The share price of CBL & Associate Properties, a second tier mall REIT, has been attractive. CBL’s good Q1 results suggest that the company has healed from last year’s high tenant bankruptcy activity. However, one question remains. Have they done enough for the long haul?
Following this year’s volatility period, CBL, a second tier mall REIT, has shown some reaction in the financial markets. However, the stock remains cheap, trading at 7.2x AFFO and at a 9% yield. Since the company recently reported good Q1 results, it brings up an interesting question. Will there be some sort of a new rally? I believe the answer runs deep.
The company’s efforts to recover tenants appeared to have paid off in Q1. After losing tenants in 2015 due to significant bankruptcy activity, the company looked to generate temporary income through short-term leases, while it searched for a definitive releasing. In Q1, occupancy advanced to 130 basis points. Also, AFFO per share went up by 8% and same center net operating income increased by 3%. In the end, the balance is positive.
At the same time, the company has promoted a disposition program and has been committed to balance sheet improvement. They have also reduced the dependency on anchors, thus reducing the average number of anchors per mall. The company will also announce a new outlet center project.
However, this stills leaves the question as to whether these measures, some of which are short-term, are enough. The regional mall REIT sector performance has been split into high and low productivity groups. While the shares of the high productivity groups are faring well, we can’t say the same about the shares of the low productivity groups, which includes CBL.
CBL invests in second tier malls where there is little competition. They tend to invest in properties where the nearest major competitor is an average of 25 miles away. As management says, they have great local support because they work as regional centers where locals hang out. CBL’s average sales per square foot is less than $400. Despite lower productivity, retailers have less pressure from competition and have room to grow.
The explanation for the discrepancy in their stock performance is that low productivity has meant lower rents, which can result in lower profits. It can also mean increased vulnerability in downturns. Although the company has distributed dividends for the past 22 years, the company did have to cut dividends during the great recession.
Of course, there are exceptions. Rouse Properties was purchased at a 26% premium by Brookfield in January. Prior to the transaction, Brookfield was aware of the portfolio intricacies for having a minority stake in the company.
In summary, CBL management has addressed more immediate concerns, but it has not yet proved that it is enough to take the stock out of the undervalue zone.
Source: CBL & Associates Properties In(NYSE:CBL),Rouse Properties, Inc.(NYSE:RSE)
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