Why Own a No-Name REIT With No-Name Malls? 4% Dividend Yield, Low Valuation
The U.S. consumer is supposedly gassed. The economic recovery has been ho-hum. So why own lots of shopping malls right now?
CBL & Associates Properties (CBL), of Chattanooga, Tenn., owns 165 shopping malls in 29 states. And its stock—both the common and preferred—looks refreshingly cheap. If you think that consumers will continue to gradually ramp up spending and you’re fond of shares that produce above-average income, CBL may be tempting to you.
First, let’s dispense with the doom and gloom in regards to consumer “confidence.” Despite the struggles of millions of Americans who have failed to find jobs or who are scarcely managing to make payments on underwater mortgages, confidence is up, retail sales are up, and the shopping industry is generally pretty healthy.
What’s nice—if you like bargains and don’t mind bucking conventional wisdom—is that most investors have remained skeptical about retail. They aren’t buying the notion that we’re in the midst of a long, slow, dependable economic expansion. So the price-earnings ratios of some big retailers are well down from levels we saw in the mid-2000s.
It’s hard to know which retailers will thrive in the next decade or so. A nice way to avoid picking a single one is to buy shares of shopping-mall owners like CBL. Shopping-mall stocks have weathered the economic meltdown pretty well. Shares of the two most respected shopping-mall real estate investment trusts, Simon Property Group (SPG) and Taubman Centers (TCO), are now well above their highs from early 2008.
One reason behind all three companies’ poor performance has been debt. The three laggard REITs carry significantly more debt than the industry’s standard-bearers. In fact, General Growth declared bankruptcy during the downturn—the only significant REIT to do so.
For brave investors willing to purchase the shares during the bankruptcy or soon afterwards, General Growth has since produced some spectacular returns. Alas, the excitement appears to be over now, with General Growth shares paying a skinny 2% dividend and the shares priced at a frothy 20 times projected 2012 funds from operations. (Funds from operations are per-share earnings with depreciation and one-time gains and losses from property sales added back. FFO is a better measure of real estate profitability than GAAP EPS.)
But what about CBL? It doesn’t own luxurious shopping malls in the best locations like Simon and Taubman do. Nor are its earnings growing like Simon’s and Taubman’s. But CBL’s stock has a higher dividend yield.
CBL covers its dividend payments with lots of room for error. Analysts are projecting CBL will haul in FFO of $2.20 this year. That leaves plenty of room to cover fix-up on its properties and pay the 88 cents a share in annual dividends that its investors are expecting.
At a recent $22, CBL shares trading at a mere 10 times projected 2012 FFO. Most shopping mall REITs are trading at 20 times FFO. Why isn’t CBL trading at 20 times FFO? Its debt load is to blame.
CBL’s $5.5 billion in liabilities amounts to 66 percent of its enterprise value. That’s far higher than, say, Simon’s debt level, at just one third of enterprise value. It justifies CBL’s lower earnings multiple.
Note how CBL’s enterprise multiple—that is, its enterprise value divided by earnings before interest, taxes, depreciation and amortization—it significantly lower than that of its rivals. It’s probably to be expected, since CBL isn’t producing the kind of earnings growth that Simon and Taubman do.
By the way, why not prefer Pennsylvania REIT to CBL, given that its dividend yield is almost as high as CBL’s? The short answer is that Penn REIT is slightly more leveraged.
If you’re fond of investments that pay solid income, CBL is worth further study. Look at the company’s preferred stock as well. CBL has a couple of issues out, both trading just slightly above par and offering yields of around 7%.
Stephane Fitch is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.
Filed under: Company Analysis