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CBL Planning Major Restructuring of its Mall Portfolio

REIT Targets up to 26 Malls for Disposition; Plans to Refocus on Development, Redevelopment and Acquisitions
April 16, 2014
CBL & Associates Properties, Inc., one of the largest owners and developers of malls and shopping centers in the U.S., has embarked on an aggressive plan to jettison under-performing shopping centers and redeploy the proceeds into higher-growth properties with the goal of doubling its NOI per year.

CBL owns or manages 91 regional malls/open-air centers and 150 retail properties located across 30 states and totaling 86.9 million square feet.

As part of the restructuring announced this week, the Chattanooga-based REIT plans to dispose of nearly 15% of its portfolio over the next few years.

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"We are in the early innings of a transformation to a higher growth portfolio," said Stephen Lebovitz, president and CEO. "We plan to achieve this through targeted divestitures of stable, but lower-growth malls and non-core properties over the next several years, as well as accretive investments in higher-growth assets. We will pursue these opportunities to create value within our existing portfolio through redevelopment and expansion, as well as through new developments and selective acquisitions."

The REIT outlined the following goals and objectives:

· Position the portfolio to produce sustained same-center net operating income (NOI) growth of 2% to 4%, increasing from the current range of 1% to 2%;
· Increase the percentage of mall NOI generated from its Tier 1 and Tier 2 assets from 78% for 2013 to more than 90% over the next several years through divestitures and investments in higher growth centers; and
· Upgrade both inline shops and anchor retailers through redevelopment and re-tenanting.

Last quarter, CBL segmented its malls into three tiers based on sales per square foot: putting malls with sales of over $375 per square foot in the top tier, malls with sales of $300-375 per square foot in tier two and those with sales below $300 per square foot in the bottom tier.

While the CBL's Tier 2 malls lagged the top tier last quester, the REIT chalked it up to higher costs from its tenant upgrade strategy which produced a short-term drag on NOI growth at several centers, the company said.

"Looking forward, we are projecting a stronger growth rate from our Tier 2 assets as the benefits of our re-tenanting strategy take effect,” Lebovitz said. “While most of our Tier 3 malls are stable properties with a solid future in their respective markets, their growth profile is more appropriate for a privately owned portfolio with a focus on yields and cash-on-cash returns.”

CBL has identified 21 malls and centers for disposition. This portfolio represents roughly 15% of its total NOI with an estimated value between $1 billion and $1.25 billion.

“We would like to make significant progress on this initiative over the next 24 to 36 months," Lebovitz said. "It is at the top of our list of corporate priorities.”

Lebovitz said the REIT does not expect to be net acquirers of new properties. Instead, it intends to focus on upgrading the performance of its existing portfolio and getting back to its core competencies of redevelopment and new development, with only a few selective acquisitions.

"The results will minimize dilution and create a portfolio that is positioned for growth,” he said.

The company also expects to use proceeds from the disposition to retire some near-term maturing outstanding debt.

Last year, according to Lea Overby and Steven Romasko, research analysts for Nomura Securities International, CBL divested $220 million of lower-growth assets and deployed over $200 million in higher-growth properties. In a continuation of that strategy, earlier this year the firm completed the foreclosure on Citadel Mall, which served as collateral for a $67 million CMBS loan.

“In addition to the REO Citadel Mall, we find 50 CMBS loans with CBL as a sponsor, including four of the firm’s non-core assets,” the analysts noted.

"Based on the firm’s previous track record and its desire to exit these assets, we believe that the risk of default is elevated for the non-core loans. In addition, given the firm’s desire to increase the set of unencumbered assets, we believe it is likely that many of the 21 disposition candidates are also securitized in CMBS."

Nomura said it has identified 13 malls that may be candidates for disposition by CBL. Those centers have occupancy of 90% or below, report net cash flow debt service coverage of 1.30x or less, or are on the master servicer’s watch list.

According to Michael Bilerman, head of the real estate research team at Citibank, the plan carries meaningful execution risk, for both the asset sales at targeted prices as well as the reinvestment of proceeds at reasonable returns.

However, Bilerman views CBL's plans to earmark another four malls for foreclosure valued at $349 million as a positive.

“Though we wish CBL started this process much earlier, like peers, the company could have potentially handed back more assets if significant secured debt hadn’t already been paid off as the company migrated towards an unsecured strategy,” he said. “Overall, a better quality portfolio should improve CBL’s growth profile and prove more defensive against future headwinds from department store closings and threats from e-commerce.”

Including the foreclosures and dispositions Citibank expected the REIT to be able to reduce debt by about $950 million ($590 million from the sale of properties and $349 million from potential foreclosures).

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