecureds ($64-$72) yet.

 

Last time I did a deep dive I concluded that their worst properties were the unencumbered ones and that the weird dynamic of where they had to pay dividends was a credit negative. Now that's taken care of, I guess I'll look again, but probably won't get there.

[CorpRaider]

Yes...well just thinking over Ashner's statements about the common being a long term call option and the amount of capital they will get to reallocate prior to the refinancing window closing.  I agree that the preferred issues seem to offer all of the downsides of the common with only a little bit of the potential upside.

 

Edit: Ashner filed a new Form 4; took down another million at a little over a buck.

 

This is from @thepupil in another thread and is basically what I decided on CBL:  "I'd either be in the equity and get paid a multibagger if the rebound comes as it eats up all the shares or not play."

 

I put on like a 2% (of my tiny discretionary/active portfolio) position in the common.