In roughly one week's time, the shares of CBL & Associates (NYSE:CBL) doubled in price. That's an incredible increase in a very short period of time, but investors shouldn't get too excited: This real estate investment trust (REIT) is still a lousy way to play the downtrodden mall sector. Here's what you need to know, and a better-positioned option that's still likely to entice value oriented investors.
How bad is it?
CBL is an REIT, a tax-favored corporate structure specifically meant to pass income through to shareholders. It cut its dividend by 63% in late 2018, then eliminated it completely in early 2019. A REIT without a dividend is rarely worth owning. But that's just one piece of the puzzle with this mall owner.
When you compare CBL with its peers, it comes up wanting on several important measures. For example, its sales per square foot (a key industry performance metric) are literally bottom-of-the-barrel. The average rent per square foot it can charge lessees is the second lowest in the group. And it has the lowest concentration of malls in the top U.S. markets.
Digging a little deeper, it comes in dead last for median and average household incomes within 15 miles of its malls. Its malls are located in areas with smaller average populations than those of its peers. And it has the lowest concentration of households with high incomes, and presumably elevated disposable incomes.
Basically, CBL owns less desirable malls than its peers. Not surprisingly, it has been hit particularly hard by the (admittedly over-hyped) "retail apocalypse." Although too much is likely being made of the impact internet sales are having on the retail sector, CBL is definitely feeling the pain as retailers increasingly shift their focus to higher quality malls. To put some numbers on that, occupancy in the second quarter fell nearly a percentage point year over year. Rental rates also fell, dropping 3.8% overall. And while average sales per square foot inched up, the metric remains at the low end of the mall REIT peer group.
Now add CBL's heavy use of leverage, with a financial debt to equity ratio of 16 (the next closest peer comes in at a far more reasonable 1.7), and you can see why CBL isn't a great option for most investors.
What happened and what to do now?
The most likely reason for the giant bounce was short sellers taking profits and covering their short positions. (This aggressive investment approach involves selling borrowed shares with the hope of buying them back at a lower price to return them and make a profit.) While the stock doubled in just a few days, it is still down roughly 95% from its 2016 highs. It's even given back a good portion of the gains, now up "just" 40% or so from when it started to rally higher. That's still a big advance, but it doesn't alter the larger picture here. CBL is a weak mall operator, and that's not going to change any time soon.
The interesting thing is that not all mall REITs are in as questionable shape as CBL. For example, Simon Property Group (NYSE:SPG), Taubman Centers, and Macerich own some of the best positioned malls in the country. And all three have seen material share price declines, down 30%, 50%, and 65%, respectively, from their 2016 highs. All three are worth deep dives if you are considering CBL.
Of the trio, Simon is probably the best risk/reward choice. Its yield is a generous 5.3%, and it has one of the strongest balance sheets in the industry. In fact, it has increased its dividend two times this year, a testament to the strength of its underlying business. Taubman and Macerich make heavier use of leverage, so there's notably more risk. But for more aggressive investors, their 6.5% and 9% respective yields may be worth it. That said, most would likely be better off sticking with industry bellwether Simon and its rock-solid financials.
Big numbers catch the eye, but they aren't always the thing you should be focusing on. No matter what happens to CBL's share price, the company's relatively low quality mall portfolio remains highly leveraged. Investors are much better off looking at higher quality peers that have also been dragged lower by the fears surrounding the retail apocalypse. The best in breed is likely Simon, which is more expensive than its peers but still trades at a reasonable 12.6 times 2019 projected funds from operations (the REIT equivalent of earnings).