CBL & Associates Properties, Inc.: This 17.5% Yield Is Surprisingly Safe
Lock in a Double-Digit Yield From CBL Stock
Usually, I tend to stay away from companies that have cut their dividends before. That’s because, once management has reduced their company’s payout to shareholders, they wouldn’t be shy about doing it again when things go south.
However, CBL & Associates Properties, Inc. (NYSE:CBL) just might be good enough for me to make an exception.
The obvious reason why CBL stock got my attention was its huge payout. With shares trading at around $4.50 apiece, the company offers investors a jaw-dropping yield of around 17.5%.
But of course, like most double-digit yielders, CBL & Associates Properties is not perfect. From 2010 to 2016, the company grew its quarterly dividend rate from $0.20 per share to $0.27 per share. But then, in November 2017, management announced that they would reduce the quarterly payout by 24.5% back to $0.20 per share. (Source: “Dividends,” CBL & Associates Properties, Inc., last accessed August 23, 2018.)
“Based on our updated projections of taxable income, the common dividend is being re-set to a rate that will preserve an estimated $50 million of cash on an annual basis,” said company President and Chief Executive Officer Stephen Lebovitz last November. “This enhanced liquidity will help to fund value-adding redevelopment activity and debt reduction.” (Source: “CBL Properties Reports Results for Third Quarter 2017,” CBL & Associates Properties, Inc., November 2, 2017.)
No one likes dividend cuts. On the trading day following that announcement, the CBL stock price plunged more than 25%. However, the well-known inverse relationship between dividend yield and stock price has made the company one of the highest yielders in the market.
Furthermore, by looking at CBL & Associates Properties’ latest financial results, the dividend cut did give the company a lot more breathing room.
CBL & Associates Properties, Inc. Pays a Safe Dividend
Before we go into the details, let’s first understand how the company makes money.
CBL & Associates Properties is in the real estate business. Its portfolio consists of 117 properties, including 63 malls, 23 associated centers, eight community centers, five outlet centers, and five office buildings. The company also manages 13 properties for third parties. (Source: “CBL Properties Investor Presentation,” CBL & Associates Properties, Inc., last accessed August 23, 2018.)
By collecting a stable stream of rental income, CBL can afford to have a generous dividend policy. And like most real estate investment trusts (REITs), the key performance metric is funds from operations (FFO) rather than earnings. By comparing a REIT’s FFO to its actual dividends, investors can see whether the payout is safe.
The company reported earnings earlier this month. Excluding non-recurring items, CBL & Associates Properties generated adjusted FFO of $0.46 per share in the second quarter of 2018, which covered its quarterly dividend payment of $0.20 per share more than twice over. (Source: “CBL Properties Reports Results for Second Quarter 2018,” CBL & Associates Properties, Inc., August 1, 2018.)
In the first six months of 2018, CBL & Associates Properties’ adjusted FFO came in at $0.88 per share. Considering that the company declared total dividends of $0.40 per share during this period, it had a payout ratio of just 45.5%.
That is, despite offering a sky-high dividend yield, CBL stock was paying out less than half of its operating cash flow. This wide margin of safety is certainly a welcome sign for risk-averse income investors.
CBL Stock Is Countering the Retail Headwinds
In this day and age, the discussion of a shopping center REIT would not be complete without mentioning retail headwinds. As consumers embrace online shopping, investors have been concerned about business slowing down at brick-and-mortar retailers. In fact, CBL & Associates Properties’ exposure to the retail industry is another reason why the stock has not been a hot commodity.
The good news is, the company is not standing still. In particular, CBL & Associates Properties is selling its lower-productivity assets in order to invest in higher-productivity assets.
Since 2013, the company has disposed of 21 lower-productivity malls. Today, 91% of CBL’s mall net operating income comes from market-dominant or only-game-in-town malls.
This strategy has greatly improved CBL’s operating performance. From 2013 to the end of March 2018, its portfolio’s rolling 12-month sales per square feet grew 5.6% from $356.00 to $376.00. At the same time, its stabilized mall average base rent per square feet increased 7.6% from $30.35 to $32.66.
Moreover, CBL has limited its exposure to department store retailers. In 2013, the company had 63 Sears tenants and 43 Macy’s tenants. Today, the numbers stand at 40 and 33, respectively.
Bottom Line on CBL Stock
At the end of the day, retail headwinds could persist and lead to bearish sentiment toward this real estate company.
But with a safe yield of around 17.5%, CBL & Associates Properties is a rare find in today’s market.