Business Overview and History
CBL Properties (NYSE:CBL) has navigated the evolving retail landscape by proactively repositioning its portfolio of regional shopping malls, lifestyle centers, and outlet destinations. Despite the challenges facing the industry, the company has demonstrated resilience through strategic redevelopment initiatives, diversifying tenant mixes, and enhancing the overall experience for consumers.
Headquartered in Chattanooga, Tennessee, CBL Properties is a self-managed, self-administered real estate investment trust (REIT) that owns and operates a diverse portfolio of 91 properties across 21 states, comprising 55 high-quality enclosed malls, outlet centers, and lifestyle retail centers, as well as over 30 open-air centers. As of June 30, 2024, the company owned interests in 90 properties, including 46 malls, 5 outlet centers, 29 lifestyle centers, 5 open-air centers, and 5 other properties, primarily located in the southeastern and midwestern United States.
The company's origins can be traced back to 1978 when Charles B. Lebovitz, the founder, established CBL & Associates as a privately held real estate development firm. Initially focusing on the southeastern United States, CBL rapidly expanded its portfolio during the 1980s and 1990s, becoming one of the largest mall owners and operators in the country. This growth was fueled by strategic acquisitions and the development of new properties in growing markets.
In 1993, CBL became a publicly traded REIT, marking a significant milestone in its history. The early 2000s brought new challenges as the retail industry underwent major shifts, including the rise of e-commerce and changing consumer preferences. In response, CBL began to shift its focus toward mixed-use redevelopment projects, incorporating non-retail elements such as entertainment, dining, and residential components into its properties. This proactive approach allowed the company to adapt to the evolving consumer preferences and the rise of e-commerce, positioning its assets as vibrant community hubs.
The Great Recession of 2008-2009 posed another significant challenge for CBL, as declining consumer spending and retailer bankruptcies led to rising vacancy rates and declining property values. The company was forced to restructure its debt and work with lenders to navigate this difficult period. Despite these challenges, CBL remained focused on executing its strategy to improve occupancy, drive rent growth, and transform its properties to meet the evolving needs of retailers and consumers.
In 2021, CBL emerged from bankruptcy, having successfully restructured its balance sheet and positioned the company for future growth. The company continues to focus on optimizing its portfolio, reducing debt, and adapting to the changing retail landscape, drawing on its extensive experience and expertise in the industry.
Financial Performance and Ratios
As of the company's latest 10-Q filing in 2024, CBL reported annual revenue of $535.29 million for the fiscal year 2023, with a net income of $6.55 million. The company's annual operating cash flow and free cash flow for 2023 both stood at $183.52 million.
For the most recent quarter (Q2 2024), CBL reported revenue of $129.66 million, a slight decrease of 0.16% compared to the prior year quarter, primarily due to lower tenant reimbursements and percentage rents. Net income for Q2 2024 was $4.74 million, a significant decrease of 77.20% from the previous year, mainly attributed to a $0.40 million higher income tax provision. However, operating cash flow increased by 53.59% to $64.62 million, and free cash flow rose by 53.41% to $63.97 million, primarily due to lower state franchise and real estate taxes, reduced janitorial and security costs, and higher interest income.
The company's financial ratios demonstrate a mixed picture, with a debt-to-equity ratio of 6.00, a current ratio of 2.48, and a quick ratio of 2.48. The interest coverage ratio stands at 0.74.
Liquidity
As of the latest reporting period, CBL Properties had cash and cash equivalents of $57.68 million. The company's current ratio and quick ratio both stand at 2.48, indicating a relatively strong short-term liquidity position. However, the high debt-to-equity ratio of 6.00 suggests a significant reliance on debt financing, which could pose challenges in terms of long-term financial flexibility.
Navigating Industry Challenges
The retail industry has faced significant headwinds in recent years, including the accelerated shift toward online shopping, the bankruptcy and closures of prominent anchor tenants, and the impact of the COVID-19 pandemic. CBL has proactively addressed these challenges through strategic initiatives:
1. Anchor Redevelopment: The company has been at the forefront of reimagining former anchor spaces, transforming them into diverse tenant mixes that include entertainment, dining, and experiential concepts. For example, the redevelopment of the former Sears at Hamilton Place in Chattanooga, Tennessee, has brought in tenants such as Crunch Fitness, The Cheesecake Factory, and an Aloft by Marriott hotel.
2. Tenant Diversification: CBL has actively curated its tenant mix, reducing its reliance on traditional retail and instead focusing on growing sectors such as service, dining, and entertainment. This strategy has helped the company weather the storm of anchor closures and evolving consumer preferences.
3. Property Transformation: The company has invested in the renovation and enhancement of its properties, improving the overall experience for visitors. These efforts include upgrading common areas, modernizing infrastructure, and introducing new amenities and experiences.
4. Strategic Dispositions: CBL has strategically divested underperforming or non-core assets, recycling capital to fund its redevelopment initiatives and strengthen its balance sheet. In 2024, the company sold Layton Hills Mall, using the proceeds to reduce debt.
Pandemic Response and Resiliency
The COVID-19 pandemic presented significant challenges for the retail industry, with temporary store closures and shifting consumer behaviors. CBL responded proactively, working closely with its tenants to provide rent relief and flexibility, while also implementing rigorous health and safety protocols to ensure the well-being of its customers and employees.
Despite the disruption, the company demonstrated resilience, with its same-center net operating income (NOI) increasing by 2.6% in the first half of 2024 compared to the same period in the prior year. This performance was driven by lower operating expenses, partially offset by a decline in rental revenues.
Segment Performance
CBL Properties operates through two main reportable segments: Malls and All Other.
1. Malls Segment: This segment includes the company's regional shopping malls, lifestyle centers, and outlet centers, generating the majority of CBL's revenues at 84.2% of total revenues in the first half of 2024. Key performance indicators for this segment include: - A slight decrease in rental revenues from tenants year-over-year due to lower tenant reimbursements and percentage rents. - A decrease in occupancy rates from 88.6% in the prior year period to 86.8% for the same-center malls, lifestyle centers, and outlet centers. - Positive leasing activity, with new and renewal leases for small shop space (less than 10,000 sq ft) showing increases in average base rents per square foot compared to expiring leases.
2. All Other Segment: This segment encompasses the company's open-air centers, office buildings, and corporate-level operations, contributing 15.8% of total revenues in the first half of 2024. Notable aspects of this segment include: - A slight increase in rental revenues year-over-year. - Relatively stable occupancy rates for open-air centers at 94.9%. - Inclusion of management, development, and leasing fees in this segment.
Analyst Perspectives and Short Reports
The company's transformation efforts have garnered the attention of industry analysts, with some highlighting the positive impact of its redevelopment initiatives and diversification strategies. However, the retail sector's ongoing challenges have also led to scrutiny, with several short reports raising concerns about CBL's long-term sustainability.
One such report, published in 2023, cautioned about the company's high debt levels and the potential risks associated with its reliance on mall-based properties. The report also questioned the viability of CBL's redevelopment plans, citing the broader industry headwinds.
In response, CBL has emphasized its proactive approach to managing its balance sheet, including the use of strategic dispositions to reduce debt and fund its ongoing transformation. The company has also highlighted the success of its redevelopment projects, which have helped to reposition its assets and attract new tenants.
Conclusion
CBL Properties has navigated the evolving retail landscape through a multifaceted strategy of anchor redevelopment, tenant diversification, and property transformations. While the industry faces persistent challenges, the company's proactive approach has enabled it to adapt and position its portfolio for long-term success. By continuing to innovate and deliver compelling experiences for consumers, CBL is poised to capitalize on the shifting dynamics of the retail sector.
The company's focus on improving occupancy, driving rent growth, and transforming its properties to include a mix of retail, service, dining, entertainment, and other non-retail uses demonstrates its commitment to adapting to changing market conditions. Additionally, CBL's efforts to reduce debt, extend maturity schedules, and lower borrowing costs support its operational strategy. While challenges remain, particularly in light of the high debt-to-equity ratio and the ongoing transformation of the retail landscape, CBL Properties' strategic initiatives and portfolio optimization efforts position it to navigate the evolving industry landscape and work towards stabilizing its portfolio and revenues in the coming years.