Redevelopment Defines CBL’s Strategy, Says CEO
LAS VEGAS — Over the past five years, CBL Properties (NYSE: CBL) has been disposing of “lower-productivity properties” and redeveloping several others. These moves reflect efforts to boost performance and upgrade the overall portfolio, which is largely concentrated in the Southeast and Midwest. Since 2013, the Chattanooga, Tenn.-based REIT has disposed of 21 mall assets and a number of other non-mall properties.
In 2017 alone, CBL sold an outlet center, three malls, two office buildings and outparcel locations for a total of more than $180 million in proceeds. During the first quarter of 2018, $40 million in disposition activity was either completed or in process, including a binding contract for the sale of Janesville Mall, a tier-three shopping center located in Janesville, Wisconsin.
Due to a combination of factors — including the threat of e-commerce and slipping occupancy for a period of time — the company’s stock price has taken a tumble during the past few years. Shares of CBL, which traded at $14.20 per share on Aug. 26, 2016, had fallen to $5.43 per share by the close of business on Wednesday, June 13. The key to righting the ship lies in redeveloping existing properties rather than conducting a fire sale of the portfolio, CEO Stephen Lebovitz believes.
Today, CBL’s holdings include 117 properties totaling 73.4 million square feet across 26 states. The portfolio is comprised of 75 “high-quality” enclosed, outlet and open-air retail centers and 11 properties managed for third parties, as well as 63 malls that recorded a total occupancy of 92 percent in 2017.
CBL’s first-quarter earnings report showed some positive signs as same-center sales per square foot for the stabilized mall portfolio increased 4.1 percent compared with the same period a year ago. For the 12 months ended March 31, 2018, same-center sales were $376 per square foot.
More than 45 of CBL’s core malls have benefited from redevelopments or have redevelopment projects in the planning/pre-construction phases. Over 1.5 million square feet of underperforming anchor tenant space has either been redeveloped or is in the process of being redeveloped at an average cost of $10 million per project, according to the company’s May 2018 investor presentation.
Lebovitz met with REBusinessOnline at ICSC RECon in Las Vegas to discuss the specifics of how a redevelopment-based strategy can rejuvenate the company’s stock price, mall occupancy and returns to shareholders.
REBusinessOnline: What will it take for the stock price to rebound to prior levels?
Stephen Lebovitz: The negativity toward the sector is bound to turn around. We’ve already started to see that a little this year, and finding more stability among retailers will help with that. Stabilizing our tenant mix and revenues is at the heart of our portfolio strategy for this year so we can then return to growth.
REBO: Is the near-term plan to pare down some of your holdings, maintain the current level, or increase holdings?
Lebovitz: We’ve done a lot of dispositions lately; in the past three years we’ve sold about 20 malls and more than 35 properties total. We still look for opportunistic dispositions, but for the most part it’s really more about investing in our properties.
Redevelopments open up a lot of opportunity for investors, especially if it’s high-quality real estate. Malls are changing and we’re in a position to take advantage of that change. We’re fielding demand from users that have never been interested in malls before because of the critical mass and infrastructure in the space, so we’re well-positioned to take advantage of those opportunities.
REBO: You stated in the first-quarter earnings release the following: “Operationally, our focus in 2018 is stabilizing revenues as well as diversifying income by adding more dining, entertainment, value and service users.” To what extent have you made progress on that diversification of income strategy?
Lebovitz: We had strong sales during the holiday season that continued into the first quarter. We saw a promising rebound in sales at some malls in Texas and the Southwest. Oil prices rebounding helped too.
In general, retailers seemed to recover during the first quarter. Also, we were able to replace some of the retailers who went out of business in 2017 with new users. Our portfolio lost a few basis points in occupancy last year due to all the bankruptcies, so regaining that occupancy is one of our goals this year.
About 70 percent of the new leases we executed during the first quarter were with non-apparel users, which is a break from the traditional kinds of retail categories we have tried to add with our malls. In addition, more of the leasing we’ve been doing has been with local and regional retailers, which is helping to bring in names not normally seen in malls.
REBO: CBL began construction in April on the first phase of redevelopment of the former Sears building at Brookfield Square in Milwaukee, Wisconsin. The redevelopment will deliver new dining and entertainment options, WhirlyBall as well as BistroPlex from Marcus Theatres, which combines dining and movie-going. To what extent is redevelopment a key part of CBL’s strategy going forward?
Lebovitz: Redevelopment is the cornerstone of our strategy and our growth at this time. It enables us to bring in new users and transform the properties. Brookfield Square is a great example of the kind of redevelopment plays we do — it’s got restaurants, a theater, a hotel and convention center. WhirlyBall is also a very dynamic go-kart concept that’s taking off.
REBO: CBL also recently announced Phase I redevelopment plans at Jefferson Mall in Louisville, Kentucky. The redevelopment will include Round1 Bowling & Amusement, which is new to the market. Construction on Round1 is currently underway in the former Macy’s building with an anticipated grand opening prior to the 2018 Christmas holiday season. Is entertainment one of the keys to success for shopping centers today?
Lebovitz: Macy’s wasn’t performing that well, but with Round1 we will be able to draw more families and bring a new energy to the center. We’re also working on redeveloping the space currently occupied by Sears, which we acquired in 2017 in a sale-leaseback.
We should have more of these projects underway by this time next year. These projects will validate the story of the transformation that’s happening in retail right now. We’re also working on adding more mixed-use components to our property, whether office, residential, medical or hospitality.
REBO: Bon-Ton stores recently announced plans to close Carson’s three locations in metro Detroit, including one at Laurel Park Place, a shopping center in Livonia, Michigan, that CBL Properties owns. What’s the game plan for backfilling that space, and does CBL view the situation as an opportunity?
Lebovitz: We definitely view this closure as an opportunity to bring in new, more relevant users. In the past three years, we’ve done about 40 redevelopment projects that have centered on bringing in new anchors — restaurants, entertainment — anything that reflects service and value.
Our view on malls is that they’re moving more toward suburban town centers than anywhere else, and closures like this are the catalyst for that movement. We’ve got a couple prospects in mind to replace the anchor spaces vacated by Carson’s, but it usually takes a couple years to get everything into place.
REBO: Do you believe the wave of store closures we’ve seen over the past few years will continue for the foreseeable future, or begin to wane?
Lebovitz: In 2017, we saw the most closures since the recession. The pace has slowed in 2018 and we expect to see more stabilization moving forward. Some of the retailers that closed stores had too much debt or were too closely aligned with their competition.
REBO: Do you think the industry obsesses too much about the impact of e-commerce on retail? Does the industry’s preoccupation with online sales sometimes become an excuse on which retailers can blame low sales?
Lebovitz: The narrative last year was that online shopping was going to replace physical stores. This year, the story has shifted to reflect a synergy between online and physical stores, and the idea that the best retailers will excel on both platforms. Amazon’s purchase of Whole Foods validated the need for physical grocery stores. Deals like that represent a trend that we’re likely to see more of.
REBO: Does the retail apocalypse narrative, even if less pronounced now than last year, hurt retail REITs in general?
Lebovitz: The story has definitely hurt the sector. Most retail REIT stocks are trading below their net asset value (NAV) and are down from their peaks. The story has also hurt the capital markets side. This is because investors and lenders who aren’t close to the business read the headlines and take away negative conclusions. So we’re fighting a negative narrative. We have to use facts, but we’re definitely on the defensive.
REBO: How will rising interest rates affect your buying and selling strategies, if at all? The 10-year Treasury yield is up approximately 60 basis points year-to-date.
Lebovitz: About 25 percent of our debt is floating-rate debt, which is subject to impact from rate hikes. But most of it’s long-term, fixed-rate debt at attractive interest rates. So while our numbers may be impacted at the margins, rate hikes don’t affect any projects in terms of being a go or a no-go.
REBO: What should our readers know about CBL that perhaps they don’t already know?
Lebovitz: I think a lot of people lose track of our size. Our portfolio spans about 120 properties totaling more than 75 million square feet. We have roughly $1 billion in revenue, $700 million in net operating income and $200 million in free cash flow. So we’re a substantial company, and that scale will be really important for us moving forward.