CBL & Associates Properties Inc. is more than happy to be the big fish in several little ponds. Unlike other regional mall REITs, the Chattanooga, Tenn.-based company focuses on middle markets in smaller cities that other REITs ignore.
With a portfolio of 164 properties totaling 93.4 million sq. ft., CBL is one of the country’s largest retail owners and developers. It also has the distinction of being one of the last REITs to benefit from family leadership: In 1978, Charles Lebovitz formed CBL’s predecessor company, and his son Stephen now serves as CBL’s president and CEO.
REIT Insider recently connected with Stephen Lebovitz to discuss CBL’s ongoing love affair with secondary and tertiary markets, its entrance into the outlet center sectors and its growth strategies through redevelopment and acquisitions. Lebovitz also shared his insights regarding Wall Street’s increased appreciation for his REIT and the lessons he and his team learned from the credit crisis.
REIT Insider: Wall Street has responded positively to CBL this year. What do they see in CBL that has them so upbeat?
Stephen Lebovitz: There are several factors. Our operating performance has gotten stronger, and analysts and investors have greater confidence in our strategy and our properties. Starting last year, we’ve consistently exceeded analyst and investor expectations. When we reported our second quarter earnings, we raised our guidance for NOI growth, our FFO was above consensus and our operating metrics were significantly improved and showed the strength of our portfolio. We’ve also shown [Wall Street] our ability to grow through our expansion into outlet centers and certain acquisitions. They had concerns about retailer expansion in middle markets, as well as questions about our balance sheet and our leverage. Our success this year has dispelled these concerns.
REIT Insider: CBL entered the outlet center sector with a joint venture with Horizon Group and a couple of recent acquisitions. Can you tell us what you like about outlet centers?
Stephen Lebovitz: We had been internally discussing strategies to enter the outlet center business when Horizon came to us with the opportunity to partner with them on the outlet center in Oklahoma City. We saw that project as an ideal chance to get our feet wet in the sector. We see outlet centers as very complementary to malls. They offer some overlap with traditional mall retailers, and it’s a sector that is growing. In fact, there’s more demand from retailers to expand in outlet centers than traditional retail. For example, Gap and American Eagle are expanding in outlet centers.Being in the outlet center space has also allowed us to build relationships with retailers we didn’t have relationships with before –Michael Kors, for example.
REIT Insider: What role will outlet centers play in CBL’s future growth?
Stephen Lebovitz: Our outlet center portfolio will continue to grow. For example, we have another outlet center project outside of Atlanta under construction, as well as the second phase of our project in Oklahoma City. We also have expansion opportunities in El Paso [Texas] and Gettysburg [Penn.]. As our portfolio grows, it will play a larger role overall in our NOI. However, regional mall revenues will continue to be the largest contributor.
REIT Insider: Analysts have said that Simon Property Group is on the only regional mall REIT that has a significant enough presence in outlet centers to have a marked impact on earnings. What are your thoughts?
Stephen Lebovitz: Simon definitely has the biggest presence in the business, and outlet centers represent less than five percent of our revenues today. We look at lots of different sources to move the needle, and if we can develop an outlet center every year to 18 months, that’s just one component of our growth. Outlet centers can be a meaningful contributor.
REIT Insider: CBL is known for its presence and dominance in middle markets. Beyond the fact that your expertise lies in this area, what is compelling about investing in secondary and tertiary markets?
Stephen Lebovitz: The thing that we like the most is the lack of volatility and greater stability. During the recession, our markets didn’t crash as much as larger markets. Part of the reason is the composition of employment in our markets—the major employers are state governments, hospitals and/or universities, so we see more stability. And we’ve seen some exciting new employer situations in a lot of our markets. Chattanooga, Tenn., for example, has a new VW plant; Nashville is the site of the new headquarters for Nissan North America; and Charleston, S.C., has a new Boeing plant. We’re actually seeing a comeback in manufacturing in a lot of our markets. With that said, I don’t think everyone is comfortable operating in middle markets. But we’ve developed expertise working with local governments and politicians, and we also have a decentralized structure. Our malls are the only one in the trade area or they’re the most dominant. As a result, they have a franchise position, and when retailers want to come to the market, they come to our mall.
REIT Insider: During one of CBL’s earnings calls earlier this year, you indicated that retailers are expanding—even in middle markets. What is the significance of their interest in middle markets today?
Stephen Lebovitz: After the recession, retailers weren’t really focused on growth. But as sales recovered and profits grew, they realized they needed more stores. Of course, they initially looked to major markets, and many didn’t see the opportunities they thought they would. Retailers can’t satisfy their growth if they’re limiting themselves to major markets, but they also need to have stores open and operating in middle markets to create a higher level of comfort level. Chico’s is a good example: They can operate at lower occupancy cost in middle markets, and that allows them to be more profitable. ULTAis another example: They were tentative initially, but we developed a good program with them. Demand pushed occupancy up 180 basis points during the second quarter, and our rents are up too.
REIT Insider: What do you see as CBL’s greatest opportunity today?
Stephen Lebovitz: In the pre-recession years, a lot of our focus was on acquisitions. Now that we have 90 malls, we’re looking to take advantage of all the opportunities in that portfolio. Our biggest opportunity is maximizing the value of our existing portfolio. We’ve been working to take advantage of re-leasing opportunities and redeveloping anchor spaces to improve productivity and to expand our properties. We’ve been adding theaters and restaurants, which bring in additional traffic and strengthen the properties significantly. We’re also being more aggressive and more proactive inbuying back spaces.
REIT Insider: CBL has been active this year on the acquisitions front. How do these acquisitions fit into CBL’s growth strategy?
Stephen Lebovitz: We’ve completed four acquisitions: two were the outlet centers and two were regional malls. Our outlet center acquisitions are consistent with our desire to be more active in outlet centers. The malls that we bought are consistent with our strategy to acquire assets that are a good fit with our existing portfolio and offer growth potential. The mall in Chattanooga, for example, is one that we originally developed, and is a good fit because we’re obviously familiar with it and the market, since it’s our hometown. We had a redevelopment strategy in place when we bought the mall through an online auction. The mall we bought in Minot, N.D., is a textbook illustration of our strategy. It’s the dominant mall in the trade area and, interestingly, Minot is a great growth market because of the boom in the energy sector.
REIT Insider: Although the credit crisis is over, the memory of it lingers. How did the crisis impact CBL and how does it influence your financial decisions today?
Stephen Lebovitz: It reinforced the value of our relationships because our banks really stood by us. We were one of the few companies that had lines of credit extended rather than cut back. It also made us more aware of the need to have a disposition program so we’re more active in selling non-core properties. We’re even selling some of the malls we don’t think we can effectively grow going forward.