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FILE PHOTO: People walk past a ZTE logo outside its booth at the Mobile World Congress in Barcelona, Spain, Feb. 25, 2019. REUTERS/Sergio Perez/File Photo
HONG KONG (Reuters) – Chinese telecom equipment maker ZTE Corp’s controlling shareholder plans to reduce its stake by as much as 3 percent after the stock more than doubled in value since surviving a U.S. sanction last year, showed regulatory filings late on Tuesday.
The stock slumped as much as 7.6 percent in Shenzhen on Wednesday following the news. Its Hong Kong-listed shares dropped as much as 5.6 percent.
The Chinese firm was crippled early last year after breaking U.S. sanctions and was only able to resume business in July after paying $ 1.4 billion in penalties to lift a U.S. supplier ban. The stock has since risen around 150 percent in Shenzhen.
ZTE in the filings said state-owned controlling shareholder Zhongxingxin Telecom plans to sell up to 2 percent in ZTE A-shares via block trades within 90 days. Zhongxingxin has also proposed to use not more than 41.9 million ZTE A-shares, or 1 percent of the company’s total share capital, to subscribe for units in the ICBCCS SHSZ 300 exchange-traded fund.
Reporting by Sijia Jiang; Editing by Christopher Cushing
Sonos’ stock fell as much as 15% late Wednesday after the company said that its chief financial officer, Mike Giannetto, will leave the company later this year.
The announcement came as Sonos reported revenue and earnings that were above analyst expectations. Sonos said that revenue in its most-recent quarter rose 5.8% to $ 496.4 million and net income of 55 cents a share. Analysts had been forecasting revenue of $ 490.7 million and earnings of 40 cents a share.
Giannetto, who has worked at Sonos for more than seven years, is leaving Sonos once a replacement can be named. The company said it hired an executive search firm to find a new CFO.
The company also warned that revenue in the current quarter could come in lower than expectations. “Reduced sell-through velocity toward the end of Q1 FY2019 created higher channel inventory levels than we would have liked,” Sonos’ letter to shareholders said. “This elevated channel inventory and our production schedule with IKEA starting in Q3 FY2019 instead of Q2 FY2019 will impact Q2 revenue.”
Sonos didn’t offer guidance for this quarter’s revenue, but indicated that overall guidance for 2019 remains close to analyst expectations. Sonos is expecting revenue to rise between 10% and 12% this year to between $ 1.25 billion and $ 1.28 billion. Analysts had been forecasting 2019 revenue of $ 1.26 billion.
Sonos’ stock, which declined 6% during official trading Wednesday, fell as much as 15% to $ 10.42 a share in after-hours trading on the announcement.
Two Restaurant industry heavyweights shared their unique, investable insights on which stocks are poised to win and lose in the months and years ahead.
In this exclusive webcast, Hedgeye Restaurants analyst Howard Penney and Restaurants journalist Jonathan Maze, Executive Editor with Restaurant Business Magazine, discuss numerous big restaurant stock winners and losers along with the key sector trends that are rapidly changing the game in the restaurant industry.
Below is access to the entire 52-minute webcast plus the key takeaways transcribed from this webcast:
Howard Penney: Welcome Jonathan. I want to start with a simple question that probably doesn’t have an easy answer. Why isn’t restaurant traffic stronger? Consumer confidence is high, unemployment rate is low, wages are growing, so what’s your take on restaurant traffic these days?
Jonathan Maze: If you think about it, restaurants have spent the last 10-plus years building new locations, starting new concepts, and we’ve had a lot of money flow into the sector year after year. Lending is readily available for just about everybody. All of this has generated a feeding frenzy in the restaurants space.
But the thing is, when consumers have a lot of choices, they make them. That’s essentially what’s happened. We’ve had same-store traffic weakness for the last decade and consumers are simply using their wallets to make choices. And any company that doesn’t do their job well is struggling to generate same store traffic.
Penney: Retail sales are showing a surge in spending recently. So consumers are out there and spending but, to your point Jonathan, there are just too many stores and not enough good ones. You can see in the Black Box data, notably, a pick-up here in November of 2017 to the present in comparable sales. That’s partly due to pricing and to a certain degree the Trump tax cuts perhaps. But traffic, as you can see, is still not doing well.
Penney: The next topic from a macro perspective is wage inflation. This is going to be one of the more difficult issues the industry is going to face. There’s good news and bad news. You’ve got wage inflation which is putting money in the pockets of consumers, but it’s also putting pressure on the P&L of these restaurant companies and that’s forcing restaurants to raise price. This creates a bigger premium in the cost of going out relative to going to a supermarket.
So Jonathan, how does the industry deal with this and not only inflation but also the supply issue?
Maze: The industry has to get more efficient. The fundamental problem with the restaurant industry today is that it’s a very inefficient method of delivering food to consumers. If you compare it with convenience stores and grocers, their primary competitors for food dollars, restaurants spend a lot more on labor. Now, it’s obviously an industry that’s a lot more experiential, but restaurants need to improve their efficiency. Wage rates are going up in an industry that spends a third of its revenue on labor, so it’s becoming less profitable from a competitive standpoint.
Penney: I want to talk about delivery for a second, because it’s changing the industry. Darden Restaurants (DRI) and Texas Roadhouse (TXRH) are taking a wait-and-see approach to delivery. Now, I would argue they’re probably two of the best-run concepts today. Texas Roadhouse probably gets the gold star, with positive traffic in an industry that has negative traffic.
Now, you can argue that these best-in-the-business operators must see something in delivery that they don’t like. Now the obvious thing is they don’t want to pay 15-30% to the aggregator to get the food delivered. And on the other side of this are the companies going after delivery like Applebee’s.
Not that the market is correct, but the market is telling us something with GrubHub (GRUB) at $ 140 today and a $ 13 billion valuation that there is going to be a big shift to delivery. Furthermore, you have private and public companies talking about 20% of sales going to delivery.
I would argue there are two points to make here. One, if 20% of your sales go to delivery and you have to pay 15% fees, that’s a problem. And then the second thing is who’s responsible when there are issues? It’s really going to be tough when a company is putting their brand in the hands of a third party. There’s certainly going to be some risk. I don’t think the consumer is going to give the brand a pass for cold fries or a cold burger.
Penney: Let’s have some fun with some names. I’d like to go through McDonald’s (MCD) first. We have McDonald’s same-store sales on this slide. Now, you can see the pick-up in sales in 3Q of 2015. McDonald’s CEO Steve Easterbrook came in a few months before that in late 2014, early 2015. He simplified things in 2015. As you can see, the menu size went from 108 to 72. Now the menu size is going back up again. Promotions also went down from 2013 to 2015, and now the promotions are going back up.
I see promotions and menu size going up, causing a slowdown in drive-thru times. Now, 70% of business goes through the drive-thrus.
Jonathan, I’m making my bear case for McDonald’s right now, and you can choose to comment or not. But my thesis is that growth creates complexity and complexity is the silent killer of growth.
Are things like Technology able to save McDonald’s?
Maze: Finding ways to add technology to a restaurant to improve efficiency, that’s a good thing. Using the tools available to improve your business is a good thing. Fresh beef should be a good thing. Adding delivery should, in theory, add incremental sales because you’re adding more ordering offers. This could point to a McDonald’s that offers consumers a better experience and gives them better tasting food.
But it’s also asking their franchisees to do an awful lot. And that’s the issue of complexity that I think you’re talking about. The danger to me has not been these individual things but that they’re doing them all at the same time.
Penney: I agree with you. The technology kiosk that they’re putting in their stores, there’s an intended consequence of that and that is they want to reduce labor over time. So they want to shift the consumer’s behavior to ordering at a kiosk from ordering from a person. Now that will take time, years to happen. But they just can’t afford to pay the person taking orders $ 15 an hour. The CEO of McDonald’s will never say that publicly for obvious reasons.
Penney: Complexity is clearly a theme of mine, and I’m going to stick with that here talking about Starbucks (SBUX). On slide 19, you see the Starbucks American same-store sales and you see sales in 1Q 2016 posting 9% growth and 1% growth by 3Q 2018.
This is another complexity story as their ticket times have gone down. They’re serving food and trying to sell more to consumers. If you look at the menu trends, total menu items are up a lot. If you look at menu trends and correlate that with sales and promotions, when menu items go up, sales go down.
Now this is my Howard Schultz slide, where he came back when Starbucks was struggling after he left. The company cut capital spending because they were growing too fast. And then he left at the peak of capital spending again as sales were slowing. So now once again he’s left the ship drifting along with a CEO who doesn’t look like he’s ready to take the right steps to fix the sales trend.
What are your thoughts Jonathan?
Maze: I think they might need to slow down again. They’re adding units at a pretty rapid pace. They just overtook McDonald’s as the second most unit heavy restaurant chain in the U.S. And that unit count tends to get concentrated in very specific markets. It’s not spread out. That’s one of their issues.
Complexity is definitely a concern. Starbucks same-store sales are definitely slowing. So I agree with you that complexity is hurting their service times and it’s hurting their traffic.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
The summer of 2018 has been another tough period for Sears, but there’s one thing that has reliably helped lift the retailer’s share price: Amazon.
On Tuesday, Sears Holdings announced that it’s expanding a pilot program with Amazon to install and balance automobile tires that consumers buy through Amazon. Under the partnership, Amazon shoppers who buy tires, including the Die-Hard brand made by Sears, can ship the tires to a nearby Sears Auto Center for installation.
Amazon also offers similar ship-to-store programs with, for example, local bike shops. In May, when Sears announced it would service tires bought on Amazon, its shares shot up 38% during the following week.
Sears’ stock more than gave up those gains in June, however, after the company said sales fell 31% in its most-recent quarter and announced it would close 72 more stores. That was on top of hundreds of stores that Sears had closed in the previous couple of years. Last week, Sears said it would close yet another 46 stores, dragging its share price down even further to a record low of $ 1.08 a share.
News that Amazon and Sears were expanding the ship-to-store program from 47 initial stores to all Sears Auto Centers in the U.S. offered Sears a reprieve from the weeks of a declining share price. Sears shares surged as much as 23% to $ 1.37 a share Tuesday. While Sears’ stock price drifted down Wednesday, they were trading about 3% higher in afterhours trading at $ 1.26 a share.
Sears has been undergoing a long, painful restructuring for several years, with the stock now down 96% from its high point in 2013. Sears, K-Mart, and other onetime powerful retail brands have been struggling in the era of Amazon retailing. Amazon, meanwhile, has been working with brick-and-mortar retailers, including partnerships with Sears and Kohl’s and the purchase of Whole Foods Market.
Gilead (GILD) is a biotech company with leading franchises in Hepatitis C, HIV, and emerging platforms in Oncology, Hepatitis B, and NASH. To an extent, Gilead is a victim of its own success. The company’s Hepatitis C (“HCV”) treatments cured the illness and for the last few years the company has seen its revenues fall as patient volumes have decreased. However, the decline of the company’s HCV franchise has masked significant progress the company has made in commercializing its HIV treatments. Furthermore, the company has generated a ton of cash which it has used to acquire companies with strong drug pipelines and engage in a number of clinical trials.
Because of all the investments that Gilead has made in its HIV franchise and in developing its pipeline, the company is strongly positioned for significant growth in new treatments. The HCV business has already declined to such a degree that it will be a much smaller driver of future earnings. This sets the stage for growth in 2019 and beyond. I expect investors to re-rate Gilead with a higher multiple once it returns to growth. Gilead’s current forward EV/EBIT multiple is 8.6x vs. the peer median at over 13x. Gilead could see its stock price rise over 50% in the next 18 months just from a valuation multiple re-rated to be in-line with peers as investors begin to appreciate the company’s new and emerging treatment franchises.
Gilead’s Hepatitis C Struggles
Gilead has had a storied history in the Hepatitis C market. The company entered the market through its $ 11 billion acquisition of Pharmasset which had late-stage clinical trials for its HCV treatments but was still pre-revenue.
Gilead’s Pharmasset acquisition was seen as risky at the time but proved to be very shrewd. By 2014, lead HCV drugs Harvoni and Solvaldi received US FDA approval. By 2015, Gilead’s HCV sales peaked at $ 19.2 billion, outselling all legacy treatments.
Gilead won the HCV market because its treatments were more effective; in fact, Gilead had a cure for the disease. As a result, beginning in 2016, the company saw HCV start to decline because patient volumes were falling due to a lack of repeat business. In addition to declining patient volumes, AbbVie and Merck have released new treatments with effectiveness on-par with Gilead and they have entered the HCV market at lower prices to aggressively take market share.
At its peak, Gilead generated $ 4.9 billion in HCV revenue per quarter. In the most recent Q2 2018 report, Gilead showed HCV revenue of just $ 1.0 billion.
Gilead’s HCV business is expected to continue declining, but the silver lining is that HCV represents a much smaller mix of Gilead’s overall business today than it did a few years ago. In 2016, HCV represented roughly 50% of total sales. In 2018E, HCV is expected to be less than 20% of total sales and HCV’s importance will only decline further in later years (source: SEC disclosures, Author’s estimate).
What’s more is that the HCV declines may be more manageable from here. Future drug price declines and share losses will probably be less acute than what we have seen. At some point the sales will stabilize to some base level and will no longer be a headwind at all. Q2 2018 was actually encouraging in the sense that HCV sales did not significantly drop sequentially between Q1 and Q2, compared to prior quarters.
Gilead Has A World-Leading HIV Franchise
All the drama from Gilead’s HCV business has taken everyone’s attention from Gilead’s blockbuster HIV business. Gilead has top-prescribed HIV drugs in both the US and Europe and is successfully transitioning from its earlier TDF treatments to its newer TAF treatments which are more effective and require patients to ingest fewer pills.
Source: Gilead Q2 investor presentation.
Based on the below table, Gilead has a 79% market share in US HIV treatments.
Source: Gilead Q2 2018 presentation.
Unlike Gilead’s HCV franchise, which was dominated by two drugs, the company has a dozen different HIV treatments, with several still in clinical trials, treating a wider range of variations on the condition. This makes the HIV franchise less reliant on single blockbusters and more durable in the face of competition. Gilead’s HIV business has grown from about $ 9 billion in 2013 sales to $ 13.6 billion in the most recent 12 month period (a roughly 10% annual growth rate). Over the next 10 years, Gilead’s HIV business is expected to grow sales at a mid-single digit annual rate (5% to 7% range).
Estimates for Gilead’s HIV Treatment Growth
Source: RBC Capital Markets.
In recent years, the decline of HCV has masked the significant growth in HIV. Over the next few years, investors will better appreciate the growth as the HCV headwind fades in magnitude.
Gilead Is Developing A Premier Oncology Franchise
Last year Gilead acquired Kite Pharma for $ 11 billion. This transaction was very similar to the Pharmasset acquisition Gilead made in 2011 which jump-started its HCV franchise. Kite was a pre-revenue oncology-focused biotech that is considered a leader in the emerging CAR-T treatment. CAR-T is a treatment which involves modifying a patient’s T-cells to make them more effective at fighting tumors.
The Kite acquisition is already starting to pay-off. In October 2017 (just six weeks after the acquisition was announced), Kite received FDA approval for its first drug, Yescarta. Although Kite isn’t the only biotech working on CAR-T treatments, Yescarta was the second ever FDA approval for a CAR-T treatment and the first FDA approval for diffuse large B-cell lymphoma (“DLBCL”).
Yescarta has generated $ 135 million in revenue since it was approved, $ 68 million of that was in the last quarter, clocking in 70% sequential q/q growth. Yescarta is currently undergoing regulatory review in Europe. Based on the early success of the drug and the large target market, Yescarta is expected to be a multi-billion dollar per year revenue generator by 2025 (source: PiperJaffray research report from May 30, 2018).
In addition to Yescarta, Gilead has several oncology drugs acquired from Kite that are in stage 2 or stage 3 clinical trials. This is an encouraging sign that Gilead is developing a large cancer drug treatment franchise on par with or potentially even bigger than the company’s HIV business.
Gilead Has An Incredibly Robust Drug Pipeline
As shown in the table below, Gilead has a couple dozen ongoing clinical trials at various stages. Some of these trials are in areas such as HIV, Hepatitis C, Hepatitis B, and oncology, where Gilead already has a presence and new drug approvals would be incremental to existing businesses or would simply extend a franchise. However, Gilead also has some exciting clinical trials in totally new drug markets such as NASH, solid cancer tumors, Rheumatoid Arthritis, Crohn’s Disease, and more. Specifically, treatments using the JAK1 inhibitor and related to liver diseases (NASH) and other forms of cancer, could each be multi-billion dollar annual revenue opportunities within the next 10 years.
What Could Gilead’s Stock Be Worth?
Today, Gilead trades for 8.6x EV / Forward EBIT. This compares to a peer median multiple of 14x. The obvious explanation for the discount in Gilead’s multiple is the comparison of its revenue declines vs. peers growing revenue at a double-digit rate on average. In other words, Gilead isn’t a sexy biotech story and has seen its stock price go nowhere for several years. Investors have simply given up on the stock after years of disappointment. However, Gilead is set to start growing again in 2019 and beyond. In fact, Gilead has a very exciting pipeline that could re-shape the entire company within the next few years.
If certain pipeline events fall in line, Gilead’s revenue growth could significantly surprise to the upside. This has the potential to cause a re-rating in Gilead’s traded valuation multiple. If Gilead’s stock were to re-rate in-line with its peers, it could rise by over 50%. Furthermore, unlike many pharma pipeline bets, Gilead has real earnings supported by a thriving HIV business and a rapidly growing oncology business. Gilead’s earnings and its un-levered balance sheet provide solid downside in the event that the pipeline disappoints. Overall, I believe Gilead represents a very attractive risk-reward: little downside with significant potential upside.
Key Investment Risks
Management transition. In the most recent Q2 2018 earnings, the company announced that CEO John Milligan will be stepping down at the end of the year. Additionally, Board Chairman John Martin would also be stepping down. Successors have not yet been named and there is a significant risk that the next crop of leaders will not live up to the former leaders. Both Milligan and Martin are long-tenured executives with the company and their exits were a surprise to investors; however, they are leaving the company in good shape. Also, now that the company is diversifying into other treatment areas, it makes sense to bring in new leaders with broader pharma experience. Investors should keep a close eye on who the company chooses to succeed Milligan and Martin.
Pipeline risk. Gilead’s pipeline presents significant future earnings possibilities, but the pipeline is not guaranteed to produce any major new drugs. To the extent that the ongoing clinical trials disappoint investors, Gilead’s stock price could suffer. However, given the current low valuation multiple placed by investors on the company, I would argue that investors haven’t placed extremely high value on the company’s pipeline. Therefore, to the extent the pipeline does produce exciting new drugs, the stock could significantly rise.
Pharma pricing pressure. Perhaps the biggest unknown in the pharmaceutical space is how the regulatory and industry landscape will evolve. There is significant political pressure from both the Left and the Right to increase regulations over excessively high drug prices. Gilead has a reputation for high-priced drugs and could face reduced pricing power from current and future treatments. Additionally, PBMs and insurance companies are merging and are better positioned to negotiate lower drug prices. We simply do not know how much (or little) the industry’s pricing will change.
Disclosure: I am/we are long GILD.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Facebook’s problems have reached a boiling point. After months of questions and, often reluctant, disclosures about massive information leaks and about how it handles false information on its site seen by hundreds of millions of people, disappointing user growth caused the social network’s stock to plummet in after-hours trading on Wednesday, shedding over $ 145 billion in market cap.
Investors’ alarm was likely triggered by a failure in growth in its most important markets, the combined U.S. and Canada segment and Europe. U.S. and Canadian traffic was flat from the previous quarter, while Europe shed 3 million average daily users quarter over quarter, down to 279 million.
U.S. and Canadian Facebook visitors provided an average revenue per user (ARPU) in the latest quarter of $ 25.91, the vast majority from advertising, while the ARPU of Europeans was $ 8.76, according to figures provided by Facebook. Other markets offer much less value: Asia-Pacific users rack up just $ 2.61 in revenue, and the rest of the world lumped together, a mere $ 1.91.
The drop in European visitors was potentially due to the continuous revelations highlighted there about Facebook’s breaches and weaknesses, and the implementation of the European Union and related entities’ General Data Protection Regulation (GDPR) in late May. The GDPR requires more disclosure and opting in to many tracking and ad-related behaviors that aren’t related to the core function of a website.
While the company saw revenue up 42% year-over-year to $ 13.2 billion in its second quarter, that was short of what Wall Street expected. Net income was similarly up, to $ 5.1 billion from $ 3.9 billion the year-ago quarter, but that didn’t assuage investors and institutions. The after-hours plunge came despite Facebook also beating a consensus estimate of earnings per share of $ 1.72 by two cents.
This slowing growth in valuable markets may have provided the jitters that led investors to significant after-hours profit taking. The company had a nearly unbroken steady climb in its stock price since mid-2014, with a blip shedding 15% in a matter of days in March when revelations about alleged data misuse by Cambridge Analytica emerged. Facebook stock recovered gradually, and was up 29% in the last year and 21% in 2018 through the close of regular trading today, rising to a new high of 217.50, before the after-hours tumble. Nearly the last year’s gains have now been lost.
Facebook has no end in sight for scrutiny and oversight, with regulators, prosecutors, and other public and private parties in multiple countries examining the company’s actions, those of nation states allegedly manipulating news and advertising, and that of firms like Cambridge Analytica, which obtained massive amounts of information that many Facebook users likely considered private.
Yesterday, BuzzFeed published a memo by chief security officer Alex Stamos written to staff in March after the initial Cambridge Analytica stories broke in which he urged the company to pick sides on important issues. Stamos reportedly still plans to leave the company next month, following a reorganization that the New York Times said earlier this year took away 98% of the group he managed. Today, Facebook’s chief legal officer announced he’s departing at the end of this year for family reasons.
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This research report was jointly produced by High Dividend Opportunities research team and Seeking Alpha author Julian Lin.
CBL & Associates Properties (CBL) is the most experienced operator of B mall properties. As their common share price continues to struggle, they have also seen their preferred stock drop considerably. Preferred dividends must be paid before those of the common, making their distributions inherently safer. In spite of tremendous cash flow coverage, their preferred shares nonetheless trade at a very opportunistic 10.4% yield. Shares have 25% upside, including dividends. The following are the two Preferred Shares of CBL:
- CBL & Associates Properties, 7.375% Series D Cumulative Redeemable Preferred (CBL-D) – Last price $ 17.80 (Annual Dividend $ 1.84375, Yield 10.36%).
- CBL & Associates Properties, 6.625% Series E Cumulative Redeemable Preferred (CBL-E) – Last Price $ 16.60 (Annual Dividend $ 1.65625, Yield 9.98%)
Note that your investment broker may list the preferred stock as CBL-PD and CBL-PE instead of CBL-D and CBL-E. Some other brokers such as IB list them as (CBL PRD) and (CBL PRE).
Business Overview: A Story Of Stability And Transformation
This is a portfolio which has undergone an impressive transformation. After the 2008 recession, management has reduced debt to EBITDA from 8.5 times to 6.7 times. Since 2013, CBL has disposed of 20 underperforming properties, increasing their net operating income (‘NOI’) exposure to Tier 1 & Tier 2 malls from 78% to 86%. This has also led to increases of tenant sales per square foot:
In spite of the headlines that malls are dying, CBL has maintained very stable mall occupancy rates, indicating the strong demand for leasing space in B malls:
This shows that strong management matters in this tough retail environment. It is not enough to have the best properties – only the strong operators will survive. This is a management team that endured the 2008 recession and adapted by cleaning up the balance sheet.
With their common stock trading at around $ 4.40 per share, this is a multiple of 2.5 times 2018 funds from operations (‘FFO’) and an 18% dividend yield, which is dirt cheap. With such a low valuation, future rent concessions appear to have been more or less priced in. We are reiterating our strong buy rating for the CBL common shares. This article, however, focuses on the preferred stock issues, which are also attractive, recently yielding 10.4%. These preferred shares have fallen considerably after trading near par for quite some time:
Preferred stock, in comparison to their common counterparts, is usually less volatile due to their more secured dividend payouts. This is a unique opportunity to take advantage of unexpected volatility.
Free Cash Flow Coverage
Using the midpoint of 2018 guidance, CBL will have approximately $ 350 million in funds from operations and $ 167 million in common dividends. CBL has guided for $ 75-125 million of annual redevelopment spending along with $ 90 million of annual capital expenditures and $ 50 million of annual debt principal repayment. As we can see, the majority of redevelopment spending is likely to be internally funded.
Using FFO, the $ 44.9 million in total preferred dividends are handily covered at 7.8 times. After recurring capital expenditures (including amortization), the preferred dividends are covered 4.68 times. This is also known as “free cash flow” coverage.
And finally, even after accounting for redevelopment expense, they are still covered at ~2 times. We can see the cash flow coverage laid out below:
(Chart by Author)
Anyway you put it, the preferred stock dividends are very well covered and appear to be very safe.
The main threat would be violation of any of their debt covenants, but even here CBL is still very strong:
Impact of Moody’s and S&P Downgrade
In February 2018, Moody’s downgraded CBL’s unsecured credit rating to Ba1, down from Baa3. This comes after S&P had downgraded the corporate credit rating (note the distinction) to BB+ from BBB-. They did maintain their BBB- unsecured credit rating. As stated in their 2017 10-K, CBL has elected to use their unsecured credit rating to determine the interest rates on three unsecured credit facilities and two unsecured term loans. As of December 31, 2017, the “three unsecured credit facilities bear interest at LIBOR plus 120 basis points and our unsecured term loans bear interest at LIBOR plus 135 and 150 basis points, respectively.” If they were to receive a downgrade from Standard and Poor’s (S&P) on their unsecured credit rating, then the unsecured credit facilities “would bear interest at LIBOR plus 155 basis points and the interest rate on our two unsecured term loans would bear interest at LIBOR plus 175 basis points and 200 basis points, respectively.”
The approximate impact to interest expense related to these unsecured credit facilities and unsecured term loans is shown below. Again, S&P has not yet downgraded the unsecured credit rating, thus, this is only a projected impact (in 000’s, only showing credit-rating sensitive loans):
(Chart by Author, data from 2017 10-K)
As we can see, the net near-term impact to interest expense would be just over $ 4 million, which is not very significant considering the approximately $ 350 million in funds from operations. Further, we anticipate that CBL will be able to regain their investment grade rating from Moody’s as their redevelopments begin to bear fruit.
Which Preferred Issue Is Better?
CBL has two preferred issues, as seen below:
(Chart by Author)
Both issues are cumulative, meaning any unpaid preferred dividends would accumulate until they are paid in full in the future. Both issues also are currently callable. Preferred shares have a natural cap on the upside around call value (or par value) of $ 25/share. For example, in general, investors do not like to buy preferred stocks at above par their value of $ 25/share plus accrued interest. A trade-off is that the preferred D shares have significantly greater liquidity, with 1.815 million shares outstanding versus 0.69 million outstanding E shares. Both issues are strong buys at the current prices.
Comparison With Peers
Mall REIT peers Washington Prime Group (WPG) and Pennsylvania Real Estate Investment Trust (PEI) both also have preferred stock, but these are yielding around 8.5%, considerably lower than what is seen at CBL. We believe that this discount is undeserved as in comparison with these two peers, CBL will be able to fund the majority of their redevelopment expense with cash flow alone. The tremendous cash flow coverage of the CBL preferred shares also makes them comparably less risky than those from these two peers.
Our short-term price target is $ 20.50 per CBL-D share or $ 18.40 per CBL-E share for a 9% yield. Including dividends, this would be a 25% total return in a period of 12 months. We believe that both issues have more upside potential if held for longer than 1 year.
The biggest risk to the preferred issues is if CBL suffers a liquidity crisis and would need to dilute preferred shareholders in order to redeem debt maturities. This, however, does not seem likely due to the currently low leverage of their balance sheet. These also have a significant cash flow cushion and the common dividend must be cut first before any suspension to the preferred dividend. This does look to be a distorted risk to the reward proposition.
CBL is investing heavily into redeveloping their mall properties. The market is not giving them any credit for their ability to internally fund these value-enhancing capital expenditures, and this pessimism has reached their preferred stock. The CBL preferred stocks are not only safe but too cheap to pass up at 10.4% yields. These have the greatest cash flow coverage compared to peers and are unlikely to remain this cheap for long.
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Note: All images/tables above were extracted from the Company’s website unless otherwise stated.
Disclosure: I am/we are long CBL, WPG.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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(Reuters) – Tesla Inc (TSLA.O) was reported to be making 2,000 of its Model 3 sedans per week, enough to ease stock market nerves around billionaire Elon Musk’s electric carmaker on Monday after a week dominated by news of a crash involving its semi-autonomous autopilot.
Musk told employees in a company-wide email on Monday that Tesla had just passed the 2,000 per week rate, according to auto website Jalopnik.
That was short of its 2,500 per week target but a big increase on the 793 Model 3s that the company built in the final week of last year. It produced 2,425 of the cars in the whole fourth quarter. [nL4N1OY42A
Tesla shares recovered from an 8 percent loss before the Jalopnik report filtered into markets to trade down 3.5 percent on the day. bit.ly/2uFdEBr
The company did not immediately respond to requests for comment.
Jalopnik also quoted Musk in the email to employees as saying: “If things go as planned today, we will comfortably exceed that number over a seven day period!”
Reporting by Sonam Rai in Bengaluru, Editing by Peter Henderson and Patrick Graham