Fitch Affirms CBL's Ratings at 'BBB-'; Outlook Stable

Fitch Ratings has affirmed the ratings of CBL & Associates Properties, Inc. (NYSE: CBL) and its operating partnership, CBL & Associates Limited Partnership (collectively, CBL) including CBL's 'BBB-' long-term IDR. The Rating Outlook is Stable. A full list of rating actions follows at the end of the release.

KEY RATING DRIVERS

The ratings reflect CBL's large, well-diversified portfolio of predominantly regional mall assets, appropriate fixed-charge coverage for the rating, and adequate financial flexibility supported by a growing pool of unencumbered assets.

These strengths are tempered by challenging cash flow growth prospects in CBL's lower-productivity malls, slightly high leverage for the rating, expected weakening in unencumbered asset coverage of unsecured debt, uncertain access to the unsecured bond market and execution risk associated with the company's asset repositioning strategy over the next several years.

The company has limited downside headroom in the 'BBB-' rating if negative credit events occur, such as a modest increase in leverage, weakening in the coverage of unsecured debt by unencumbered assets, the inability of the company to reduce secured debt via unsecured bond issuances and a reduction in the company's liquidity coverage ratio. Negative momentum could also result from sector-specific headwinds such as further deterioration in the liquidity or financeability of 'B' malls.

'ONLY GAME IN TOWN' STRATEGY

The average CBL property is located 25 miles from its nearest major competitor and 91% of mall net operating income (NOI) is derived from market-dominant or only game in town malls. This middle-market strategy creates NOI stability and provides barriers to entry given the modest populations in these regions generally do not support multiple regional malls or major retail centers. The company's ongoing redevelopment strategy also enhances asset quality and deters new competition from entering respective markets. Nonetheless, Fitch does consider whether other forms of retail such as big-box, outlets and e-commerce could increasingly act as a form of competition to 'only game in town' malls thereby pressuring same-store net operating income (SSNOI) in future periods.

SOLID DIVERSITY BY GEOGRAPHY AND TENANT

St. Louis is CBL's largest market at only 7.8% of 2014 revenues, while the top five markets generated 20.3% of revenues. L Brands, Inc. is the company's largest tenant, having generated 3.3% of annualized revenues at June 30, 2015 with the top 10 generating only 20%. Further, more than 71% of revenues are generated from tenants that individually contribute less than 1% of annual revenue. This granularity insulates CBL's cash flows from large swings due to regional economic weakness and credit risk at the tenant level.

STRONGER PERFORMANCE RELATIVE TO 'B-MALL' PEERS

CBL's SSNOI growth underperformed mall REITs broadly by 150 basis points (bps) on average over the past 10 years (1% vs. 2.5%). Underperformance has been somewhat secular though, as broader 'Class B' operators have underperformed 'Class A' landlords by 250 bps during this span, highlighting the lower growth prospects and recent operational challenges for lower-productivity centers. However, CBL outperformed 'B' mall peers by 120 bps, attributed to CBL's 'only game in town' strategy and strong franchise value.

GROWTH AUGMENTED BY TENANT REPLACEMENT STRATEGY & TEMPERED BY OCCUPANCY LOSSES

Small-shop leasing spreads for stabilized malls increased 12.6% during 2014 and 9.8% for 1H'15, driven by a 32.8% improvement on new leases and 3.6% on renewals for the six months ended June 30, 2015. CBL's tenant replacement strategy drove outsized growth on new leases, replacing weaker-performing retailers on short-term, percentage-heavy rents with tenants generating higher sales productivity. Fitch views this strategy favorably despite the downtime that can arise prior to new tenants occupying the space.

Despite good releasing spreads, the company's portfolio has recently suffered from vacancies due to inline tenant bankruptcies. This dynamic partially weighed on the relatively soft 0.4% SSNOI growth for 1H'15. Fitch expects 1% SSNOI growth in both 2015 and 2016, respectively, driven by the commencement of new leases signed in 2014 and 2015 and contractual rent escalators, offset by tenant vacancies.

INVESTMENT-GRADE CREDIT METRICS; SLIGHTLY HIGH LEVERAGE

CBL's leverage was 6.6x at June 30, 2015, as compared with 6.6x and 6.7x as of Dec. 31, 2014 and 2013, respectively. Headline LTM leverage is elevated due to the acquisition of Mayfaire Town Center towards the end of 2Q'15. Pro forma for the acquisition, leverage is 6.5x. Fitch expects that leverage will remain in the high 6.0x's into 2017, driven by low single-digit SSNOI growth and asset sales, offset by (re)development spending. Fitch defines leverage as debt net of readily available cash divided by recurring operating EBITDA.

Fixed-charge coverage was 2.2x for the trailing 12 months (TTM) ended June 30, 2015, and Fitch expects it to remain around this level over the next 12-24 months. Fitch defines fixed-charge coverage as recurring operating EBITDA, less recurring capital expenditures and straight-line rent adjustments, divided by total interest incurred and preferred dividends.

EVOLVING ACCESS TO UNSECURED DEBT CAPITAL

CBL raised $300 million via an unsecured bond offering in October 2014 and $450 million via its inaugural unsecured bond offering in November 2013, and Fitch expects the company will attempt to access the bond market annually to repay secured debt. However, the company's announcement on Sept. 29, 2015 that it elected not to proceed with an announced unsecured bond offering due to market conditions highlights challenges of REITs that own less favored portfolios in more volatile credit market environments. The inability or unwillingness of the company to access the unsecured bond market on a consistent basis could have negative implications on the company's ratings or Outlook. CBL's persistently above average line of credit balances makes it increasingly more impacted by its ability to access the unsecured and secured bond markets.

The company's secured debt/total debt ratio declined to 65.7% at June 30, 2015 from 69.9% and 76.4% as of Dec. 31, 2014 and Dec. 31, 2013, respectively. Fitch expects the ratio will decline to below 50% by year-end 2016 as the company continues to unencumber its real estate portfolio, improving financial flexibility.

ENHANCED UNENCUMBERED ASSET POOL; WEAKENING UA/UD COVERAGE

Fitch expects CBL to continue to unencumber properties encompassing over $1.8 billion of gross asset value during 2015-2017, furthering the company's strategy to grow and improve the asset quality in the unencumbered pool. Unencumbered assets (calculated using a stressed 9% cap rate on 2Q'15 unencumbered NOI) covered net unsecured debt by 1.9x at June 30, 2015, which is slightly low for the rating. Fitch expects that coverage will decline through 2017 to approximately 1.7x as the company unencumbers higher-leveraged assets, below Fitch's 2x sensitivity for negative momentum.

SECURED MATURITIES WEIGH ON LIQUIDITY

CBL's base case liquidity ratio of 0.8x through 2016-end is slightly low for the rating and constrained by more than $500 million of 2016 pro rata mortgage maturities, which Fitch expects will be refinanced with unsecured debt. Fitch defines liquidity coverage as sources of liquidity divided by uses of liquidity. Sources of liquidity include unrestricted cash, availability under unsecured revolving credit facilities, and projected retained cash flow from operating activities after dividends. Uses of liquidity include pro-rata debt maturities, expected recurring capital expenditures, and remaining development costs.

ELEVATED LINE OF CREDIT USAGE

CBL's lines of credit have been 52% drawn on average since 2004 compared to 30% for the broader REIT sector, and was 35% drawn as of June 30, 2015. Fitch does not expect the elevated balance to impact credit quality in the near term, presuming an accommodating capital markets environment that would enable the company to reduce outstanding balances. The company's tolerance for higher line of credit borrowings indicates more aggressive financial policies, and liquidity risk would be materially amplified in a less hospitable debt financing market similar to late 2008-2009.

ASSET SALES STRATEGY FACES EXECUTION RISK

CBL's asset repositioning strategy initially targeted 21 mature lower-growth assets with an estimated portfolio value of $1.0-1.25 billion, representing approximately 15% of total NOI. The pace of the company's divestitures has been relatively slow, as the company has only sold $42.7 million of assets (four properties) since announcing the disposition program in April 2014. Acquisition demand for 'B' malls is uncertain, and Fitch expects that an accommodating secured financing environment will be necessary to enable dispositions.

PREFERRED STOCK NOTCHING

The two-notch differential between CBL's IDR and preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'BBB-'. Based on Fitch's research on 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis', available on Fitch's website at 'www.fitchratings.com', these preferred securities are deeply subordinated and have loss absorption elements that would likely result in poor recoveries in the event of a corporate default.

STABLE OUTLOOK

The Stable Outlook is driven by Fitch's expectation that CBL's credit profile will remain appropriate for the rating, although Fitch anticipates that CBL could breach one or more of the negative rating sensitivities noted below under 'Rating Sensitivities.'

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for CBL include:

--SSNOI growth of approximately 1% in 2015, followed by 1% annual growth in 2016-2017;

--Development/redevelopment spend of $250-330 million annually in 2015-2017. The weighted average initial yield on cost for projects coming online is approximately 8%;

--$150 million of non-core asset sales for the remainder of 2015, followed by $40 million in the aggregate in 2016-2017. The forecasted capitalization rate is 7-9% given the lower-productivity nature of the assets;

--Recurring capital expenditures of $100 million annually in 2015-2017, reflecting the reduced real estate footprint given aforementioned asset sales.

RATING SENSITIVITIES

The following factors may have a negative impact on the company's ratings and/or Outlook:

--Failure to execute the asset repositioning strategy as a result of weaker liquidity in, or unattractive valuations of lower-tier properties;

--Fitch's expectation of leverage sustaining above 7.0x (headline leverage at June 30, 2015 was 6.6x and 6.5x pro forma for June 2015 Mayfaire acquisition);

--Fitch's expectation of fixed-charge coverage sustaining below 1.8x (coverage for the TTM ended June 30, 2015 was 2.2x);

--Reduced financial flexibility stemming from sustained high secured leverage and/or significant utilization under lines of credit;

--Failure to maintain unencumbered asset coverage of unsecured debt (based on a stressed 9% cap rate) around 2.0x (coverage was 1.9x as of June 30, 2015).

While Fitch does not envision positive rating momentum in the near term, the following factors may have a positive impact on CBL's ratings and/or Outlook:

--Fitch's expectation of leverage sustaining below 6.0x;

--Fitch's expectation of fixed-charge coverage sustaining above 2.5x.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

CBL & Associates Properties, Inc.

--Long-term IDR at 'BBB-';

--Preferred stock at 'BB'.

CBL & Associates Limited Partnership

--Long-term IDR at 'BBB-';

--Senior unsecured lines of credit at 'BBB-';

--Senior unsecured term loans at 'BBB-';

--Senior unsecured notes at 'BBB-'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Recovery Ratings and Notching Criteria for Equity REITs (pub. 18 Nov 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=813628

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 25 Nov 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=821568

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=991797

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991797

Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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