Fitch Assigns Initial 'BBB-' IDR to CBL & Associates Properties, Inc.;
NEW YORK -- July 25, 2013
Fitch Ratings has assigned initial credit ratings to CBL & Associates
Properties, Inc. (NYSE:CBL) as follows:
CBL & Associates Properties, Inc.
--Issuer Default Rating (IDR) 'BBB-';
--Preferred stock 'BB'.
CBL & Associates Limited Partnership
--Senior unsecured lines of credit 'BBB-';
--Senior unsecured term loan 'BBB-';
--Senior unsecured notes (indicative) 'BBB-'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The ratings reflect the company's large, well-diversified portfolio of
predominantly regional mall assets, strong franchise value, sufficient credit
metrics for the rating, and adequate financial flexibility highlighted by
improving access to capital and growing unencumbered asset pool. These
strengths are offset by lower growth prospects and less liquidity in
lower-productivity malls relative to Class A peers, high projected utilization
under lines of credit, elevated secured leverage, and execution risk tied to
terming out the company's lines of credit via the unsecured debt markets.
'ONLY GAME IN TOWN' STRATEGY
CBL's investment strategy focuses on owning dominant retail centers in
middle-markets that are insulated from competition. The average CBL property
is located 30 miles from its nearest competitor with nearly half of the
portfolio meeting this 'only game in town' investment philosophy. This
strategy creates net operating income (NOI) stability and provides barriers to
entry given the modest population in these regions generally does not support
more than one sizable regional mall or retail center. The company's franchise
value also leads to strong relationships with retailers while an ongoing
redevelopment strategy enhances asset quality, which helps deter new
competition from entering the market.
SOLID DIVERSITY BY GEOGRAPHY AND TENANT
The company has a granular real estate portfolio across 27 states that
benefits from strong tenant and geographic diversification. St. Louis is CBL's
largest market and generated 8.2% of 2012 revenues, while the top five markets
generated 20.6%. Limited Brands is the company's largest tenant having
generated 3.2% of annualized revenues at March 31 with the top 10 generating
only 18.5%. Further, more than 73% of revenues are generated from tenants that
individually contribute less than 1% of annual revenue. This granularity
insulates the company's cashflows from economic weakness in any particular
region as well as credit risk at the tenant level.
UNDERPERFORMANCE RELATIVE TO 'CLASS A' PEERS
CBL has underperformed its mall REIT peers on a same-store NOI growth basis by
100 basis points on average since 2001. The majority of these peers focus on
Class A properties in more infill locations (tenant sales per square foot
average $570), which are generally higher productivity, lower capitalization
rate assets with outsized growth. However, CBL's portfolio (average tenant
sales of $355 per square foot) outperformed Pennsylvania REIT, which owns
predominantly lower-productivity centers ($381/sf), by 90 basis points during
the same span.
GROWING OUTLET PRESENCE
CBL continues to grow its outlet footprint through joint ventures with Horizon
Group Properties. The portfolio currently consists of four properties with 1.4
million square feet and projected to grow to over 1.7 million sf with the
addition of a project in Louisville next year. The joint ventures have
generated strong double-digit returns on these projects and management has
indicated that CBL will target a new project every 12-18 months. Fitch views
this strategy favorably given the continued solid performance for outlets,
together with the complementary nature of the business to CBL's core mall
Small shop leasing spreads increased 10.8% on a GAAP basis during the first
quarter, driven by a 32.9% improvement on new leases and 3.4% on renewals. The
outsized growth on new leases was driven by CBL's active tenant repositioning
strategy, which focuses on replacing weaker performing retailers on
short-term, percentage-heavy rents with stronger tenants generating higher
sales per square foot. Fitch views this strategy favorably given the company's
focus on longer-term rent growth with stronger credit quality tenants, though
there is execution risk given the potential for downtime-driven vacancy and
replacement capital costs across the portfolio. Fitch expects double-digit
blended lease spreads during 2013, which should drive same-store NOI growth of
approximately 2% during the year.
INVESTMENT GRADE CREDIT METRICS
CBL's leverage has declined steadily to 6.5x at March 31, 2013 from 8.1x at
fiscal year-end (FYE) 2008. Fitch expects that leverage will decline to the
low 6.0x range over the next 12-24 months. Fixed charge coverage was 2.1x for
the trailing 12 months (TTM) ended March 31, 2013 and is expected to remain in
the low 2.0x range. Fitch defines fixed-charge coverage as recurring operating
EBITDA, less recurring capital expenditures and straight-line rent
adjustments, divided by total interest incurred and preferred dividends. These
metrics are adequate for the 'BBB-' rating.
TRANSITION TO UNSECURED FINANCING STRATEGY
The company continues to undergo a transition to a predominantly
unsecured-focused debt financing strategy. Since late 2012, the company has
converted its corporate lines of credit to unsecured and continues to reduce
secured debt via repayment of mortgage maturities. This has driven CBL's
secured debt/total debt ratio to 84% at first quarter 2013 (1Q'13) from 92% at
FYE 2009, with Fitch expecting the metric to decline below 70% over the next
12-24 months. Fitch also anticipates that the company will execute an
inaugural unsecured bond offering and/or term loan issuance over the near
ADEQUATE LIQUIDITY AND UNENCUMBERED ASSET PROFILE
CBL has adequate base case liquidity of 1.3x from April 1, 2013 - Dec. 31,
2014. Fitch defines liquidity coverage as sources of liquidity divided by uses
of liquidity. Sources of liquidity include unrestricted cash, availability
under the unsecured revolving credit facility, and projected retained cash
flow from operating activities after dividends. Uses of liquidity include debt
maturities, expected recurring capital expenditures, and remaining development
The company's unencumbered asset coverage of unsecured debt (calculated using
a stressed 8.5% cap rate on 2012 unencumbered NOI) is strong for the rating at
3.1x. Pro forma for a hypothetical $400 million unsecured offering to repay
secured debt maturities, coverage would decline to 2.2x, which remains
adequate for the rating.
HEAVY PROJECTED LINE OF CREDIT USAGE
Fitch's base case projects the company will maintain a high utilization rate
across its lines of credit of approximately 50%, which is well above REIT
peers (the median percentage drawn from retail REITs' revolving credit
facilities was 14% as of March 31, 2013). Though this would imply $650 million
of availability, investment grade REITs generally maintain low balances on
their lines of credit, which can help mitigate a poor capital markets
environment and provide backup liquidity for opportunistic growth
The following factors may have a positive impact on CBL's ratings and/or
--Fitch's expectation of leverage sustaining below 6.0x (leverage at March 31,
2013 was 6.5x);
--Fitch's expectation of fixed charge coverage sustaining above 2.5x (coverage
for the TTM ended March 31, 2013 was 2.1x);
--Unencumbered asset coverage of unsecured debt (based on a stressed 8.5% cap
rate) maintaining above 2.0x.
The following factors may have a negative impact on the company's ratings
--Fitch's expectation of leverage sustaining above 7.0x;
--Fitch's expectation of fixed charge coverage sustaining below 1.8x;
--Inability to access the public unsecured debt market;
--Reduced financial flexibility stemming from sustained high secured leverage
and/or significant utilization under lines of credit.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 26, 2013);
--'Treatment and Notching of Hybrids in Nonfinancial Corporates and REIT
Credit Analysis' (Dec. 13, 2012);
--'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 12, 2012);
--'Corporate Rating Methodology' (Aug. 12, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Criteria for Rating U.S. Equity REITs and REOCs
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
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