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You May Have Been Looking At CBL & Associates Properties, Inc (NYSE:CBL) All Wrong

Simply Wall St

CBL & Associates Properties, Inc is a US$373m small-cap, real estate investment trust (REIT) based in Chattanooga, United States. REIT shares give you ownership of the company than owns and manages various income-producing property, whether it be commercial, industrial or residential. The structure of CBL is unique and it has to adhere to different requirements compared to other non-REIT stocks. I’ll take you through some of the key metrics you should use in order to properly assess CBL.

View our latest analysis for CBL & Associates Properties

REIT investors should be familiar with the term Fund from Operations (FFO) – a REIT’s main source of cash flow from its day-to-day business activities. FFO is a higher quality measure of earnings because it takes out the impact of non-recurring sales and non-cash items such as depreciation. These items can distort the bottom line and not necessarily reflective of CBL’s daily operations. For CBL, its FFO of US$377m makes up 62% of its gross profit, which means the majority of its earnings are high-quality and recurring.

NYSE:CBL Historical Debt, March 14th 2019

CBL’s financial stability can be gauged by seeing how much its FFO generated each year can cover its total amount of debt. The higher the coverage, the less risky CBL is, broadly speaking, to have debt on its books. The metric I’ll be using, FFO-to-debt, also estimates the time it will take for the company to repay its debt with its FFO. With a ratio of 9.3%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take CBL 10.72 years to pay off using just operating income, which is a long time, and risk increases with time. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.

I also look at CBL’s interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it’s better to use FFO divided by net interest. With an interest coverage ratio of 1.71x, CBL is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.

I also use FFO to look at CBL’s valuation relative to other REITs in United States by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. In CBL’s case its P/FFO is 1.04x, compared to the long-term industry average of 16.5x, meaning that it is highly undervalued

Next Steps:

As a REIT, CBL & Associates Properties offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in CBL, I highly recommend taking a look at other aspects of the stock to consider:

  1. Future Outlook: What are well-informed industry analysts predicting for CBL’s future growth? Take a look at our free research report of analyst consensus for CBL’s outlook.
  2. Valuation: What is CBL worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CBL is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.