Fitch Rates CBL & Associates' $450MM Sr Unsecured Notes Due 2023 'BBB-';
NEW YORK -- November 26, 2013
Fitch Ratings assigns a credit rating of 'BBB-' to the $450 million senior
unsecured notes due 2023 issued by CBL & Associates Limited Partnership, a
subsidiary of CBL & Associates Properties, Inc. (NYSE: CBL). The notes have an
annual coupon rate of 5.25% and were priced at 98.972% of the principal amount
to yield 5.384% to maturity or 260 basis points (bps) over the benchmark rate.
CBL expects to use the net proceeds to reduce amounts outstanding under the
company's revolving credit facilities and for general corporate purposes.
Fitch currently rates 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 loans 'BBB-';
--Senior unsecured notes '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, and elevated secured
'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 that 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 30 states (including
owned and managed assets) that benefits from strong tenant and geographic
diversification. St. Louis is CBL's largest market and generated 8.2% of
annualized revenues for the nine months ended Sept. 30, 2013, while the top
five markets generated 20.6%. Limited Brands is the company's largest tenant,
having generated 3.2% of annualized revenues at Sept. 30, 2013 with the top 10
tenants generating only 18.6%. Further, more than 72% 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 bps 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
$358 per square foot [sf]) outperformed Pennsylvania REIT, which owns
predominantly lower-productivity centers ($381/sf), by 90 bps during the same
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 sf and is 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 portfolio.
Small-shop leasing spreads increased 12.8% on a GAAP basis during the third
quarter, driven by a 26.1% improvement on new leases and 9.5% 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 that blended lease spreads will
sustain above 10% into 2014, which should drive same-store NOI growth of
INVESTMENT-GRADE CREDIT METRICS
CBL's leverage has declined steadily to 6.6x at Sept. 30, 2013 from 8.1x at
fiscal year-end (FYE) 2008. Fitch expects that leverage will decline below
6.5x over the next 12-24 months.
Fixed-charge coverage was 2.2x for the trailing 12 months (TTM) ended Sept.
30, 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-'
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 raised $850 million
of unsecured term loans and bonds. This has driven CBL's pro-forma secured
debt/total debt ratio to 77% from 92% at FYE 2009, with Fitch expecting the
metric to decline to below 70% by 2015.
ADEQUATE LIQUIDITY AND UNENCUMBERED ASSET PROFILE
CBL has adequate base case liquidity of 1.4x from Oct. 1, 2013-Dec. 31, 2015.
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 pro forma for the 2023 notes offering,
and projected retained cash flow from operating activities after dividends.
Uses of liquidity include pro-rata debt maturities, expected recurring capital
expenditures, and remaining development costs.
The company's unencumbered asset coverage of unsecured debt at Sept. 30, 2013
(calculated using a stressed 8.5% cap rate on 2012 unencumbered NOI) is
adequate for the rating at 2.0x. Fitch expects that coverage will remain
stable over the next 12-24 months as the company continues to transition to an
unsecured-focused debt strategy.
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 Sept. 30,
2013 was 6.6x);
--Fitch's expectation of fixed-charge coverage sustaining above 2.5x (coverage
for the TTM ended Sept. 30, 2013 was 2.2x);
--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;
--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:
--'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 19, 2013);
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013);
--'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).
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Equity REITs
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Criteria for Rating U.S. Equity REITs and REOCs
Parent and Subsidiary Rating Linkage
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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Reinor Bazarewski, +1-212-908-0291
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Steven Marks, +1-212-908-9161
Monica Aggarwal, +1-212-908-0282
Sandro Scenga, New York, +1-212-908-0278
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