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Will CBL Properties Survive?

Jul 03, 2020 by Matthew DiLallo

Conditions in the retail industry have gone from bad to worse this year. The sector has endured what really seemed like apocalyptic conditions as governments forced non-essential retailers to close their doors to help slow the spread of a global pandemic. Because of that, these stores weren't able to generate revenue for several weeks, which significantly impacted their already-weak financial positions. That led many to withhold their rent through most of the second quarter.

The significant drop in rental receipts blindsided retail REITs, which were already struggling due to weakness in the sector. It could prove to be the fatal blow for financially-strapped mall owner CBL Properties (NYSE: CBL), which might not survive much longer.

From a slump to a free fall

CBL Properties has been struggling due to the challenges facing the retail sector. Last year, the REIT's FFO declined by 21.6% due to falling occupancy levels, slumping net operating income (NOI), and asset sales to shore up its balance sheet. That slide continued during this year's first quarter as FFO fell 13.3% year over year while occupancy and NOI also kept falling.

Those financial metrics will be under even more pressure during the second quarter because the company only received 27% of the rent it billed in April and estimated that it would only collect 25% to 30% of May's rent. While the company anticipates that it will receive a large portion of this rent later this year and into 2021 as it works out deferral plans with tenants, there's no guarantee they'll survive long enough to make those payments.

CBL's financial concerns are growing

CBL Properties has taken several steps to shore up its financial position, given the significant decline in rental income over the past few months. It drew down the remaining $280 million on its credit line to bolster its cash position. It also delayed or suspended $60 million to $80 million of capital spending, including most of its major redevelopment projects.

The REIT is also working with lenders to address its debt, which stood at nearly $4.5 billion at the end of the first quarter. It has hired advisors to explore alternatives to help reduce its overall leverage and interest expenses as well as extend the maturities on its debt.

However, the company warned in an SEC filing that "there is substantial doubt about our ability to continue as a going concern." It was not in compliance with the covenants under its senior secured credit facility as of the end of the first quarter, which could cause lenders to accelerate this debt's maturity date. Meanwhile, it chose not to make the June interest payment on some unsecured bonds that mature in 2023 and has since entered into forbearance agreements with more than 50% of those creditors to buy it a bit more time to either make the payment or restructure this debt. If the company can't reach acceptable terms with its lenders, it might need to file for bankruptcy to restructure its debt.

Things look bleak for this REIT

CBL Properties doesn't seem like it will survive. The retail REIT was already struggling mightily before COVID-19 hit, which is now putting even more pressure on its weak financial position. Because of that, it seems likely that the company will file for bankruptcy this year, which would probably wipe out its existing shareholders. Meanwhile, even if it manages to stay afloat by working out solutions with its creditors, the company faces a long uphill battle to transform its malls into retail centers of the future, suggesting shares could languish for years.

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Matthew DiLallo 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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