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REIT CBL's Brief And Painful Stay On The Goldman Sachs Conviction Buy List

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For a good example of just how worthless of a tool for investors (and useful for persuading follow on offering "participation") the Goldman Sachs Conviction Buy list is, look no further than the recent performance of REIT CBL & Associates, coupled with the recommendations on the stock by Goldman Sachs REIT analyst Jonathan Habermann.

I present a recent stock performance chart, overlaid with Goldman's recommendations on the stock, which indicate that either i) the Conviction Buy list is completely useless, ii) Habermann is the worst momentum chaser in the world, or iii) nobody, least of all Wall Street professionals, has a clue how to value REITs, or iv) all of the above.

For those who may not follow Goldman's REIT recommendations, I will summarize what has happened with this name over the past 3 months:

On March 27, Habermann kept his existing Sell Rating on the stock ($2.28 that day), and lowered his target price on CBL from $3.00 to $2.50, providing the following explanation [highlights here and in all quotes mine]:

We lower our 6-month price target on regional mall REIT CBL & Associates $2.50 (from $3 previously) due to our concerns on a further deceleration in fundamentals given the company’s high middle-market exposure and average portfolio sales productivity. Our $2.50 price target now indicates a 30% discount (previously 15%) to our unchanged NAV estimate. Further, we expect B/C class mall owners to be disproportionately impacted by increasing store closings and tenant bankruptcies increase through the current downturn, and caution that occupancy could decline substantially from current levels. Our $2.50 price target, including the company’s 23.2% dividend yield, now implies a total return potential of 9%.

Amusingly, beginning that day, the stock started rapidly moving higher, hitting $4.44 on April 15, which would have been a short loss of 100% to anyone who listened to Haberman on March 27. Probably as a result of numerous angry clients calling and demanding to know why they are losing boatloads of cash (and likely getting margin calls from Goldman's own repo desk no less), on that same day Haberman, comes out with a new report, this time advising clients to Hold their CBL stocks, and gives a $4.00 target on the stock. In an accompanying report, Jonathan provides the following justification:

Key reasons for our Neutral rating [upgrade] on CBL include:

1. Easing of concerns over credit issues. We see less risk associated with CBL’s balance sheet for three key reasons. First, the company faces over $2bn of debt maturing through 2011, including the expiration of its $550mn secured credit facility next year. While we acknowledge the above average volume and a heavy weighting towards the near term, recent signs of liquidity in the capital markets have reduced CBL’s refinancing risk in our view. Second, most of the expiring debt (with the exception of the unsecured revolver in 2011) is in the form of mortgage debt held by life insurance companies, an avenue of lending which still seems to be alive (albeit, much reduced). Lastly, CBL has already cut the dividend and opted to pay 60% of the dividend in stock, eliminating the risk of further dilution to forward earnings.

2. Refinancing risk largely reflected in shares – CBL trades at 1.3X our 2009 FFO estimates, versus the regional mall peer group average of 5.5X. As mentioned above, we acknowledge the high volumes of debt to be refinanced over the next 2 years, including the heavily drawn secured and unsecured credit lines (due in 2010 and 2011 respectively). However, we believe these concerns are reflected in the current share price. Further, the company’s 8.7X leverage (we look at Debt to 2009E EBITDA) is roughly in-line with the REIT average, and well below retail peers including MAC and DDR. Yet, CBL shares are much less expensive.

3. Stay at Neutral for time being as fundamentals should decelerate further. We highlight that fundamentals could display a further moderation over the next 12 months, with NOI growth potentially falling below the company’s current outlook of a (1.5%)-(3%). While CBL's portfolio has already been impacted by a number of troubled retailers including Steve and Barry's, Linens 'n Things and Circuit City, we expect the pace of store closings to accelerate in 2009, particularly as weaker retailers concentrate operations at malls demonstrating highest sales productivity and attractive demographic profiles.

So basically, horrendous fundamentals but it is a little cheaper than comparable crappy REITs, and credit has thawed, plus insurance companies can't wait to lend more to CBL. Upgrade merited - brilliant. But let's continue.

A mere week later, on April 24, after CBL is squeezed another 100% higher, hitting $7.88, a panicking Haberman is now fielding all sorts of angry calls as clients (Fidelity: 6.24%, Vanguard: 3.97%, T Rowe Price 3.9%) are screaming at him for missing them a 400% appreciation opportunity in less than a month. So what does Jonathan do? He changes the rating on CBL from Hold to not just Buy, but Conviction List Buy. All this less than a month before he was telling anyone who cares to read his research that the stock is a Sell and is worth $2.50. And, in case anyone cares, he puts a $10 price target on the stock, 400% higher than the $2.50 target he put on it on March 27.

We upgrade regional mall REIT CBL & Associates to CL Buy (from Neutral) as we believe the shares are undervalued. Concerns over the company’s balance sheet have caused the stock to trade at 1-2X FFO. However we view the recent progress made on refinancing activity across the sector as serving to eliminate ‘‘bankruptcy risk’’ from several low multiple stocks. We believe CBL survives as liquidity conditions have improved, and the company now has options to raise capital through an equity raise and / or asset sales. Our new $10 price target (raised from $4 previously) assumes a multiple of 3.5X our 2009 FFO estimate and now reflects a premium to our $8 NAV (versus a discount previously).

Oh, so even if it still has the worst tenants in the world, just because the company's "bankruptcy risk" has been "eliminated", everyone should buy (and not just buy, but Conviction Buy) into the stock. Again - brilliant.

What else does Jonathan say:

1. Easing of concerns over credit issues. We view CBL’s balance sheet as better positioned for the near term versus general investor perception, as 2009 and 2010 maturities are manageable and largely held by life companies. Specifically, the company has $304mn maturing in 2009, and $1bn maturing in 2010 (including the credit line). A capital raise and modest amounts of asset sales should go a long way in aiding the company through this (exhibit 3). Giving us more comfort, loans maturing over the next two years are smaller in size ($50-$60mn on average) and held mainly by life companies. While we acknowledge the above average volumes of debt CBL faces 2011 and beyond, we do not think shares deserve to trade at as depressed a multiple due to availability of options mentioned above (equity raises and asset sales). Also, CBL has already cut the dividend and opted to pay 55% of the dividend in stock, eliminating the risk of a further reduction.

2. Fundamentals get worse, but who doesn’t know this? To be clear, we expect fundamentals to get worse with NOI growth potentially falling below the company’s current outlook of (1.5%) to (3%). In fact, we model in occupancy falling to 87% and flat rent spreads by year end 2010. However, CBL was one of the first mall REITs to experience declining fundamentals and the scenario has not improved since (i.e. for several quarters now). For this reason, we think a further deterioration in fundamentals is not unexpected, and likely reflected in current valuation.

3. Valuation reflects overly severe balance sheet issues. As mentioned, we view CBL as relatively well positioned in terms of refinancing needs over the next 2 years (see exhibit 3). We therefore find it hard to justify the severe discount the shares trade at, both to their longer term average of 9.5X, and to the current REIT multiple of 9.5X. We certainly recognize that longer term refinancing needs (especially in 2011 and beyond) could prevent the multiple from reverting to the company's longer term average of 10X. That said, we simply find it less compelling that the shares remain trading in the 1-2X range, especially if capital raising efforts outlined above occur over the next 3-6 months.

We encourage readers to re-re-re-reread paragraph 2. And when they have done that, to reread it some more. After all, this has the vetting of former investment bank and current SLP monopolist extraordinaire Goldman Sachs.

So, continuing - what happens? Well, the stock peaks that day. In all honesty, it retraces the level it had when Habermann put it on the CBL list twice, but never goes anywhere even close to $10.00, despite the bankruptcy risk being eliminated. Instead, what happens is that on June 9, a syndicate of REIT underwriters extraordinaire Merrill Lynch and Wachovia issue and successfully price 50 million shares of CBL stock at $6.00. Tangentially notable is that the Wachovia analyst on CBL is none other than Zero Hedge long time favorite, Jeffrey Donnelley, CFA. For those new to the story, we would like to remind how Mr. Donnelley upgraded Weingarten Resources, a REIT in which Wachovia was in the offering syndicate, less than 24 hours before Wachovia et al raised equity for the company. And somehow Mr. Donnelley is still a CFA. Zero Hedge is hoping our SEC readers pay particular attention as we disclose all these various underwriting stories.

But back to Mr. Habermann. Naive clients who assumed that "fool me twice" would never be applicable to them, and decided to purchase some CBL after it somehow had the magical Conviction List designation before the Buy (kinda like an M3 badge on a BMW) now find themselves furious after realizing that had they waited a mere month they could have bought the stock in the ML/Wachovia secondary at a 40% discount. One can only imagine the pleasant conversations on Mr. Habermann's hopefully unrecorded phone line that day.

So a visibly [or so one assumes, alas the author of this post was nowhere near Mr. Habermann at the time] shaken Mr. Haberman does what? He issues a report, this Monday, in which he goes for broke: "CBL - Mall REIT at a deep discount; Our top idea in REITs" [emphasis mine]. Yes ladies and gents, the company that less than three months was at the bottom of the Goldman reject/Sell pile, has emerged as Goldman's top REIT idea. Not like anyone cares at this point, but here is Mr. Habermann's attempts at salvaging something... anything out of this whole fiasco:

Our top investment idea remains middle-market mall REIT CBL & Associates (CBL). Our $10 price target is based on a 15% premium to our roughly $9/sh net asset value (NAV) estimate and indicates a total return potential of more than 60%. We favor the stock for several reasons:

(1) Attractive yield - the stock has a current cash yield of 7% which we think is safe;

(2) Attractive Valuation – CBL trades at just 3X our 2010 estimate, a sharp discount to the REIT average of 10X-11X and the stock’s longer-tern average of 10X; and

(3) The bad news is in our numbers - our current estimates already reflect our cautious near-term outlook and incorporate a 500-600 basis point dip in occupancy as well as rental rate declines.

Alas for Mr. Habermann and his few remaining clients, the stock does not budge and in fact drops subsequent to this report. All is lost.

But the piece de resistance? Today, a mere 2 days after CBL became Goldman's "top idea in REITs", Mr. Habermann throws in the towel and issues this:

"We are removing CBL from the Americas Conviction Buy List as we now see better opportunities across our broader financials universe. We are encouraged by recent efforts to manage near term balance sheet risk, but expect incremental restructuring activity to take place over a longer time frame, and therefore see fewer catalysts for near term outperformance."

Bravo, Jonathan, Bravo. Of course the Goldman analyst won't do something as stupid as actually issue a forward looking analysis, so the stock merely goes from Conviction List Buy to plain, old, boring Buy. In 2 weeks when the stock hits $4.50 it will likely be downgraded to a Hold, and in a month when it is back to $2.00, look for Goldman to brand it with the anti M3 - Conviction List Sell.

And now you know how and why stocks get their rating at Goldman Sachs.

At least there is a silver lining: it seems REIT permabulls Cohen & Steers managed to dump all their CBL shares... when CBL was trading at its lowest price.

Who is it again who claimed that the "best and brightest" work on Wall Street?

hat tip Ryan

 


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