Wednesday, October 29, 2008

A 300 Point Misunderstanding/Buy CBLPRC

The Dow fell about 300 points during the last 15 minutes of trading after  Dow Jones ran a news story about GE.  The story claimed that that Jeffrey Immelt said that GE aims to keep 2009 profit the same as 2008 even if revenue drops 10 to 15 per cent. After the close, Dow Jones corrected the news story to say that Immelt was not predicting flat profit for 2009 but was instead merely answering a hypothetical question that he would ask managers to keep 2009 profits level with those in 2008 even if revenues fell 10 to 15 per cent.  Sell first and ask questions later is the mantra of those who are destined to lose money.   

I am going to continue adding a few REIT cumulative preferred stocks in 50 share lots.  Today, I added 50 shares of CBLPRC at 10.  It is a preferred issue from CBL Properties (CBL), a REIT that owns retail malls.  It has a 7.75% coupon and a $25 par value.  At my price, the yield is 18.75% annualized, paid in quarterly installment.  It is cumulative.  I am primarily interested in these preferred issues as a result of their tremendous fall in price during the past weeks.  In early September 2008, this issue was over 21. This preferred was originally issued in 2003 and traded near par value until the middle of 2007.  

One of the two main concerns with CBL is the fall off in retail sales with the recession.  CB & L did arrange recently financing for its 2008 debt maturities.  

For the last quarter, CB & L increased Funds from Operations by 9.5% and revenue by 9.4%.

Portfolio occupancy was 91.4% compared to 91.6% for the prior year's quarter. The company also announced then a new unsecured credit facility of 228 million for 3 years in the range of 150 to 180 basis points over LIBOR. Total Revenues for the June Quarter were 269.527 million. Net cash provided by operating activities was 190.493 million of the Q/E 6/08. Total debt is very high at 5.998 billion with 4.653 being fixed rate debt and the remainder variable rate. As of 6/08, the company owned controlling interests in 75 regional malls/open air centers, 28 associated centers,  and 13 office buildings. There are nine malls where it has less than a controlling interest.

In the current environment, a negative factor is that the average maturity on the debt was 4.1 years. I could not find out how much of that was coming due in 2009. I can only say that as of 6/30/08,  it has "sixteen loans and two lines of credit totaling $1,593.7 million that are scheduled to mature before June 30.2009. Of the total amount scheduled to mature within the next twelve months, the two lines of credit account for $932 million."  Of the remaining 16 loans, 4 totaling 103.3 million have extension options and 5 loans totaling 251.6 million "have term sheets and commitments for refinancing already in place" which they expect to complete by the end of the 3rd quarter. If my math is correct, that leaves 7 loans to be dealt with. I would say the current weakness in the common and preferred issue is tied to the constant large refinancings this company has to do. While it has a lot of properties, it is still at the mercy of lenders in an environment where lenders may become more unforgiving. 

Even though I was investing in a preferred, I read the most recent report from Morningstar dated 10/22/2008 where they lowered the fair value estimate for the common from $31 to $10 due to the deteriorating economy and the probable increases in credit costs. 

EBITDA COVERS INTEREST ONLY BY 1.8 TO 1. THIS IS VERY NEGATIVE IN THE CURRENT ENVIRONMENT for a heavily indebted company entering a recession in consumer spending.

Another downside to all of these REIT preferred stocks is that there is no maturity date and the coupon is fixed. I have had one called for redemption when the company could finance at lower rates. If called, the company would have to pay the $25 par value and any accrued interest. 
I would expect a dividend cut for the common shareholders within the next year. The common yields almost 29% at the today's closing price of $7.55. This alone suggests that the Street believes a cut is imminent. As long as the common shareholders receive a cash dividend, the preferred shareholders have to be paid in full. (see page S-11 of the Prospectus, any buyer of a cumulative preferred issue needs to read this kind of material on that page and understand it) If a cumulative preferred dividend is skipped, it accumulates and is not forgiven short of bankruptcy.   

I will do a fair amount of research even when I only take a nibble in a preferred issue. This includes at a minimum reviewing the prospectus for the preferred issue,  reading at least one earnings reports, reading all recent news items, examining the amounts and due dates for the debt, amount of leverage, determining interest coverage ratios, and reading analysts reports available to me. After doing all that, and weighing the significant risks, I decided not to risk buying the common which had a higher yield than the preferred, due the risk of a dividend cut and its inferior status in the priority chain,  and instead limited myself to only 50 shares of the cumulative preferred that pays almost 20% at my cost which has better preference rights and has to be paid as long as any cash common dividend is paid, plus it is cumulative unlike the common dividend.

First Industrial (FR)  will release earnings in the morning and I will read that report. I am less worried about that REIT than I am about CB & L.

I was impressed with the earnings report from SL Green Realty, which may encourage me to add to one of its cumulative preferreds, SLGPRC & SLGPRD, both selling at about 1/2 of par value and yielding close to 15 to 16%. I am also considering adding a small odd lot position in the common, viewing this as an opportune time for this Tennessee boy to buy a piece of Manhattan.

  I am not a financial advisor but an individual investor trying to navigate my way through a mind field. In these posts, I am acting as an unpaid financial journalist and an occasional ornery political commentator.   I am also aggregating financial news stories that I view as important and providing any reader of these posts, assuming there are more than a couple, with links to those articles, sort of a filtered, somewhat intelligent, free search engine.  Any discussion made by me of particular securities  is not a recommendation to buy or to sell.  Trade at your own risk.  Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons.  The sale may before or after the post.  Before buying or selling any stock, even one recommended by a trusted financial advisor,  please research it and make up your own mind which is what I always try to do.  Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news.  In this post, and all others by me, I am merely describing my reasons for purchasing  or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale.  The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile.  Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments.    

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