CBLEQ
CBL & ASSOC PPTYS INC DEPOSITARY SHS REPSTG 1/10 6.625% SER E CUM REDEEMABLE (PFD STK) Depositary Shares
stock OTC

\*\*DISCLAIMER: DO YOUR OWN DUE DILIGENCE!!!! THIS IS NOT INVESTING ADVICE!!! THERE IS A LOT OF RISK IN INVESTING IN BANKRUPT COMPANIES!!!!
**Background**
A new plan was recently released in April for the restructuring of CBL Properties after they filed for bankruptcy in 2020. The plan provides a recovery for common and preferred shareholders, which is very rare in chapter 11 cases. Specifically, 11% of the common stock of the combined company will go to equity holders, with 5.5% going to preferred shareholders and 5.5% going to common shareholders. The remaining 89% will go to unsecured creditors. The current market value of the two classes of preferred shares (Ticker:CBLDQ and CBLEQ) combined is $24m (\~$1 per share), while the common trades at $20m market cap (\~$0.10 per share) (ticker: CBLAQ). Visit this website for all the information on the case: [https://dm.epiq11.com/case/cblproperties/info](https://dm.epiq11.com/case/cblproperties/info)
**Thesis**
I believe the preferred and equity shareholders far exceeds their current market value, and these securities trade at 70-80% discount to their estimated recovery. Here are a few reasons why:
* Despite 2020's challenges, CBL still produced $140m in FCF if you exclude bankruptcy-related charges that won't continue after they emerge. If we assume there is no improvement in FCF after 2020, current preferred and common holder's share of FCF in the reorganized company will be $7.7m, or $0.30 per existing preferred share and $0.04 per common share (recall their current prices are $1 and $0.10, respectively). This means preferred shares are currently trading at 3x 2020's FCF, which the company achieved in almost apocalyptic conditions. FCF will undoubtedly be higher in the future and I estimate it will be around $0.50 per preferred share ($0.06 per common) after reorganization, which is half the current price of the shares.
* Using the cap rate method, net asset value of the shares that preferred and common shareholders will receive in the reorganized company will be around $3-$5 for the preferred and $0.40-$0.60 for the common, which is 3-5x their current price. This is based off of their 2020 net operating income of $400m, share in joint venture operating income of $94m, and a capitalization rate of 9-11%, which is far higher than cap rates for other mall REITS. This values CBL's real estate assets at around $4.5-$5.5b ($494m/.09, 494m/.11). The reorganized company will have about $3.6b in debt and other liabilities, including their share of joint venture debt. Along with cash and other assets, this leaves a net asset value of $1.4b-$1.8b for the reorganized company. Preferred shareholders and common each receive 5.5% of this reorganized NAV, which comes out to $76m-$100m, or the per share figures noted above. Commercial REITS of average leverage typically trade above NAV, and CBL will have below average leverage after they emerge, which means they are also likely to trade above NAV after reorganization, which means even more upside.
* The current market value of CBL's equity implies a cap rate of 14%, which is ridiculously high. Cap rates for similar mall REITS ranged from 7-9% during 2020. Even a 11% cap rate implies 200% upside. This means that downside risk for the preferred is extremely small.
* Before May 20, there was a "deathtrap" provision in the restructuring plan for the preferred and common shareholders, meaning that if they did not receive the necessary votes, they would receive nothing. However, in a hearing on May 20th, Judge Jones of Texas, the judge overseeing CBL's case, ordered CBL to strike out the deathtrap for the preferred shareholders. Before, there was the risk incumbent preferred shareholders would vote down the plan and the preferred shares would receive nothing. That risk has largely been eliminated. Preferred shareholders could vote against the plan and STILL receive the 5.5% in a "cram-down" scenario where the senior classes force the recovery onto the preferred shares, regardless of their vote. In this event, the common shareholders must receive nothing (this is the "absolute priority rule"), but it means that there is a significant chance that preferred shareholders will receive their 5.5%.
* Preferred shareholders may still receive more than 5.5%, as the bankruptcy judge has said he is open to putting the 11% allocated to common and preferred in a trust for the allocation to be determined later. There is a very strong case that the preferred shareholders should receive more than 5.5% due to their seniority over the common.
**Risks**
1. If unsecured creditors, for some reason, vote against the plan, or Judge Jones strikes down the current plan, preferred shareholders will get nothing. 64% of the unsecured notes and 88% of the secured debt already approved the plan, which is in excess of the votes required for confirmation. However, there is always the chance it could fall through. Most of the unsecured notes are held by the Delaware Trust Corporation for its beneficiaries. This means the unsecured creditors are represented by one party. Upset that party, and equity holders could be wiped out. I find this unlikely, given the Delaware Trust Corporation is part of the creditor committee and already expressed approval of the plan, but at the end of they day they are looking to maximize their recovery. Anything could happen.
2. The longer it takes to approve the plan and for the shareholders to receive the recovery, the less attractive and valuable CBL's shares are. There is always the chance this could drag on for much longer than we would like.
**Conclusion**
In summary, the preferred and common shares of CBL properties are trading at a significant 70-80% discount to their estimated recovery. I believe the preferred shares are much more attractive, because they offer similar upside to the common but much less downside, because there is still a world where common shareholders receive little to no recovery. That risk has been largely eliminated for the preferred.