- Once a certain point is reached, there are few catalysts that can save a truly deteriorating company.
- Always do your own due diligence. And if it looks too good to be true, it probably is.
- Now is not the time to become the hero when it comes to high-yielding REITs.
- This idea was discussed in more depth with members of my private investing community, iREIT on Alpha. Get started today »
This article was co-produced with Williams Equity Research and edited by Brad Thomas.
Many prominent analysts and investors failed to resist the temptation that was the deeply discounted CBL & Associates Properties (CBL).
Seeing what they saw – and nothing more – they recommended and/or invested in its common stock. The same went for its preferreds – the 7.375% Series D Cumulative Redeemable and 6.625% Series E Cumulative Redeemable shares.
And that’s a major shame considering this week’s news.
Here at iREIT, we’ve always maintained extreme caution when it comes to high-flying sucker yielding stocks. We make a point to adhere to the principles of sound investment strategies. Because that’s what works.
It’s a proven fact.
Granted, there's always risk when investing. But not all risk is created equal. In the same way, everyone makes bad investments. The key is to limit losses and not repeat mistakes.
So, regardless of whether you have been or are now an investor in CBL, here’s the lesson to be learned.
Once a certain point is reached, there are few catalysts that can save a truly deteriorating company.
That’s why we’re taking the opportunity today to evaluate the warning signs and where this beaten-down pick stands today.
But, just to give you a heads-up about where we’re headed, we’ll turn to Ralph Block, who once said:
“A REIT that yields 10% almost always means that investors perceive very low growth or, even worse, a potential dividend cut.”
Now onto the case in point…
What Is CBL & Associates Properties, Inc?
For better or worse (perhaps much worse) CBL’s portfolio consists of a pretty good chunk of real estate:
- 108 properties
- 59 malls
- 5 outlet centers
- 23 associated centers
- 6 community centers
- 6 office buildings
- 9 properties managed for third-parties.
It buys in tertiary markets, which are areas outside urban cores. Properties are cheaper there and often have better going-in capitalization rates. Though they are subject to greater risks.
For instance, if your building is out in the sticks, there’s little stopping competitors from building identical properties next door.
Of all the types of commercial real estate – office, self-storage, hotel, industrial, medical, retail, grocery-anchored, multi-family, and pipelines – malls ranked Class B and below have shown some of the weakest fundamentals and equity performance in the last five years.
Their future outlook isn't improving either. And CBL focuses on Class-B malls.
Like Washington Prime Group (WPG) – which also fell hard (-7%) on the distribution cut news – CBL is frantically repurposing and releasing its retail properties before the money dries up. (A major contributor to the supply of funding is a company's ability and cost to borrow money.)
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