Founded in 1978, CBL & Associates Properties, Inc. (NYSE: CBL) owns 148 properties spread across 30 states in the US, the majority of which are in the Southeast and Midwest. CBL & Associates has solid financials receiving an investment grade rating from both Moody’s and Fitch in 2013. The company’s stock boasts a 5.8 percent yield, the highest among its peers*, and a current price-to-FFO ratio of 8.0, lower than the 5-year historical average of 8.5 and much lower than the peers’ median of 17.4. Despite the attractive numbers, a recent drop in occupancy has introduced some concerns.
*Peer group: Simon Property Group, Inc. (SPG), General Growth Properties, Inc. (GGP), Macerich Company (MAC), Taubman Centers, Inc. (TCO), WP GLIMCHER, Inc (WPG), Pennsylvania Real Estate Investment Trust (PEI), and Rouse Properties, Inc. (RSE).
The mission of this REIT is to acquire, develop, lease, manage, and operate regional shopping malls, open-air shopping centers, outlet shopping centers, associated centers, community centers and office properties. Of the 148 properties in CBL & Associates’ portfolio, half are regional shopping malls. The company’s anchor tenants, which play an important role in generating consumer traffic, include well-known names as Burlington, Dick’s Sporting Goods, H&M, T.J. Maxx, and Michael’s.
Aside from their community centers holdings, the occupancy rates of both the regional shopping mall and associated center portfolios showed declines. In addition, same center stabilized malls occupancy rates declined to 89.5 percent in Q1 2015 from 92.6 percent in Q1 2014. This data reinforces the concern regarding falling occupancy rates.
First quarter results for 2015 were negatively impacted by the bankruptcy related store closures of Deb Shops, Wet Seal, RadioShack, Cache, and Body Central. Approximately 175 locations were closed representing over $16 million in annual gross rents or about 2 percent of CBL & Associates’ total annual revenues. Management views this as a short-term issue and they plan to fill these vacated locations with higher quality tenants. However, the company has stated the occupancy rate for the balance of 2015 will be lower than 2014.
Similar to CBL & Associates occupancy rates, same center net operating income has been disappointing as well. The growth rate for Q1 2015 was essentially flat when compared to the same period in 2014. The news is not all bad as same center sales increased from $355 per square foot for the twelve months ended March 31, 2014 compared to $365 per square foot for the same period ended March 31, 2015. The company also showed an increase in same center sales per square foot of 6.9 percent for Q1 2015 when compared to Q1 2014.
CBL & Associates has worked to gradualy better its debt profile. Since 2010, the company has improved interest coverage and debt-to-EBITDA ratios resulting in an investment grade rating as mentioned above. Currently, the majority of debt held has a fixed interest rate, the weighted average interest rate for the entire debt portfolio is 4.91 percent, and the debt-to-total market capitalization ratio is approximately 54 percent.
Further evidence of the occupancy rate slide is the company’s Q1 2015 Adjusted FFO per share that was flat at $0.52 when compared to Q1 2014. Conversely, FFO per share fell from $0.73 in Q1 2014 to $0.62 in Q1 2015. The figure for Q1 2015 appears to be indicative of the norm as FFO per share in Q1 2014 was skewed by gains in debt retirement.
CBL & Associates increased dividend increase from $0.245 to $0.265 in mid-2014. This dividend increase resulted in the Adjusted FFO-to-dividend payout ratio to rise from 49 percent in Q1 2014 to 53 percent in Q1 2015. Although this ratio did rise, it is still conservative and enabled the company to continue increasing dividends.
The main takeaway is that due to CBL & Associates occupancy rate uncertainty and lackluster operational results, it would be prudent to wait on the sidelines and revisit the stock after Q2 results are released.
Source: CBL & Associates website
Written by Heli Brecailo
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