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Why Shares of CBL & Associates Plunged on Wednesday

By Lou Whiteman – Updated Apr 16, 2019 at 9:24AM

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An already-struggling REIT temporarily loses one of the best things going for it.

What happened

Shares of CBL & Associates Properties (CBLQ) fell more than 16% on Wednesday morning after the real estate investment trust announced it had settled a class action lawsuit alleging that it overcharged tenants. It also said it would suspend dividend payments for two quarters.

So what

CBL was already under pressure due to its focus on shopping malls and the ongoing struggles of many of its retailer clients. Shares of the company are down more than 60% in the last six months, falling 14% in February after it reported fourth-quarter results and providing 2019 guidance that fell short of Wall Street expectations.

After the markets closed on Tuesday, the company said it would settle a class action lawsuit initiated in 2016 by Wave Lengths Hair Salons of Florida claiming CBL and certain affiliated entities overcharged tenants at bulk metered malls for electricity. The two sides settled ahead of a potential April 2 trial date.

Interior of a shopping mall.

Images source: Getty Images.

CBL in a statement denied all allegations of wrongdoing, but said "given the class certification, the accelerated trial schedule, the inherent risk of any trial, and the potential cost of an adverse resolution of the litigation, the company believes that mediation was the prudent path." As part of the proposed settlement, CBL will suspend payment of its common dividend for the quarters ending June 30 and Sept. 30, thereby preserving about $26 million in cash at the current quarterly dividend rate.

Check out the latest earnings call transcript for CBL & Associates Properties.

Now what

Given the company's exposure to retail bankruptcies including Bon-Ton Stores and Sears, the 15%-plus dividend yield on the REIT was one of the few compelling reasons to hold the stock. CBL is in the early stages of attempting to diversify its portfolio away from struggling apparel-focused retailers, but that's an arduous process complicated by the REIT's more than $4 billion in total debt.

CBL notes that the proposed settlement does not restrict dividend payments after the September quarter, and said it anticipates resuming a quarterly distribution with its dividend payable in January 2020. Given the retail landscape, that wait feels like an eternity. Current investors might want to hold on through March 29, the record date for the last already-declared dividend before the suspension. Beyond that, there is now one less reason to hold shares of CBL.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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