CBL and AFSI.

music selection:  “Take Your Whiskey Home” — Van Halen

Each Friday at the raptor, I explore opportunities in income investing. It has become sort of trendy in the FIRE community to go with a 100% allocation to equities. I think this is foolhardy. All the research proves that buy and hold investors are really “buy and fold” investors. You need a bulwark to protect you against your own emotions.

I keep 40% of my portfolio allocated to fixed income and similar instruments. By focusing the remainder on yield producing assets, I have 117.63% of my annual budget met through passive sources. I will never be forced by the market to “sell low” and submarine my early retirement. And this does not mean working extra years and saving for an extreme lean-FIRE. I run a withdrawal rate of 5.32%. You can retire earlier than even most of the FIRE cohort with less risk and lower volatility by taking an income centric approach.

Today, I have two bonds that were recently purchased at a discount to par. First up is the AmTrust Financial (AFSI) 15AUG2023 maturity 6.125 coupon bond (CUSIP: 032359AE1). This is a bond that has long been range bound between 95 cents on the dollar and par. I have had a good till canceled limit order open for months at 95 and it finally cleared the market on Wednesday. If held to maturity, this bond has an annualized yield to maturity of 7.538%.  For me, this is a trading position and I already have a good till canceled limit order open to sell at 99.5000. That will return 4.7% on my capital at risk and will probably take about 3 months so I am expecting an annualized return of around 18.9%. If it takes longer, I am being paid 6.4% in coupon payments to wait for my capital gains. This is a very safe bond. The founding family is still in management and still owns billions in the underlying equity. They have extended credit to the company and appear committed to keeping the doors open. Of course, they personally lose billions if they manage the company such that it fails.

Next is the CBL and Associates 1DEC2023 maturity 5.250 coupon bond (CUSIP: 12505JAA1). CBL is a best in class mall operator. Much has been said about the decline of brick and mortar retailing but this mainly focuses on the big anchor stores. While CBL’s malls have Sears, JCP, and Macy’s anchors, they represent less than 1% of revenue each. As the company has lost anchors it has gotten creative to fill the space. Sometimes it puts in a national gym chain, sometimes it puts in a brewpub/movie theater complex. Other times, it is is mixed use commercial office space or mid tier casual dining.  Point is, this mall operator is keeping its inventory utilized and is a nimble operator that is dealing well with the Amazon threat.

CBL’s malls are also located in primarily in mid-tier cities that are otherwise underserved by traditional mall space. Think of places like St. Louis or Laredo, TX. The company’s top four tenants by revenue are L Brands (Victoria’s Secret) (LB), Signet Jewelers (SIG), Foot Locker (FL), and Ascena Retail (ASNA) – (Ann Taylor / Lane Bryant.) All four of these are in sound financial shape and can be expected to continue paying rent. The result is a landlord with cash profits that exceed 40% of revenue. Cash profits to interest expense has an excellent 2.7 times coverage making this a very safe bond. Profits could fall by 40% and the coupons would still be well covered.

My limit order cleared at 83.7000 this morning. My annualized yield to maturity is 10.076%, which is excellent considering the superior safety of this bond.  I am being paid 6.3% to wait on capital appreciation. The yield to maturity will soar if the bond is sold near par prior to maturity. I see four catalysts that could cause the bond price to soar and allow a profitable early exit. These are: 1) Improvement in occupancy rates 2) Refinancing of short term debt 3) Distribution cut of 50% or more 4) Conversion from REIT to C corp. Any one of these four or combination thereof could result in an early exit.

Ravenous lizards playing the home game are cautioned not to chase these issues higher. Maximum buy price for 032359AE1 is 95 and for 12505JAA1 is 84. Patience while stalking prey is the raptor way.

Devour your prey raptors!