lundi 27 mars 2017

CBL & Associates Properties

Date de l'analyse:27/03/2017
Cours: 9,45 $
Nb d'actions: 170 792 645
Preferred stocks D (7,375%): 1 815 000 shares at liquidation preference of 250 $ (can be redeemed any time), market value: 238,9 $
Preferred stocks E (6,625%): 690 000 shares at liquidation preference of 250 $ (as from 12 October 2017, may be redeemed), market value: 231 $
Market cap: 1 613 990 495 $
Net debt: 4 950 000 000 $ (includes non consolidated debt)
Net debt + preferred = 4 950 000 000 + 626 250 000 = 5 576 250 000$
EV: 1 613 990 495 + 626 250 000 (total preferred+ 4 900 000 000 = 7 140 240 495$
Sources for analysis: 10K 2016, presentation March 2017 and Q4 2016 conf call. For the rest of the analysis, I will consider the preferred stocks as debt.

Business


CBL &Associates properties is a REIT of class B malls in US. Class B malls usually refers to malls with sales below $500/sqf. The company divides its properties into Tiers:
Tier 1: sales > 375$/sqf
Tier 2: sales > 300$/sqf and < 375$/sqf
Tier 3: sales < 300$/sqf (Tier 3 now represents 6,1% of NOI).

For the total portfolio, average Sales per sqf is 376$ with a diversified range of tenants.

Dividend yield is 11,22% with an FFO payout ratio of 48% !



Operational metrics


Occupancy rate is 94%.
NOI is 775m$ (NOI margin: 72%).
Adjusted FFO to the common unitholder is 410m$ (preferred dividends are deducted).
G/A represents 6,1% of the revenues and 8,1% of the NOI.

As the company does not provide a calculation of EBITDA, here is mine:
EBIT: 381m
D/A: 292m
Loss on impairment: 116m
One time gain in sale in equity in earnings in unconsolidated affiliate: 97m
EBITDA: 381+292+116-97 = 692m


Capital structure and credit metrics


81% of the 5b$ debt is at fixed rate.According to the presentation of March 2017, net debt to EBITDA is 6,5, but taking into account the prefered shares and calculating my EBITDA, I get net debt/EBITDA  at 8,06.
Interest coverage: 3,2.
Total debt / undepreciated book value of assets: 53%.
The debt is still high but the priority for the management is to reduce the debt (also reducing the number of unencumbered properties) and redevelop properties to maintain/raise the NOI. I give credit for the management as they have been doing this over the last few years and they own approximately 10% of the shares, therefore, interests are aligned. 

Net Debt/EBITDA = 5 576 / 692 = 8,06

Valuation


Book Value Method

Gross book value is 10b$, debt and preferred is 5,5b$, therefore, the value of the equity should be 4,5b$, to be compared with a market value of 1,6b$. However the central question is the value of the properties now, considering the risks on the retails and shopping malls compared to the value of the assets when acquired.

NOI and cap Rate method

NOI is 770m. Applying a 10% discount rate gives 7,7b$. When subtracting debt and preferred, we have a valuation of 2,2b$.

We can try to give a more granular valuation based of the three Tiers proposed by CBL, but I could not find the share of Tier 1 and Tier 2 for the NOI. I only have 6,1% for the Tier 3 NOI. By applying a discount rate of 8% for Tier 1&2 and a discount rate of 12% for Tier 3, we have a valuation of:
Tier 1&2: 770m* (100%-6,1%) / 8% = 9b$
Tier 3: 770m*6,1%/9%= 521m$

When subtracting debt and preferred, we have a valuation of 9 + 0.52 - 5.5 = 4b$.
Obviously, by changing the cap rate by just 1%, we have big variations in the valuation and the cap rate is always an estimation. In this case, I've tried to consider a fair cap rate.

Relative valuation

FFO per share guidance for 2017: 2,26 - 2,33
Market value is 4,1x estimated 2017 FFO, which is very cheap. 
EV/EBITDA = 7140/692= 10,3

The question, as stated before is to guess the evolution of the retail industry and therefore, the evolution of the NOI. If the NOI is stable, the offered price is very cheap and could be easily multiplied by 2.

Conclusion

By all metrics, the company seems to be cheap. CBL & Associates Properties is a well managed REIT, but in a difficult market and with assets (class B malls) that could be in difficulty considering the current retail reputation in US with the development of online retail and the foreseen raising interest rates. 

Part of the anchors are Sears, JC Penney, Macy's and there is the fear that losing an anchor may impact a whole mall as smaller tenants will leave a less attractive mall. 

However, the management seems to be more optimistic and (pro)actively overcoming these difficulties while improving the balance sheet. At these price, I'd seriously consider buying some shares. 

During the conf call Q4 2017, the management informed that Q1 would have difficult comparable. I will be closely following.

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