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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30,2003
-------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended __________to ____________
Commission File No. 1-12494
CBL & ASSOCIATES PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 62-1545718
- --------------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
2030 Hamilton Place Blvd., Suite #500
Chattanooga, Tennessee 37421-6000
- -------------------------------------------- -------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 855-0001
-----------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of Each Class on which Registered
- ------------------------------------------------ -----------------------
Common Stock, $.01 par value per share New York Stock Exchange
9.0% Series A Cumulative Redeemable Preferred New York Stock Exchange
Stock, par value $.01 per share
8.75% Series B Cumulative Redeemable Preferred New York Stock Exchange
Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes_X__ No_____
As of August 11, 2003, there were 30,191,383 shares of common stock, par
value $0.01 per share, outstanding.
CBL & Associates Properties, Inc.
INDEX
PAGE NUMBER
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL INFORMATION 3
CONSOLIDATED BALANCE SHEETS AS OF 4
JUNE 30, 2003 AND DECEMBER 31, 2002
CONSOLIDATED STATEMENTS OF OPERATIONS FOR 5
THREE MONTHS AND THE SIX
MONTHS ENDED JUNE 30, 2003 AND 2002
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR 6
THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2: MANAGEMENT'S DISCUSSION AND 16
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 3: QUANTITATIVE AND QUALITATIVE 31
DISCLOSURE ABOUT MARKET RISK
ITEM 4: CONTROLS AND PROCEDURES 32
PART II OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS 33
ITEM 2: CHANGES IN SECURITIES 33
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 33
ITEM 4: SUBMISSION OF MATTERS TO HAVE A 33
VOTE OF SECURITY HOLDERS
ITEM 5: OTHER INFORMATION 34
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 34
SIGNATURE 35
2
CBL & Associates Properties, Inc.
Item 1: Financial Information
The accompanying financial statements are unaudited; however, they have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and in conjunction with the
rules and regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the disclosures required by accounting principles
generally accepted in the United States for complete financial statements. In
the opinion of management, all adjustments (consisting solely of normal
recurring matters) necessary for a fair presentation of the financial statements
for these interim periods have been included. The results for the interim
periods ended June 30, 2003, are not necessarily indicative of the results to be
obtained for the full fiscal year.
These financial statements should be read in conjunction with the CBL &
Associates Properties, Inc. (the "Company"), audited financial statements and
notes thereto included in the CBL & Associates Properties, Inc. Form 10-K for
the year ended December 31, 2002.
3
CBL & Associates Properties, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
June 30, December 31,
2003 2002
--------------- ---------------
ASSETS
Real estate assets:
Land.............................................................. $ 584,175 $ 570,818
Buildings and improvements........................................ 3,513,308 3,394,787
--------------- ---------------
4,097,483 3,965,605
Less accumulated depreciation................................... (483,228) (434,840)
--------------- ---------------
3,614,255 3,530,765
Developments in progress.......................................... 107,278 80,720
--------------- ---------------
Net investment in real estate assets............................ 3,721,533 3,611,485
Cash and cash equivalents........................................... 25,750 13,355
Receivables:
Tenant, net of allowance for doubtful accounts of $2,889 in
2003 and $2,861 in 2002........................................ 41,252 37,994
Other............................................................. 3,193 3,692
Mortgage and other notes receivable................................. 22,070 23,074
Investment in unconsolidated affiliates............................. 72,556 68,232
Other assets........................................................ 63,353 37,282
--------------- ---------------
$ 3,949,707 $ 3,795,114
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage and other notes payable.................................... $ 2,540,914 $ 2,402,079
Accounts payable and accrued liabilities............................ 148,251 151,332
--------------- ---------------
Total liabilities................................................. 2,689,165 2,553,411
--------------- ---------------
Minority interests.................................................. 505,088 500,513
--------------- ---------------
Commitments and contingencies (Note 10).............................
Shareholders' equity:
Preferred stock, $.01 par value, 15,000,000 shares authorized:
9.0% Series A Cumulative Redeemable Preferred Stock,
2,675,000 shares outstanding in 2003 and 2002.............. 27 27
8.75% Series B Cumulative Redeemable Preferred Stock,
2,000,000 shares outstanding in 2003 and in 2002 .......... 20 20
Common stock, $.01 par value, 95,000,000 shares authorized,
30,149,026 and 29,797,469 shares issued and outstanding
in 2003 and 2002, respectively.................................. 301 298
Additional paid - in capital...................................... 775,587 765,686
Accumulated other comprehensive loss.............................. (626) (2,397)
Deferred compensation............................................. (1,808) --
Accumulated deficit............................................... (18,047) (22,444)
--------------- ---------------
Total shareholders' equity...................................... 755,454 741,190
--------------- ---------------
$ 3,949,707 $ 3,795,114
=============== ===============
The accompanying notes are an integral part of these balance sheets.
4
CBL & Associates Properties, Inc.
Consolidated Statements Of Operations
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------- ------------
REVENUES:
Rentals:
Minimum rents..................................... $ 104,604 $ 94,982 $ 207,592 $ 185,551
Percentage rents.................................. 1,198 1,798 7,528 8,515
Other rents....................................... 1,762 1,697 3,791 3,755
Tenant reimbursements................................ 52,251 43,759 102,207 82,345
Management, development and leasing fees............. 1,406 2,456 2,725 3,754
Other................................................ 3,798 3,026 7,149 7,961
------------ ------------ ------------- ------------
Total revenues..................................... 165,019 147,718 330,992 291,881
------------ ------------ ------------- ------------
EXPENSES:
Property operating................................... 28,052 27,177 56,324 49,497
Depreciation and amortization........................ 27,690 23,646 54,002 46,127
Real estate taxes.................................... 12,818 11,267 26,811 22,794
Maintenance and repairs.............................. 9,616 8,891 20,173 17,453
General and administrative........................... 6,644 5,466 12,997 11,206
Other................................................ 2,315 2,060 4,656 5,807
------------ ------------ ------------- ------------
Total expenses..................................... 87,135 78,507 174,963 152,884
------------ ------------ ------------- ------------
Income from operations............................... 77,884 69,211 156,029 138,997
Interest income...................................... 592 230 1,165 983
Interest expense..................................... (38,363) (34,050) (75,319) (70,837)
Loss on extinguishment of debt....................... (167) (1,240) (167) (3,187)
Gain on sales of real estate assets.................. 3,002 1,789 4,106 2,204
Equity in earnings of unconsolidated affiliates...... 731 2,015 2,488 4,102
Minority interest in earnings:
Operating partnership.............................. (17,979) (16,335) (38,616) (32,532)
Shopping center properties......................... (893) (1,216) (1,433) (2,133)
------------ ------------ ------------- ------------
Income before discontinued operations................ 24,807 20,404 48,253 37,597
Operating income (loss) of discontinued operations... (93) 353 (6) 919
Gain on discontinued operations...................... -- 164 2,935 1,406
------------ ------------ ------------- ------------
Net income........................................... 24,714 20,921 51,182 39,922
Preferred dividends.................................. (3,692) (2,010) (7,384) (3,627)
------------ ------------ ------------- ------------
Net income available to common shareholders.......... $ 21,022 $ 18,911 $ 43,798 $ 36,295
============ ============ ============= ============
Basic per share data:
Income before discontinued operations,
net of preferred dividends.................... $ 0.71 $ 0.63 $ 1.37 $ 1.23
Discontinued operations.......................... 0.00 0.02 0.10 0.08
------------ ------------ ------------- ------------
Net income available to common shareholders...... $ 0.70 $ 0.65 $ 1.47 $ 1.31
============ ============ ============= ============
Weighted average common shares outstanding....... 29,886 29,084 29,806 27,728
Diluted per share data:
Income before discontinued operations,
net of preferred dividends.................... $ 0.68 $ 0.61 $ 1.32 $ 1.19
Discontinued operations.......................... 0.00 0.02 0.10 0.08
------------ ------------ ------------- ------------
Net income available to common shareholders...... $ 0.68 $ 0.63 $ 1.42 $ 1.27
============ ============ ============= ============
Weighted average common and potential dilutive
common shares outstanding........................ 31,066 29,943 30,942 28,541
The accompanying notes are an integral part of these statements.
5
CBL & Associates Properties, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended June 30,
----------------------------
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... $ 51,182 $ 39,922
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation................................................................ 41,057 38,275
Amortization................................................................ 15,309 9,063
Gain on sales of real estate assets......................................... (4,106) (2,204)
Gain on discontinued operations............................................. (2,935) (1,406)
Loss on extinguishment of debt.............................................. 167 3,187
Issuance of stock under incentive plan...................................... 1,203 1,926
Write-off of development projects........................................... 107 57
Deferred compensation....................................................... 177 --
Amortization of deferred compensation....................................... 62 --
Minority interest in earnings............................................... 40,049 34,665
Changes in:
Tenant and other receivables................................................ (3,065) 1,942
Other assets................................................................ (6,172) (3,240)
Accounts payable and accrued liabilities.................................... (8,047) 515
----------- -----------
Net cash provided by operating activities........................... 124,988 122,702
=========== ===========
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of real estate and lease assets.............................. (40,635) (53,494)
Additions to real estate assets........................................... (27,922) (35,426)
Other capital expenditures................................................ (73,156) (32,928)
Capitalized interest...................................................... (2,742) (1,858)
Additions to other assets................................................. (1,014) (1,470)
Deposits in escrow........................................................ -- (12,845)
Proceeds from sales of real estate assets................................. 15,657 37,932
Payments received on mortgage notes receivable............................ 1,004 1,488
Additions to mortgage notes receivable.................................... -- (5,160)
Distributions in excess of equity in earnings of unconsolidated affiliates 148 3,042
Additional investments in and advances to unconsolidated affiliates....... (4,472) (2,659)
----------- -----------
Net cash used in investing activities............................... (133,132) (103,378)
=========== ===========
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage and other notes payable............................ 243,680 566,270
Principal payments on mortgage and other notes payable.................... (144,871) (714,050)
Additions to deferred financing costs..................................... (3,331) (5,283)
Prepayment penalties on extinguishment of debt............................ -- (1,875)
Proceeds from issuance of common stock.................................... 2,173 116,400
Proceeds from issuance of preferred stock................................. -- 96,394
Proceeds from exercise of stock options................................... 5,425 4,523
Repurchase of preferred stock............................................. -- (5,000)
Distributions to minority investors....................................... (35,981) (32,142)
Dividends paid............................................................ (46,556) (33,411)
----------- -----------
Net cash provided by (used in) financing activities................. 20,539 (8,174)
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS....................................... 12,395 11,150
CASH AND CASH EQUIVALENTS, beginning of period................................ 13,355 10,137
----------- -----------
CASH AND CASH EQUIVALENTS, end of period...................................... $ 25,750 $ 21,287
=========== ===========
SUPPLEMENTAL INFORMATION:
Cash paid for interest, net of amounts capitalized.......................... $ 73,699 $ 71,964
=========== ===========
The accompanying notes are an integral part of these statements.
6
CBL & Associates Properties, Inc.
Notes to Unaudited Consolidated Financial Statements
(In thousands, except per share data)
Note 1 - Organization and Basis of Presentation
CBL & Associates Properties, Inc. (the "Company"), a Delaware corporation,
is a self-managed, self-administered, fully integrated real estate investment
trust ("REIT") that is engaged in the development, acquisition and operation of
regional shopping malls and community centers. The Company's shopping center
properties are located primarily in the Southeast, as well as in select markets
in the Northeast and Midwest regions of the United States.
The Company conducts substantially all of its business through CBL &
Associates Limited Partnership (the "Operating Partnership"). The Company is the
100% owner of two qualified REIT subsidiaries, CBL Holdings I, Inc. and CBL
Holdings II, Inc. At June 30, 2003, CBL Holdings I, Inc., the sole general
partner of the Operating Partnership, owned a 1.7% general partnership interest
and CBL Holdings II, Inc. owned a 52.3% limited partnership interest in the
Operating Partnership for a combined interest held by the Company of 54.0%.
At June 30, 2003, the Operating Partnership owns controlling interests in
51 regional malls, 20 associated centers (each adjacent to a regional shopping
mall), 62 community centers and an office building. The Operating Partnership
consolidates the financial statements of all entities in which it has a
controlling financial interest. The Operating Partnership owns non-controlling
interests in four regional malls, two associated centers and two community
centers. Because major decisions such as the acquisition, sale or refinancing of
principal partnership assets must be approved by one or more of the other
partners, the Operating Partnership does not control these partnerships and,
accordingly, accounts for these investments using the equity method. The
Operating Partnership currently has under construction one mall, which is owned
in a joint venture, one associated center, and two community centers and has
options to acquire certain development properties owned by third parties.
The minority interest in the Operating Partnership is held primarily by CBL
& Associates, Inc. and its affiliates (collectively "CBL's Predecessor") and by
affiliates of The Richard E. Jacobs Group, Inc. ("Jacobs"). CBL's Predecessor
contributed their interests in certain real estate properties and joint ventures
to the Operating Partnership in exchange for a limited partnership interest when
the Operating Partnership was formed in November 1993. Jacobs contributed their
interests in certain real estate properties and joint ventures to the Operating
Partnership in exchange for a limited partnership interest when the Operating
Partnership acquired Jacobs' interests in 23 properties in January 2001. At June
30, 2003, CBL's Predecessor owned a 15.7% limited partnership interest, Jacobs
owned a 21.4% limited partnership interest and third parties owned an 8.9%
limited partnership interest in the Operating Partnership. CBL's Predecessor
also owned 2.3 million shares of the Company's common stock at June 30, 2003,
for a combined total interest of 19.7% in the Operating Partnership.
Under the terms of the Operating Partnership's limited partnership
agreement, each of the limited partners has the right to exchange all or a
portion of its partnership interests for shares of the Company's common stock or
their cash equivalent, at the Company's election. In such case, the Company
assumes the limited partner's ownership of its interests in the Operating
Partnership. The number of shares of common stock received by a limited partner
of the Operating Partnership upon exercise of its exchange rights will be equal
on a one-for-one basis to the number of partnership units exchanged by the
limited partner. The amount of cash received by the limited partner, if the
Company elects to pay cash, will be based on the trading price at the time of
exercise of the shares of common stock that would otherwise have been received
by the limited partner in the exchange. Neither the limited partnership
interests in the Operating Partnership nor the shares of common stock of the
Company are subject to any right of mandatory redemption.
7
The Operating Partnership conducts the Company's property management and
development activities through CBL & Associates Management, Inc. (the
"Management Company") to comply with certain requirements of the Internal
Revenue Code of 1986, as amended (the "Code"). The Operating Partnership has a
controlling financial interest in the Management Company based on the following
factors:
|X| The Operating Partnership holds 100% of the preferred stock and owns
6% of the common stock of the Management Company. Through its
ownership of the preferred stock, the Operating Partnership has the
right to perpetually receive 95% of the economic benefits of the
Management Company's operations.
|X| The Operating Partnership provides all of the operating capital of the
Management Company.
|X| The Management Company does not perform any material services for
entities in which the Operating Partnership is not a significant
investor.
|X| The remaining 94% of the Management Company's common stock is owned by
individuals who are directors and/or officers of the Company (with the
exception of one individual who is a member of the immediate family of
a director of the Company) and whose interests are aligned with those
of the Company. These individuals contributed nominal amounts of
equity in exchange for their interest in the Management Company's
common stock.
|X| All of the members of the Management Company's Board of Directors are
members of the Company's Board of Directors.
All of these factors result in the Company having a controlling financial
interest in the Management Company and, accordingly, the Management Company is
treated as a consolidated subsidiary.
CBL & Associates Properties, Inc., the Operating Partnership and the
Management Company are collectively referred to herein as "the Company".
Note 2 - INVESTMENT IN UNCONSOLIDATED AFFILIATES
The Operating Partnership owns non-controlling interests in four regional
malls, two associated centers and two community centers, as well as one mall
under construction, vacant land held for sale or lease and one development
property. Condensed combined financial statement information for the
unconsolidated affiliates is as follows:
Company's Share for the
Total for the Six Months Six Months
Ended June 30, Ended June 30,
---------------------------- ---------------------------
2003 2002 2003 2002
------------ ----------- ----------- -----------
Revenues $ 20,516 $ 26,654 $ 11,954 $ 11,351
Depreciation and amortization (3,673) (3,539) (2,019) (1,772)
Interest expense (5,331) (6,707) (3,882) (2,322)
Other operating expenses (5,455) (7,399) (3,565) (3,155)
------------ ----------- ----------- ----------
Income from operations $ 6,057 $ 9,009 $ 2,488 $ 4,102
============ =========== =========== ==========
Note 3 - MORTGAGE AND OTHER NOTES PAYABLES
Mortgage and other notes payable consisted of the following at June 30,
2003 and December 31, 2002, respectively:
8
June 30, 2003 December 31, 2002
------------------------------- ---------------------------
Weighted Weighted
Average Average
Interest Interest
Amount Rate(1) Amount Rate(1)
--------------- ------------ -------------- ------------
Fixed-rate debt:
Non-recourse loans on operating properties $ 1,973,945 7.02% $ 1,867,915 7.16%
--------------- --------------
Variable-rate debt:
Recourse term loans on operating properties 305,721 3.73% 290,954 3.98%
properties
Lines of credit 245,000 2.15% 221,275 2.69%
Construction loans 16,248 2.71% 21,935 3.08%
--------------- --------------
Total variable-rate debt 566,969 3.02% 534,164 3.41%
--------------- --------------
Total $ 2,540,914 6.13% $ 2,402,079 6.32%
=============== ==============
(1) Weighted-average interest rate before amortization of deferred financing costs.
On February 26, 2003, the Company obtained an $85,000, non-recourse loan
that is secured by Westmoreland Mall and Westmoreland Crossing in Greensburg,
PA. The loan bears interest at 5.05% and has a term of ten years with payments
based on a 25-year amortization schedule.
On February 28, 2003, the Company entered into a new secured credit
facility for $255,000. This new credit facility replaced both the Company's
$130,000 secured credit facility and its unsecured facility of $105,275. The new
credit facility bears interest at LIBOR plus 100 basis points, expires in
February 2006, and has a one-year extension, which is at the Company's election.
Six regional malls and three associated centers secure the new credit facility.
As discussed in Note 6, the Company assumed $40,000 of debt in connection
with its acquisition of Sunrise Mall on May 1, 2003. The debt bears interest at
LIBOR plus 300 basis points, with a floor of 4.90%, and matures in May 2004.
The Company's credit facilities total $365,000, of which $99,566 was
available at June 30, 2003. In addition to the $245,000 of outstanding
borrowings under these credit facilities, there were also $20,434 outstanding
under letters of credit. Additionally, the Company had other credit facilities
totaling $19,585 that are used only for issuances of letters of credit, of which
$5,930 was available at June 30, 2003.
As of June 30, 2003, the Company had total commitments under construction
loans of $29,018, of which $12,965 was available to be used for completion of
construction and redevelopment projects and replenishment of working capital
previously used for construction. The Company also had $12,276 available in
unfunded construction loans on operating properties that can be used to
replenish working capital previously used for construction.
The weighted average remaining term of the Company's consolidated debt was
5.3 years at June 30, 2003 and 5.7 years at December 31, 2002.
In May 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections", which rescinds SFAS No. 4. As a
result, gains and losses from extinguishments of debt should be classified as
extraordinary items only if they meet the criteria of Accounting Principles
Board Opinion No. 30 ("APB 30"). SFAS No. 145 was effective for the Company on
January 1, 2003. All losses on extinguishment of debt that were classified as an
extraordinary item in prior periods have been reclassified to expense in the
accompanying consolidated statements of operations.
Fourteen malls, five associated centers and the office building are owned
by special purpose entities that are included in the consolidated financial
statements. The sole business purpose of the special purpose entities is the
9
ownership and operation of the properties. The mortgaged real estate and other
assets owned by these special purpose entities are restricted under the loan
agreements in that they are not available to settle other debts of the Company.
However, so long as the loans are not under an event of default, as defined in
the loan agreements, the cash flows from these properties, after payments of
debt service, operating expenses and reserves, are available for distribution to
the Company.
Note 4 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to manage exposure to
interest rate risks inherent in variable-rate debt and does not use them for
trading or speculative purposes. At June 30, 2003, the Company had one interest
rate swap agreement, which was designated as a cash flow hedge, with a notional
amount of $80,000 that expires August 30, 2003. Under this interest rate swap
agreement, the Company receives payments at a rate equal to LIBOR (1.125% at
June 30, 2003) and pays interest at a fixed rate of 5.83%. The Company also had
one interest rate cap of 5.50%, which expires May 7, 2004, that was in place on
$40,000 of variable rate debt that was assumed in connection with the
acquisition of Sunrise Mall during the second quarter (see Note 6).
At June 30, 2003, the interest rate swap's fair value of $(626) was
recorded in accounts payable and accrued liabilities. The interest rate cap's
fair value was $0 at June 30, 2003. For the quarter, adjustments of $917 were
recorded as adjustments in other comprehensive income. Over time, unrealized
gains and losses held in accumulated other comprehensive loss will be
reclassified to earnings. This reclassification occurs in the same period or
periods that the hedged cash flows affect earnings. The Company estimates that
it will reclassify the entire balance of $(626) to earnings as interest expense
by August 30, 2003.
The Company is exposed to credit losses if counterparties to the swap and
cap agreements are unable to perform; therefore, the Company continually
monitors the credit standing of the counterparties.
Note 5 - SEGMENT INFORMATION
The Company measures performance and allocates resources according to
property type, which is determined based on certain criteria such as type of
tenants, capital requirements, economic risks, leasing terms, and short- and
long-term returns on capital. Rental income and tenant reimbursements from
tenant leases provide the majority of revenues from all segments. Information on
the Company's reportable segments is presented as follows:
10
Associated Community
Three Months Ended June 30, 2003 Malls Centers Centers All Other Total
- -------------------------------------- ------------ ------------ ------------ ------------ ---------
Revenues $ 138,824 $ 5,804 $ 14,971 $ 5,420 $ 165,019
Property operating expenses (1) (47,364) (1,298) (3,583) 1,759 (50,486)
Interest expense (34,425) (948) (2,048) (942) (38,363)
Other expense -- -- -- (2,315) (2,315)
Gain on sales of real estate assets -- -- 183 2,819 3,002
------------ ------------ ------------ ------------ ---------
Segment profit and loss $ 57,035 $ 3,558 $ 9,523 $ 6,741 76,857
============ ============ ============ ============
Depreciation and amortization (27,690)
General and administrative (6,644)
Interest income 592
Loss on extinguishment of debt (167)
Equity in earnings and minority
interest in earnings (18,141)
---------
Income before discontinued operations $ 24,807
=========
Capital expenditures (2) $ 96,969 $ 9,463 $ 4,313 $ 5,673 $ 117,418
Associated Community
Three Months Ended June 30, 2002 Malls Centers Centers All Other Total
- -------------------------------------- ------------ ------------ ------------ ------------ ---------
Revenues $ 123,169 $ 4,950 $ 14,030 $ 5,569 $ 147,718
Property operating expenses (1) (43,205) (877) (3,389) 136 (47,335)
Interest expense (28,811) (980) (2,401) (1,858) (34,050)
Other expense -- -- -- (2,060) (2,060)
Gain on sales of real estate assets -- -- -- 1,789 1,789
------------ ------------ ------------ ------------ ---------
Segment profit and loss $ 51,153 $ 3,093 $ 8,240 $ 3,576 66,062
============ ============ ============ ============
Depreciation and amortization (23,646)
General and administrative (5,466)
Interest income 230
Loss on extinguishment of debt (1,240)
Equity in earnings and minority
interest in earnings (15,536)
---------
Income before discontinued operations $ 20,404
=========
Capital expenditures (2) $ 121,516 $ 219 $ 6,906 $ 26,498 $ 155,139
11
Associated Community
Six Months Ended June 30, 2003 Malls Centers Centers All Other Total
- -------------------------------------- ------------ ------------ ------------ ------------ ---------
Revenues $ 279,442 $ 11,199 $ 30,204 $ 10,147 $ 330,992
Property operating expenses (1) (95,196) (2,636) (7,438) 1,962 (103,308)
Interest expense (67,236) (1,900) (3,989) (2,194) (75,319)
Other expense -- -- -- (4,656) (4,656)
Gain (loss) on sales of real estate
assets (5) -- 164 3,947 4,106
------------ ------------ ------------ ------------ ---------
Segment profit and loss $ 117,005 $ 6,478 $ 18,681 $ 9,651 151,815
============ ============ ============ ============
Depreciation and amortization (54,002)
General and administrative (12,997)
Interest income 1,165
Loss on extinguishment of debt (167)
Equity in earnings and minority
interest in earnings (37,561)
---------
Income before discontinued operations $ 48,253
=========
Total assets (2) $3,182,195 $ 189,142 $ 442,704 $ 135,666 $3,949,707
Capital expenditures (2) $ 134,454 $ 15,026 $ 11,002 $ 8,700 $ 169,182
Associated Community
Six Months Ended June 30, 2002 Malls Centers Centers All Other Total
- -------------------------------------- ------------ ------------ ------------ ------------ ---------
Revenues $ 244,587 $ 9,393 $ 29,965 $ 7,936 $ 291,881
Property operating expenses (1) (84,743) (2,189) (7,757) 4,945 (89,744)
Interest expense (58,974) (1,933) (5,041) (4,889) (70,837)
Other expense -- -- -- (5,807) (5,807)
Gain on sales of real estate assets (283) -- 2,361 126 2,204
------------ ------------ ------------ ------------ ---------
Segment profit and loss $ 100,587 $ 5,271 $ 15,877 $ 5,962 127,697
============ ============ ============ ============
Depreciation and amortization (46,127)
General and administrative (11,206)
Interest income 983
Loss on extinguishment of debt (3,187)
Equity in earnings and minority
interest in earnings (30,563)
---------
Income before discontinued operations $ 37,597
=========
Total assets (2) $2,848,354 $ 121,899 $ 446,496 $ 115,912 $3,532,661
Capital expenditures (2) $ 195,656 $ 6,112 $ 26,133 $ 26,920 $ 254,821
(1) Property operating expenses include property operating expenses, real estate
taxes and maintenance and repairs. (2) Amounts include investments in
unconsolidated affiliates. Developments in progress are included in the All
Other category.
12
Note 6 - ACQUISITIONS
On May 1, 2003, the Company acquired Sunrise Mall and its associated
center, Sunrise Commons, which are located in Brownsville, TX. The results of
operations of both Sunrise Mall and Sunrise Commons have been included in the
consolidated financial statements since the date of acquisition. The total
purchase price of $80,686 consisted of $40,686 in cash and the assumption of
$40,000 of debt. The $40,000 of debt bears interest at LIBOR plus 300 basis
points, with a floor of 4.90%, and matures in May 2004. This debt was assumed
subject to a pre-existing interest rate cap of 5.50% The following table
summarizes the estimated fair values of the assets acquired and liabilities
assumed as of the acquisition date.
Land $ 5,765
Building and improvements 55,390
Lease assets 19,531
----------
Total assets 80,686
Debt (40,000)
----------
Net assets acquired $ 40,686
==========
Note 7 - DISCONTINUED OPERATIONS
On February 28, 2003, the Company sold a community center for $7,760 and
recognized a net gain on discontinued operations of $2,935. Total revenues for
this community center were $116 and $389 for the six months ended June 30, 2003
and 2002, respectively, and $0 and $197 for the three months ended June 30, 2003
and 2002, respectively.
Note 8- EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income
available to common shareholders by the weighted-average number of unrestricted
common shares outstanding for the period. Diluted EPS assumes the issuance of
common stock for all potential dilutive common shares outstanding. The limited
partners' rights to convert their minority interest in the Operating Partnership
into shares of common stock are not dilutive. The following summarizes the
impact of potential dilutive common shares on the denominator used to compute
earnings per share:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ----------- -----------
Weighted average shares outstanding 30,036 29,183 29,944 27,826
Effect of nonvested stock awards (150) (99) (138) (98)
------------ ------------ ----------- -----------
Denominator - basic earnings per share 29,886 29,084 29,806 27,728
Effect of dilutive securities:
Stock options, nonvested stock awards and
deemed shares related to deferred
compensation plans 1,180 859 1,136 813
------------ ------------ ----------- -----------
Denominator - diluted earnings per share 31,066 29,943 30,942 28,541
============ ============ =========== ===========
Note 9- COMPREHENSIVE INCOME
Comprehensive income includes all changes in shareholders' equity during
the period, except those resulting from investments by shareholders and
distributions to shareholders. Comprehensive income consisted of the following
components:
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- ----------------------------
2003 2002 2003 2002
--------------- ------------- ------------- ------------
Net income $24,714 $20,921 $51,182 $39,922
Gain on current period cash flow hedges 917 466 1,771 2,608
--------------- ------------- ------------- ------------
Comprehensive income $25,631 $21,387 $52,953 $42,530
=============== ============= ============= ============
13
Note 10 - CONTINGENCIES
The Company is currently involved in certain litigation that arises in the
ordinary course of business. It is management's opinion that the pending
litigation will not materially affect the financial position or results of
operations of the Company.
Based on environmental studies completed to date, management believes any
exposure related to environmental cleanup will not materially affect the
Company's financial position or results of operations.
The Company has guaranteed all of the construction debt related to
Waterford Commons, a community center in Waterford, CT, which is owned in a
joint venture with a third party that owns a minority interest. The total amount
of the commitment for this construction loan is $30,000, of which $10,762 was
outstanding at June 30, 2003. The Company will receive a fee from the joint
venture in exchange for the guaranty, which will be recognized as revenue pro
rata over the term of the guaranty to the extent of the third-party partner's
ownership interest. The guaranty will expire when the construction loan matures
in July 2004. The fee had not been received as of June 30, 2003.
The Company has guaranteed 50% of the debt of Parkway Place L.P., an
unconsolidated affiliate in which the Company owns a 45% interest, which owns
Parkway Place in Huntsville, AL. The total amount outstanding at June 30, 2003,
was $29,235, of which the Company has guaranteed $14,618. The guaranty will
expire when the related debt matures in December 2003. The Company did not
receive a fee for issuing this guaranty.
Under the terms of the partnership agreement of Mall of South Carolina
L.P., an unconsolidated affiliate in which the Company owns a 50% interest, the
Company has guaranteed 100% of the construction debt to be incurred to develop
Coastal Grand in Myrtle Beach, SC. The Company received a fee of $1,571 for this
guaranty when it was issued during the three months ended June 30, 2003. The
Company will recognize one-half of this fee as revenue pro rata over the term of
the guaranty until it expires in May 2006, which represents the portion of the
fee attributable to the third-party partner's ownership interest. The Company
recognized $44 of revenue related to this guaranty during the three months ended
June 30, 2003.
Note 11 - STOCK-BASED COMPENSATION
Historically, the Company has accounted for stock options using the
intrinsic value method of APB No. 25, "Accounting for Stock Issued to
Employees". Effective January 1, 2003, the Company will record the expense
associated with stock options granted after January 1, 2003, on a prospective
basis in accordance with the fair value and transition provisions of SFAS No.
123, "Accounting for Stock Based Compensation". There were no stock options
granted during the six months ended June 30, 2003.
No stock-based compensation expense related to stock options granted prior
to January 1, 2003, has been reflected in net income since all options granted
had an exercise price equal to the fair value of the Company's common stock on
the date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to employee stock options:
14
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ---------------------------
2003 2002 2003 2002
------------- ------------ ------------ ------------
Net income available to common shareholders, as reported $21,022 $18,911 $43,798 $36,295
Compensation expense determined under fair value method (148) (111) (302) (226)
------------- ------------ ------------ ------------
Pro forma net income available to common shareholders $20,874 $18,800 $43,496 $36,069
============= ============ ============ ============
Earnings per share:
Basic, as reported $0.70 $0.65 $1.47 $1.31
============= ============ ============ ============
Basic, pro forma $0.70 $0.65 $1.46 $1.30
============= ============ ============ ============
Diluted, as reported $0.68 $0.63 $1.42 $1.27
============= ============ ============ ============
Diluted, pro forma $0.67 $0.63 $1.41 $1.26
============= ============ ============ ============
Note 12 - Recent Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires that the costs
associated with exit or disposal activity be recognized and measured at fair
value when the liability is incurred. The provisions of SFAS No. 146 are
effective for exit or disposal activities initiated after December 31, 2002.
Since the Company typically does not engage in significant disposal activities,
the implementation of SFAS No. 146 in 2003 did not have a significant impact on
the Company's reported financial results.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of SFAS No. 5, 57, and
107, and rescission of FASB Interpretation No. 34." The interpretation
elaborates on the disclosures to be made by a guarantor in its financial
statements. It also requires a guarantor to recognize a liability for the fair
value of the obligation undertaken in issuing the guarantee at the inception of
a guarantee, which is effective for guarantees issued or modified after December
31, 2002. The Company adopted the disclosure provisions of FASB Interpretation
No. 45 in the fourth quarter of 2002. In accordance with the interpretation, the
Company adopted the remaining provisions of FASB Interpretation No. 45 effective
January 1, 2003. See Note 10 for disclosures related to the Company's
guarantees.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51". FASB Interpretation No. 46 requires the consolidation of entities in
which an enterprise absorbs a majority of the entity's expected losses, receives
a majority of the entity's expected residual returns, or both, as a result of
ownership, contractual or other financial interests in the entity. Currently,
entities are generally consolidated by an enterprise when it has a controlling
financial interest through ownership of a majority voting interest in the
entity. The consolidation provisions of FASB Interpretation No. 46 will be
effective for the Company beginning with the quarter ending September 30, 2003,
for entities formed prior to January 1, 2003. The Company is currently
evaluating the effects of the issuance of FASB Interpretation No. 46.
Note 13 - NONCASH INVESTING AND FINANCING ACTIVITIES
The Company's noncash investing and financing activities were as follows
for the six months ended June 30, 2003 and 2002:
Six Months Ended
June 30,
-------------------------
2003 2002
-------------------------
Debt assumed to acquire property interest $ 40,000 $ 40,709
=========================
Issuance of minority interest to acquire property interest $ -- $ 4,487
=========================
15
Note 14 - SUBSEQUENT EVENTS
On July 25, 2003, the Company announced that it had entered into separate
agreements to acquire four regional malls for a total purchase price of
$340,000. The purchase price will consist of cash and the assumption of $170,000
of non-recourse fixed rate debt with a weighted average interest rate of 7.71%.
The Company expects the acquisition to close in at least two separate
transactions beginning in the third quarter of 2003.
On August 6, 2003, the Company agreed to issue 4,200,000 depositary shares
in a public offering, each representing one-tenth of a share of 7.75% Series C
cumulative redeemable preferred stock with a par value of $0.01 per share. The
underwriters of the offering have been granted an option, exercisable for 30
days, to purchase up to an additional 630,000 depositary shares. The Series C
preferred stock has a liquidation preference of $250.00 per share ($25.00 per
depositary share). Dividends on the Series C preferred stock are cumulative,
accrue from the date of issuance and are payable quarterly in arrears at a rate
of $19.375 per share ($1.9375 per depositary share) per annum. The Series C
preferred stock has no stated maturity, is not subject to any sinking fund or
mandatory redemption and is not redeemable before August 22, 2008. The net
proceeds will be used to partially fund the purchase price of the four malls
discussed in the preceding paragraph and for general corporate purposes,
including funding future developments, expansions and acquisitions. The offering
is scheduled to close on August 22, 2003.
On August 6, 2003, the Company sold a community center in for $1.1 million
and recognized a gain of $0.4 million. The results of operations of this
community center will be reflected as discontinued operations beginning in the
third quarter of 2003.
Note 15 - RECLASSIFICATIONS
Certain reclassifications have been made to prior periods' financial
information to conform to the current period presentation.
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and accompanying notes that are included in this Form 10-Q.
Certain statements made in this section or elsewhere in this report may be
deemed "forward looking statements" within the meaning of the federal securities
laws. Although the Company believes the expectations reflected in any
forward-looking statements are based on reasonable assumptions, the Company can
give no assurance that these expectations will be attained, and it is possible
that actual results may differ materially from those indicated by these
forward-looking statements due to a variety of risks and uncertainties. Such
risks and uncertainties include, without limitation, general industry, economic
and business conditions, interest rate fluctuations, costs of capital and
capital requirements, availability of real estate properties, inability to
consummate acquisition opportunities, competition from other companies and
retail formats, changes in retail rental rates in the Company's markets, shifts
in customer demands, tenant bankruptcies or store closings, changes in vacancy
rates at the Company's properties, changes in operating expenses, changes in
applicable laws, rules and regulations, the ability to obtain suitable equity
and/or debt financing and the continued availability of financing in the amounts
and on the terms necessary to support the Company's future business. The Company
disclaims any obligation to update or revise any forward-looking statements to
reflect actual results or changes in the factors affecting the forward-looking
information.
16
GENERAL BACKGROUND
See Note 1 to the unaudited consolidated financial statements for a
description of the Company.
The Company classifies its regional malls into two categories - malls that
have completed their initial lease-up ("Stabilized Malls") and malls that are in
their initial lease-up phase ("Non-Stabilized Malls"). The Non-Stabilized Mall
category is presently comprised of The Lakes Mall in Muskegon, MI, which opened
in August 2001, and Parkway Place Mall in Huntsville, AL, which opened in
October 2002.
RESULTS OF OPERATIONS
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30,
2003 TO THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002
The following significant transactions impact the comparison of the results
of operations for the three months ended June 30, 2003 to the comparable period
ended June 30, 2002:
|X| The Company has opened or acquired nine properties since May 1, 2002.
Therefore, the three months ended June 30, 2003, include a greater
amount of operations for these properties than the comparable period a
year ago. The properties opened or acquired are as follows:
Open/Acquisition
Project Name Location Type of Addition Date
---------------------------- ------------------- -------------------- -----------------
Richland Mall Waco, TX Acquisition May 2002
Panama City Mall Panama City, FL Acquisition May 2002
Parkdale Crossing Beaumont, TX New development November 2002
Westmoreland Mall Greensburg, PA Acquisition December 2002
Westmoreland Crossing Greensburg, PA Acquisition December 2002
Sunrise Mall Brownsville, TX Acquisition May 2003
Sunrise Commons Brownsville, TX Acquisition May 2003
The Shoppes at Hamilton Place Chattanooga, TN New development May 2003
Cobblestone Village St. Augustine, FL New development May 2003
|X| In December 2002, the Company acquired the remaining ownership interest
in East Towne Mall, West Towne Mall and West Towne Crossing in Madison,
WI. These properties were consolidated during the second quarter of
2003, but were accounted for as unconsolidated affiliates during the
second quarter of 2002.
17
(Dollars in Thousands)
2003 2002 $ Variance % Variance
-------- -------- ---------- ----------
Total revenues $165,019 $147,718 $17,301 11.7%
-------- -------- ---------- ----------
Expenses:
Property operating, real estate taxes and
maintenance and repairs 50,486 47,335 3,151 6.7%
Depreciation and amortization 27,690 23,646 4,044 17.1%
General and administrative 6,644 5,466 1,178 21.6%
Other 2,315 2,060 255 12.4%
-------- -------- ---------- ----------
Total expenses 87,135 78,507 8,628 11.0%
-------- -------- ---------- ----------
Income from operations 77,884 69,211 8,673 12.5%
Interest income 592 230 362 157.4%
Interest expense (38,363) (34,050) (4,313) 12.7%
Loss on extinguishment of debt (167) (1,240) 1,073 (86.5)%
Gain on sales of real estate assets 3,002 1,789 1,213 67.8%
Equity in earnings of unconsolidated affiliates 731 2,015 (1,284) (63.7)%
Minority interest in earnings:
Operating partnership (17,979) (16,335) (1,644) 10.1%
Shopping center properties (893) (1,216) 323 (26.6)%
-------- -------- ---------- ----------
Income before discontinued operations 24,807 20,404 4,403 21.6%
Income from discontinued operations (93) 517 (610) 118.0%
-------- -------- ---------- ----------
Net income 24,714 20,921 3,793 18.1%
Preferred dividends (3,692) (2,010) (1,682) 83.7%
-------- -------- ---------- ----------
Net income available to common shareholders $21,022 $18,911 $2,111 11.2%
======== ======== ========== ==========
Revenues
The $17.3 million increase in revenues resulted primarily from:
|X| an increase in minimum rents and tenant reimbursements of $15.2 million
attributable to the nine properties opened or acquired since May 1,
2002 and the three properties that are now consolidated,
|X| an increase in minimum rents and tenant reimbursements of $2.9 million
from the Company's remaining properties, including a reduction in lease
termination fees of $2.6 million to $1.2 million in the second quarter
of 2003 compared to $3.8 million in the second quarter of 2002. The
Company's cost recovery percentage increased to 101% for the second
quarter of 2003 compared to 92.5% for the second quarter of 2002 due to
increases in occupancy and the recovery of capital expenditures from
tenants,
|X| an increase in other revenues of $0.8 million due to an increase in the
revenues of the Company's taxable REIT subsidiary, |X| a reduction in
percentage rents of $0.6 million, which resulted from a decline at the
Company's existing properties of $0.8 offset by an increase of $0.2
million from the addition of the twelve properties discussed above, and
|X| a reduction of $1.1 million in management, development and leasing
fees, which resulted from a decrease in management and leasing fees
related to the three properties that are now consolidated.
Expenses
The $3.2 million increase in property operating expenses, including real
estate taxes and maintenance and repairs, resulted from:
|X| an increase of $0.5 million attributable to the nine properties opened
or acquired since May 1, 2002 and the three properties that are now
consolidated and
|X| an increase of $2.7 million in general operating costs at the Company's
remaining properties.
18
The increase of $4.0 million in depreciation and amortization expense was
primarily due to:
|X| an increase of $2.8 million attributable to the nine properties opened
or acquired since May 1, 2002 and the three properties that are now
consolidated and
|X| an increase of $1.2 million as a result of the ongoing capital
expenditures made by the Company for renovations, expansions, tenant
allowances and deferred maintenance.
General and administrative expenses increased $1.2 million primarily as a
result of additional salaries and benefits of personnel added to manage newly
opened or acquired properties, as well as annual increases in salaries and
benefits of existing personnel.
Other expense increased due to an increase in operating expenses of the
Company's taxable REIT subsidiary.
Interest Income
The increase of $0.4 million in interest income results from the increase
in the amount of mortgage and other notes receivable outstanding compared to the
prior year period. The increase in mortgage and other notes receivable primarily
relates to mortgage notes receivable from buyers of real estate assets the
Company has sold.
Interest Expense
Interest expense increased by $4.3 million primarily due to the additional
debt related to the nine properties opened or acquired since May 1, 2002 and the
three properties that are now consolidated.
Loss on Extinguishment of Debt
The loss on extinguishment of debt of $167,000 recognized during the second
quarter of 2003 resulted from the write-off of unamortized deferred financing
costs related to a loan that was retired before its scheduled maturity. The loss
on extinguishment of debt in the second quarter of 2002 consisted of the
write-off of $1.2 million of unamortized deferred financing costs.
Gain on Sales of Real Estate Assets
The gain on sales of $3.0 million in the second quarter of 2003 was
primarily from gains on sales of ten outparcels and an option on land. The gain
on sales of $1.8 million in the second quarter of 2002 resulted from gains on
sales of two outparcels offset by a loss on one outparcel.
Equity in Earnings of Unconsolidated Affiliates
The three properties that are now consolidated accounted for $1.2 million
of the decline in equity in earnings of unconsolidated affiliates.
Discontinued Operations
Discontinued operations in the second quarter of 2003 represent the true-up
of estimated costs related to the sale of Capital Crossing to the actual amounts
that became known in the second quarter. Discontinued operations in the second
quarter of 2002 represent the operations for Capital Crossing plus five
community centers and one office building that were sold during 2002. In
accordance with SFAS No. 144, the results of operations of operating properties
that have been sold are reclassified and presented as discontinued operations
for all periods presented. One of the community centers and the office building
were sold for gains and one community center was sold at a loss during the
second quarter of 2002.
19
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003 TO
THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002
The following significant transactions impact the comparison of the results
of operations for the six months ended June 30, 2003 to the comparable period
ended June 30, 2002:
|X| The Company has opened or acquired nine properties since May 1, 2002.
Therefore, the six months ended June 30, 2003, include a greater amount
of operations for these properties than the comparable period a year
ago. The properties opened or acquired are as follows:
Open/Acquisition
Project Name Location Type of Addition Date
------------------------------ -------------------- -------------------- -----------------
Richland Mall Waco, TX Acquisition May 2002
Panama City Mall Panama City, FL Acquisition May 2002
Parkdale Crossing Beaumont, TX New development November 2002
Westmoreland Mall Greensburg, PA Acquisition December 2002
Westmoreland Crossing Greensburg, PA Acquisition December 2002
Sunrise Mall Brownsville, TX Acquisition May 2003
Sunrise Commons Brownsville, TX Acquisition May 2003
The Shoppes at Hamilton Place Chattanooga, TN New development May 2003
Cobblestone Village St. Augustine, FL New development May 2003
|X| In December 2002, the Company acquired the remaining ownership interest
in East Towne Mall, West Towne Mall and West Towne Crossing in Madison,
WI. These properties were consolidated during the six months ended June
30, 2003, but were accounted for as unconsolidated affiliates during
the six months ended June 30, 2002.
(Dollars in Thousands)
2003 2002 $ Variance % Variance
-------- -------- ---------- ----------
Total revenues $330,992 $291,881 $39,111 13.4%
-------- -------- ---------- ----------
Expenses:
Property operating, real estate taxes and
maintenance and repairs 103,308 89,744 13,564 15.1%
Depreciation and amortization 54,002 46,127 7,875 17.1%
General and administrative 12,997 11,206 1,791 16.0%
Other 4,656 5,807 (1,157) (19.8)%
-------- -------- ---------- ----------
Total expenses 174,963 152,884 22,079 14.4%
-------- -------- ---------- ----------
Income from operations 156,029 138,997 17,032 12..3%
Interest income 1,165 983 182 18.5%
Interest expense (75,319) (70,837) (4,482) 6.3%
Loss on extinguishment of debt (167) (3,187) (3,020) (94.8)%
Gain on sales of real estate assets 4,106 2,204 1,902 86.3%
Equity in earnings of unconsolidated affiliates 2,488 4,102 (1,614) (39.3)%
Minority interest in earnings:
Operating partnership (38,616) (32,532) (6,084) 18.7%
Shopping center properties (1,433) (2,133) 700 (32.8)%
-------- -------- ---------- ----------
Income before discontinued operations 48,253 37,597 10,656 28.3%
Income from discontinued operations 2,929 2,325 604 26.0%
-------- -------- ---------- ----------
Net income 51,182 39,922 11,260 28.2%
Preferred dividends (7,384) (3,627) (3,757) 103.6%
-------- -------- ---------- ----------
Net income available to common shareholders $43,798 $36,295 $7,503 20.7%
======== ======== ========== ==========
20
Revenues
The $39.1 million increase in revenues resulted primarily from:
|X| an increase in minimum rents and tenant reimbursements of $28.8 million
attributable to the nine properties opened or acquired since the May 1,
2002 and the three properties that are now consolidated,
|X| an increase in minimum rents and tenant reimbursements of $13.1 million
from the Company's remaining properties, including a reduction in lease
termination fees of $3.0 million to $1.6 million in the first six
months of 2003 compared to $4.6 million for the same period in 2002.
The Company's cost recovery percentage increased to 98.9% for the first
six months of 2003 compared to 91.8% for the comparable periods of 2002
due to increases in occupancy and the recovery of capital expenditures
from tenants,
|X| a reduction in percentage rents of $1.0 million, which resulted from a
decline at the Company's existing properties of $1.5 million, offset by
an increase of $0.5 million from the addition of the properties
discussed above,
|X| a reduction of $1.0 million in management, development and leasing
fees, which resulted from a decrease in management and leasing fees
related to the three properties that are now consolidated, and
|X| a reduction in other revenues of $0.8 million due to a reduction in
the revenues of the Company's taxable REIT subsidiary.
Expenses
The $13.6 million increase in property operating expenses, including real
estate taxes and maintenance and repairs, resulted from:
|X| an increase of $10.6 million attributable to the nine properties opened
or acquired since May 1, 2002 and the three properties that are now
consolidated and
|X| an increase of $3.0 million in general operating costs at the Company's
remaining properties.
The increase of $7.9 million in depreciation and amortization expense was
primarily due to:
|X| an increase of $5.1 million attributable to the nine properties opened
or acquired since the first quarter of 2002 and the three properties
that are now consolidated and
|X| an increase of $2.8 million as a result of the ongoing capital
expenditures made by the Company for renovations, expansions, tenant
allowances and deferred maintenance.
General and administrative expenses increased $1.8 million primarily as a
result of additional salaries and benefits of personnel added to manage newly
opened or acquired properties, as well as annual increases in salaries and
benefits of existing personnel.
Other expense decreased due to a reduction in operating expenses of the
Company's taxable REIT subsidiary.
Interest Income
The increase of $0.2 million in interest income results from the increase
in the amount of mortgage and other notes receivable outstanding compared to the
prior year period. The increase in mortgage and other notes receivable primarily
relates to mortgage notes receivable from buyers of real estate assets the
Company has sold.
Interest Expense
Interest expense increased $4.5 million primarily because of the additional
debt related to the properties opened or acquired since May 1, 2002 and the
properties that are now consolidated.
21
Loss on Extinguishment of Debt
The loss on extinguishment of debt of $167,000 recognized during the first
six months of 2003 resulted from the write-off of unamortized deferred financing
costs related to a loan that was retired before its scheduled maturity. The loss
on extinguishment of debt in the first six months of 2002 consisted of
prepayment penalties of $1.9 million and the write-off of $1.3 million of
unamortized deferred financing costs.
Gain on Sales of Real Estate Assets
The gain on sales of $4.1 million in 2003 resulted from gains on sales of
12 outparcels and two options on land. The gain on sales of $2.2 million in 2002
resulted from gains on five outparcels offset by losses on two outparcels and
one department store building.
Equity in Earnings of Unconsolidated Affiliates
The decrease in equity in earnings of unconsolidated affiliates of $1.6
million was due to a reduction of $2.0 million related to the three properties
that are now consolidated, offset by improvements in the operations of the
remaining unconsolidated affiliates. The improvement from the remaining
unconsolidated affiliates was primarily attributable to Kentucky Oaks Mall,
where occupancy increased 4.90% compared to the prior year. The increase in the
equity in earnings of Kentucky Oaks Mall was $0.7 million.
Discontinued Operations
Discontinued operations in 2003 relate to Capital Crossing, a community
center in Raleigh, NC, that was sold during the first quarter of 2003 for a gain
of $2.9 million. Discontinued operations in 2002 represent the operations of
Capital Crossing plus five community centers and one office building that were
sold during 2002. Two of the community centers and the office building were sold
for gains and one community center was sold at a loss in the first six months of
2002.
PERFORMANCE MEASUREMENTS
The shopping center business is, to some extent, seasonal in nature with
tenants achieving the highest levels of sales during the fourth quarter because
of the holiday season. The malls earn most of their "temporary" rents (rents
from short-term tenants), during the holiday period. Thus, occupancy levels and
revenue production are generally the highest in the fourth quarter of each year.
Results of operations realized in any one quarter may not be indicative of the
results likely to be experienced over the course of the fiscal year.
The Company's consolidated revenues were derived from the Company's
property types as follows for the six months ended June 30, 2003:
Malls 84.4%
Associated centers 3.4%
Community centers 9.1%
Mortgages, office building and other 3.1%
22
Sales and Occupancy Costs
For those tenants who occupy 10,000 square feet or less and have reported
sales, mall shop sales in the 53 Stabilized Malls decreased by 1.5% on a
comparable per square foot basis to $125.71 per square foot for the six months
ended June 30, 2003 from $127.61 per square foot for the six months ended June
30, 2002.
Total sales volume in the mall portfolio, including Non-Stabilized Malls,
decreased 0.5% to $1.325 billion for the six months ended June 30, 2003 from
$1.332 billion for the six months ended June 30, 2002. Sales were negatively
impacted by severe winter weather and the effects of the war in Iraq.
Occupancy costs as a percentage of sales for the Stabilized Malls for the
six months ended June 30, 2003 and 2002, were 14.5% and 14.1%, respectively.
Occupancy costs as a percentage of sales are generally higher in the first three
quarters of the year as compared to the fourth quarter due to the seasonality of
retail sales.
Occupancy
Occupancy for the Company's portfolio was as follows:
At June 30,
---------------------------------
2003 2002
----------------- ---------------
Total portfolio occupancy 92.4% 91.1%
Total mall portfolio 91.7% 89.4%
Stabilized Malls (53) 92.2% 89.7%
Non-Stabilized Malls (2) 77.8% 84.5%
Associated centers 91.7% 95.9%
Community centers 94.0% 94.3%
Occupancy for the associated centers declined due to the acquisition of
Westmoreland Crossing in Greensburg, PA, in December 2002, which has a 68,000
square foot former Ames store that is vacant. Excluding Westmoreland Crossing,
occupancy for the associated centers would have been 95.3% at June 30, 2003.
Occupancy for the Non-Stabilized Malls declined because Arbor Place in
Douglasville, GA, was moved from the Non-Stabilized Mall category to the
Stabilized Mall category.
Average Base Rents
Average base rents per square foot for the portfolio were as follows:
At June 30,
----------------------
Percentage
Increase
2003 2002 (Decrease)
-------- ------- ----------
Stabilized Malls $23.98 $23.22 3.3%
Non-Stabilized Malls 26.52 21.87 21.3%
Associated centers 9.88 9.78 1.0%
Community centers 9.39 9.65 (2.7)%
23
Leasing Results
The Company achieved the following results from renewal and new leasing for
the six months ended June 30, 2003, compared to the base rent at the end of the
lease term for spaces previously occupied:
Base Rent Base Rent
Per Square Per Square Percentage
Foot Foot Renewal/ Increase
Prior Lease New Lease (1) (Decrease)
-------------- -------------- -----------
Stabilized malls $21.53 $21.99 2.1%
Associated centers 15.33 14.43 (5.9)%
Community centers 10.31 10.46 1.5%
(1) Average base rent over the term of the lease.
CASH FLOWS
Cash provided by operating activities increased $2.3 million primarily due
to the additional operations of the nine properties opened or acquired since the
first quarter of 2002 and the three properties that are now consolidated.
Additionally, the Company's cost recovery ratio increased to 98.9% in 2003 from
91.8% in 2002 as a result of increased portfolio occupancy and the recovery of
capital expenditures from tenants.
Cash used in investing activities increased $42.6 million primarily due to
increases in other capital expenditures related to ongoing renovations of
properties and a significant decrease in the amount of proceeds received on
sales of real estate assets due to fewer transactions in the current year period
as compared to the prior year period.
Cash provided by financing activities was $20.5 million in 2003 as compared
to cash used in financing activities of $21.0 million in 2002. The change was
due to a significant decrease in the amount of loan borrowings and repayments, a
significant decrease in proceeds from issuances of common and preferred stocks,
an increase in distributions to minority investors and an increase in the amount
of dividends paid.
LIQUIDITY AND CAPITAL RESOURCES
The principal uses of the Company's liquidity and capital resources have
historically been for property development, expansions, renovations,
acquisitions, debt repayment and distributions to shareholders. In order to
maintain its qualification as a real estate investment trust for federal income
tax purposes, the Company is required to distribute at least 90% of its taxable
income, computed without regard to net capital gains or the dividends-paid
deduction, to its shareholders.
The Company's current capital structure includes:
|X| property specific mortgages, which are generally non-recourse,
|X| construction loans, term loans, and revolving lines of credit, which
have recourse to the Company
|X| common stock and preferred stock, |X| joint venture investments and
|X| a minority interest in the Operating Partnership.
The Company anticipates that the combination of its equity and debt sources
will, for the foreseeable future, provide adequate liquidity to continue its
capital programs substantially as in the past and make distributions to its
shareholders in accordance with the requirements applicable to real estate
investment trusts.
24
The Company's policy is to maintain a conservative debt-to-total-market
capitalization ratio in order to enhance its access to the broadest range of
capital markets, both public and private. Based on the Company's share of total
consolidated and unconsolidated debt and the market value of equity described
below, the Company's debt-to-total-market capitalization (debt plus market value
equity) ratio was 50.3% at June 30, 2003.
Equity
As a publicly traded company, the Company has access to capital through
both the public equity and debt markets.
The Company has an effective shelf registration statement with the
Securities and Exchange Commission, that authorizes the Company to publicly
issue shares of preferred stock and common stock, preferred and common stock
represented by depositary shares and warrants to purchase shares of common stock
up to $562.0 million, which includes $62.3 million that is available under a
previously filed shelf registration statement.
On August 6, 2003, the Company agreed to issue 4,200,000 depositary shares
in a public offering, each representing one-tenth of a share of 7.75% Series C
cumulative redeemable preferred stock with a par value of $0.01 per share. The
underwriters of the offering have been granted an option, exercisable for 30
days, to purchase up to an additional 630,000 depositary shares. The Series C
preferred stock has a liquidation preference of $250.00 per share ($25.00 per
depositary share). Dividends on the Series C preferred stock are cumulative,
accrue from the date of issuance and are payable quarterly in arrears at a rate
of $19.375 per share ($1.9375 per depositary share) per annum. The Series C
preferred stock has no stated maturity, is not subject to any sinking fund or
mandatory redemption and is not redeemable before August 22, 2008. The net
proceeds will be used to partially fund the purchase of the four malls to be
acquired as discussed in the Acquisitions section that follows and for general
corporate purposes, including funding future developments, expansions and
acquisitions. The offering is scheduled to close on August 22, 2003.
As of June 30, 2003, the minority interest in the Operating Partnership
includes the 15.7% ownership interest in the Operating Partnership held by the
Company's executive and senior officers that may be exchanged for approximately
8.8 million shares of common stock. Additionally, executive and senior officers
and directors own approximately 2.3 million shares of the Company's outstanding
common stock, for a combined total interest in the Operating Partnership of
approximately 19.7%.
Limited partnership interests issued to acquire the Richard E. Jacobs
Group's interest in a portfolio of properties in January 2001 and March 2002,
may be exchanged for approximately 12.0 million shares of common stock, which
represents a 21.4% interest in the Operating Partnership. Other third-party
interests may be exchanged for approximately 5.0 million shares of common stock,
which represents an 8.9% interest in the Operating Partnership.
Assuming the exchange of all limited partnership interests in the Operating
Partnership for common stock, there would be approximately 55.8 million shares
of common stock outstanding with a market value of approximately $2.40 billion
at June 30, 2003 (based on the closing price of $43.00 per share on June 30,
2003). The Company's total market equity is $2.57 billion, which includes 2.675
million shares of Series A preferred stock ($66.9 million based on a liquidation
preference of $25.00 per share) and 2.0 million shares of Series B preferred
stock ($100.0 million based on a liquidation preference of $50.00 per share).
The Company's executive and senior officers' and directors' ownership interests
had a market value of approximately $478.8 million at June 30, 2003.
25
Debt
The Company presents its total share of consolidated and unconsolidated
debt because the Company believes that this amount provides investors with a
clearer understanding of the Company's total debt obligations. The Company's
share of mortgage debt on consolidated properties, adjusted for minority
investors' interests in consolidated properties, and its pro rata share of
mortgage debt on unconsolidated properties, consisted of the following at June
30, 2003 (in thousands):
Minority
Company's Share Investors' Company's Weighted
of Share of Total Average
Consolidated Unconsolidated Consolidated Share Interest
Debt Debt Debt of Debt Rate(1)
Total -------------- ---------------- ------------ ------------- ----------
Fixed-rate debt:
Non-recourse loans on operating properties $1,973,945 $ 37,924 $(19,857) $1,992,012 7.05%
-------------- ---------------- ------------ -------------
Variable-rate debt:
Recourse term loans on operating properties 305,721 29,235 -- 334,956 3.66%
Lines of credit 245,000 -- -- 245,000 2.15%
Construction loans 16,248 14,962 -- 31,210 2.82%
-------------- ---------------- ------------ -------------
Total variable-rate debt 566,969 44,197 -- 611,166 3.01%
============== ================ ============ =============
Total $2,540,914 $ 82,121 $(19,857) $2,603,178 6.10%
============== ================ ============ =============
(1) Weighted-average interest rate before amortization of deferred financing costs.
On February 26, 2003, the Company obtained an $85.0 million, non-recourse
loan that is secured by Westmoreland Mall and Westmoreland Crossing in
Greensburg, PA. The loan bears interest at a fixed rate of 5.05% and has a term
of ten years with a 25-year amortization schedule.
On February 28, 2003, the Company entered into a new secured credit
facility for $255.0 million. This new credit facility replaced both the
Company's $130.0 million secured credit facility and its unsecured facility of
$105.3 million. The new credit facility bears interest at LIBOR plus 100 basis
points, expires in February 2006, and has a one-year extension, which is at the
Company's election. Six regional malls and three associated centers secure the
new credit facility.
The Company's credit facilities total $365.0 million, of which $82.6
million was available at June 30, 2003. Additionally, the Company had other
credit facilities totaling $19.6 million that are used only for issuances of
letters of credit, of which $5.9 million was available at June 30, 2003.
As of June 30, 2003, total commitments under construction loans were $161.8
million, of which $106.5 million was available to be used for completion of
construction and redevelopment projects and replenishment of working capital
previously used for construction. The Company also had $13.6 million available
in unfunded construction loans on operating properties that can be used to
replenish working capital previously used for construction.
The Company has fixed the interest rate on $80.0 million of an operating
property's debt at a rate of 6.95% using an interest rate swap agreement that
expires in August 2003. The Company did not incur any fees for the swap
agreement. The Company also has an interest rate cap of 5.50% that was in place
on the $40.0 million of variable rate debt the Company assumed in connection
with its acquisition of Sunrise Mall (see Acquisitions). The interest rate cap
agreement expires in May 2004.
The Company expects to refinance the majority of its mortgage notes payable
maturing over the next five years with replacement loans. Taking into
consideration extension options that are available to the Company, there are no
debt maturities through December 31, 2003, other than normal principal
amortization.
26
DEVELOPMENTS, EXPANSIONS, ACQUISITIONS AND DISPOSITIONS
The Company expects to continue to have access to the capital resources
necessary to expand and develop its business. Future development and acquisition
activities will be undertaken as suitable opportunities arise. The Company does
not expect to pursue these opportunities unless adequate sources of financing
are available and a satisfactory budget with targeted returns on investment has
been approved internally.
The Company intends to fund major development, expansion and acquisition
activities with traditional sources of construction and permanent debt financing
as well as other debt and equity financings, including public financings and the
lines of credit, in a manner consistent with its intention to operate with a
conservative debt-to-total-market capitalization ratio.
Developments and Expansions
The following development projects are currently under construction:
Projected
Property Location GLA Opening Date
- ------------------------------------- ------------------------------------ -------------- ---------------------------
MALL
- ----
Coastal Grand Myrtle Beach, SC 902,000 March 2004
(50/50 Joint Venture)*
ASSOCIATED CENTER
- -----------------
The Shoppes of Panama City Panama City, FL 110,000 February 2004
COMMUNITY CENTERS
- -----------------
Waterford Commons Waterford, CT 348,000 September 2003
(75/25 Joint Venture)**
Wilkes-Barre Township Marketplace Wilkes-Barre Township, PA 281,000 May 2004
* Joint venture development.
** The Company will own at least 75% of the joint venture.
The following renovation projects are currently under construction:
Property Location Projected Completion Date
----------------------- ------------------------ -------------------------
Parkdale Mall Beaumont, TX August 2003
Jefferson Mall Louisville, KY October 2003
Eastgate Mall Cincinnati, OH November 2003
East Towne Mall Madison, WI November 2003
West Towne Mall Madison, WI November 2003
St. Clair Square Fairview Heights, IL November 2003
The Company has entered into a number of option agreements for the
development of future regional malls and community centers. Except for the
projects discussed under Developments and Expansions above and Acquisitions
below, the Company does not have any other material capital commitments.
Acquisitions
On May 1, 2003, the Company acquired Sunrise Mall, a 740,000 square foot
regional mall, and Sunrise Commons, a 225,000 square foot associated center, in
Brownsville, TX, for a total purchase price of $80.7 million. The total purchase
price consisted of $40.7 million in cash and the assumption of a non-recourse
loan of $40.0 million that bears interest at 300 basis points over LIBOR, with a
minimum rate of 4.90%. This debt was assumed subject to a pre-existing interest
rate cap of 5.50%.
27
On July 25, 2003, the Company announced that it had entered into separate
agreements to acquire four regional malls for a total purchase price of $340.0
million. The purchase price will consist of cash and the assumption of $170.0
million of non-recourse fixed rate debt with a weighted average interest rate of
7.71%. The Company anticipates that three of the transactions will close during
the third quarter of 2003 and that the fourth will close during the fourth
quarter of 2003.
Dispositions
On February 28, 2003, the Company sold Capital Crossing, a community center
in Raleigh, NC, for $7.8 million and recognized a net gain on discontinued
operations of $2.9 million.
In addition, the Company sold twelve outparcels, plus two options on land,
and recognized a total net gain of $4.1 million during the six months ended June
30, 2003.
On August 6, 2003, the Company a community center for $1.1 million and
recognized a gain of $0.4 million. The results of operations of this community
center will be reflected as discontinued operations beginning in the third
quarter of 2003.
OTHER CAPITAL EXPENDITURES
The Company prepares an annual capital expenditure budget for each property
that is intended to provide for all necessary recurring and non-recurring
capital improvements. The Company believes that its operating cash flows will
provide the necessary funding for such capital improvements. These cash flows
will be sufficient to cover tenant finish costs associated with tenant leases
and capital expenditures necessary for the enhancement and maintenance of the
properties.
Including its share of unconsolidated affiliates' capital expenditures and
excluding minority investor's share of capital expenditures, the Company spent
$19.3 million during the first six months of 2003 for tenant allowances, which
generate increased rents from tenants over the terms of their leases. Deferred
maintenance expenditures, a majority of which are recovered from tenants, were
$13.7 million for the first six months of 2003. Renovation expenditures, which
include some deferred maintenance items, were $40.8 million for the six months
ended June 30, 2003, a portion of which is recovered from tenants. Deferred
maintenance expenditures and renovation expenditures included $4.3 million for
the resurfacing and the improved lighting of parking lots and $4.2 million for
roof repairs and replacements.
Deferred maintenance expenditures are billed to tenants as common area
maintenance expense, and most are recovered over a 5- to 15-year period.
Renovation expenditures are primarily for remodeling and upgrades of malls, of
which approximately 30% is recovered from tenants over a 5- to 15-year period.
OTHER
The Company believes the properties are in compliance, in all material
respects, with federal, state and local ordinances and regulations regarding the
handling, discharge and emission of hazardous or toxic substances. The Company
has not been notified by any governmental authority, and is not otherwise aware,
of any material noncompliance, liability or claim relating to hazardous or toxic
substances in connection with any of its present or former properties.
Therefore, the Company has not recorded any material liability in connection
with environmental matters.
28
CRITICAL ACCOUNTING POLICIES
A critical accounting policy is one that is both important to the
presentation of a company's financial condition and results of operations and
requires significant judgment or complex estimation processes. The Company
believes that its most significant accounting policies are those related to
revenue recognition, accounting for the development of real estate assets and
evaluating long-lived assets for impairment.
Minimum rental revenue from operating leases is recognized on a
straight-line basis over the initial terms of the related leases. Certain
tenants are required to pay percentage rent if their sales volumes exceed
thresholds specified in their lease agreements. Percentage rent is recognized as
revenue when the thresholds are achieved and the amounts become determinable.
The Company receives reimbursements from tenants for real estate taxes,
insurance, common area maintenance, and other recoverable operating expenses as
provided in the lease agreements. Tenant reimbursements are recognized as
revenue in the period the related operating expenses are incurred. Tenant
reimbursements related to certain capital expenditures are billed to tenants
over periods of 5 to 15 years and are recognized as revenue when billed.
The Company receives management, leasing and development fees from third
parties and unconsolidated affiliates. Management fees are charged as a
percentage of minimum and percentage rents and are recognized as revenue when
earned. Development fees are recognized as revenue on a pro rata basis over the
development period. Leasing fees are charged for newly executed leases and
recognized as revenue when earned.
Gain on sales of real estate assets is recognized when title to the asset
is transferred to the buyer, if the buyer's initial and continuing investment is
adequate and the buyer assumes all future ownership risks of the asset.
The Company capitalizes predevelopment project costs paid to third parties.
All previously capitalized predevelopment costs are expensed when it is no
longer probable that the project will be completed. Once development of a
project commences, all direct costs incurred to construct the project, including
interest and real estate taxes are capitalized. Additionally, certain general
and administrative expenses are allocated to the projects and capitalized based
on the amount of time applicable personnel work on the development project, and
the investment in the project relative to all development projects. Once a
project is completed and placed in service, it is depreciated over its estimated
useful life. Buildings and improvements are depreciated generally over 40 years
and leasehold improvements are amortized over the lives of the applicable leases
or the estimated useful life of the assets, whichever is shorter. Ordinary
repairs and maintenance are expensed as incurred. Major replacements and
improvements are capitalized and depreciated over their estimated useful lives.
In accordance with Statement of Financial Accounting Standards Nos. 141 and
142, when operating real estate assets are acquired, the Company estimates the
fair value of acquired tangible assets, consisting of land, building and
improvements, and identified intangible assets and liabilities generally
consisting of the fair value of (i) above and below market leases, (ii) in-place
leases and (iii) tenant relationships. The Company allocates the purchase price
to the assets acquired and liabilities assumed based on their relative fair
values. The Company determines the estimates of fair value based on estimated
cash flow projections utilizing appropriate discount and capitalization rates
and available market information. The capitalized above market (deferred charge)
or below market (deferred credit) intangible is amortized to rental income over
the remaining non-cancelable term of the respective leases. The intangible
related to in-place leases is amortized over the remaining term of the
respective leases.
29
The Company periodically evaluates its real estate assets to determine if
there has been any impairment in their carrying values and records impairment
losses if the undiscounted cash flows estimated to be generated by those assets
are less than the assets' carrying amounts or if there are other indicators of
impairment. At June 30, 2003, the Company did not own any real estate assets
that were impaired.
ACCOUNTING FOR STOCK OPTIONS
Historically, the Company has accounted for stock options using the
intrinsic value method of APB No. 25, "Accounting for Stock Issued to
Employees". Effective January 1, 2003, the Company began recording the expense
associated with stock options granted after January 1, 2003, on a prospective
basis in accordance with the fair value and transition provisions of Statement
of Financial Accountings Standards No. 123, "Accounting for Stock-Based
Compensation." There were no stock options granted during the six months ended
June 30, 2003.
RECENT ACCOUNTING PRONOUNCEMENTS
As described in Note 12 to the unaudited consolidated financial statements,
the FASB has issued certain statements that were effective January 1, 2003.
IMPACT OF INFLATION
In the last three years, inflation has not had a significant impact on the
Company because of the relatively low inflation rate. Substantially all tenant
leases do, however, contain provisions designed to protect the Company from the
impact of inflation. These provisions include clauses enabling the Company to
receive percentage rent based on tenant's gross sales, which generally increase
as prices rise, and/or escalation clauses, which generally increase rental rates
during the terms of the leases. In addition, many of the leases are for terms of
less than ten years, which may enable the Company to replace existing leases
with new leases at higher base and/or percentage rents if rents of the existing
leases are below the then existing market rate. Most of the leases require
tenants to pay their share of operating expenses, including common area
maintenance, real estate taxes and insurance, thereby reducing the Company's
exposure to increases in costs and operating expenses resulting from inflation.
FUNDS FROM OPERATIONS
Funds from operations ("FFO") is a widely used measure of the operating
performance of real estate investment trusts that supplements net income
determined in accordance with generally accepted accounting principles ("GAAP").
The Company computes FFO in accordance with the National Association of Real
Estate Investment Trusts' definition of FFO, which is net income (computed in
accordance with GAAP) excluding gains or losses on sales of operating
properties, plus depreciation and amortization of real estate assets, and after
adjustments for unconsolidated partnerships and joint ventures. Beginning with
the first quarter of 2003, the Company includes gains on sales of outparcels in
FFO to comply with the Securities and Exchange Commission's rules related to
disclosure of non-GAAP financial measures. FFO for the comparable periods of
2002 have been restated to include gains on sales of outparcels.
The Company believes that FFO provides an additional indicator of the
operating performance of the Company's properties without giving effect to real
estate depreciation and amortization, which assumes the value of real estate
assets declines predictably over time. Since values of well-maintained real
estate assets have historically risen or fallen with market conditions, the
Company believes that FFO provides investors with a better understanding of the
Company's operating performance.
30
The use of FFO as an indicator of operating performance is influenced not
only by the operations of the properties and interest rates, but also by the
capital structures of the Company and the Operating Partnership. Accordingly,
FFO will be one of the significant factors considered by the Board of Directors
in determining the amount of cash distributions the Operating Partnership will
make to its partners, including the REIT.
FFO does not represent cash flow from operations as defined by accounting
principals generally accepted in the United States, is not necessarily
indicative of cash available to fund all cash flow needs and should not be
considered as an alternative to net income for purposes of evaluating the
Company's operating performance or to cash flow as a measure of liquidity.
For the three months ended June 30, 2003, FFO increased $8.0 million, or
13.5%, to $67.4 million from $59.4 million for the same period in 2002. For the
six months ended June 30, 2003, FFO increased by $19.8 million, or 17.3%, to
$134.7 million as compared to $114.9 million for the same period in 2002. The
increase in FFO is primarily attributable to the results of operations of the
properties added to the portfolio, increases in base rents and tenant
reimbursements at the existing properties and increases in gains on outparcel
sales. These increases were offset by reductions related to operating properties
that were sold and a reduction in lease termination fees. Lease termination fees
were $1.2 million and $3.8 million in the three months ended June 30, 2003 and
2002, respectively, and $1.6 million and $4.6 million in the six months ended
June 30, 2003 and 2002, respectively. Gains on sales of outparcels were $3.0
million and $1.8 million in the three months ended June 30, 2003 and 2002,
respectively, and $4.1 million and $2.2 million in the six months ended June 30,
2003 and 2002, respectively.
The Company's calculation of FFO is as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- ----------
Consolidated net income available to common shareholders $ 21,022 $ 18,911 $ 43,798 $ 36,295
Depreciation and amortization from consolidated properties 27,690 23,646 54,002 46,127
Depreciation and amortization from unconsolidated
affiliates 1,123 848 2,019 1,772
Depreciation and amortization from discontinued
operations -- 214 10 465
Minority interest in earnings of operating partnership 17,979 16,335 38,616 32,532
Minority investors' share of depreciation and amortization
in shopping center properties (275) (302) (541) (694)
Gain on discontinued operations -- (164) (2,935) (1,406)
Depreciation and amortization of non-real estate assets (133) (116) (266) (227)
----------- ----------- ----------- ----------
FUNDS FROM OPERATIONS $ 67,406 $ 59,372 $ 134,703 $ 114,864
=========== =========== =========== ==========
DILUTED WEIGHTED AVERAGE SHARES AND
POTENTIAL DILUTIVE COMMON SHARES
WITH OPERATING PARTNERSHIP UNITS
FULLY CONVERTED 56,748 54,966 56,625 53,399
Item 3: Quantitative and Qualitative
Disclosure About Market Risk
The Company has exposure to interest rate risk on its debt obligations and
derivative financial instruments. The Company uses derivative financial
instruments to manage its exposure to changes in interest rates and not for
speculative purposes. The Company's interest rate risk management policy
requires that derivative instruments be used for hedging purposes only and that
they be entered into only with major financial institutions based on their
credit ratings and other factors.
31
Based on the Company's share of consolidated and unconsolidated variable
rate debt at June 30, 2003, excluding debt fixed using an interest rate swap
agreement, a 0.5% increase or decrease in interest rates on this variable rate
debt would decrease or increase annual cash flows by approximately $3.1 million
and, after the effect of capitalized interest, annual earnings by approximately
$2.7 million.
Based on the Company's share of consolidated and unconsolidated debt at
June 30, 2003, a 0.5% increase in interest rates would decrease the fair value
of debt by approximately $52.9 million, while a 0.5% decrease in interest rates
would increase the fair value of debt by approximately $54.6 million.
See Note 4 to the unaudited consolidated financial statements for a
description of the Company's derivative financial instruments.
Item 4: Controls and Procedures
As of the end of the period covered by this quarterly report, an
evaluation, under Rule 13a-15 of the Securities Exchange Act of 1934 was
performed under the supervision of the Company's Chief Executive Officer and
Chief Financial Officer and with the participation of the Company's management,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective. No change
in the Company's internal control over financial reporting occurred during the
period covered by this quarterly report that materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
32
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings
None
ITEM 2: Changes in Securities
None
ITEM 3: Defaults Upon Senior Securities
None
ITEM 4: Submission of Matter to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on May 5, 2003.
The matters that were submitted to a vote of shareholders and the
related results are as follows:
1. The following directors were re-elected to three-year terms that
expire in 2006:
|X| John N. Foy (23,503,501 votes for and 2,341,328 votes against or
withheld),
|X| Martin J. Cleary (23,502,621 votes for and 2,342,208 votes
against or withheld), and
|X| William J. Poorvu (23,396,272 votes for and 2,448,557 votes
against or withheld).
The following additional directors are presently serving
three-year terms, which continue beyond the 2003 Annual Meeting:
|X| Charles B. Lebovitz (term expires 2005),
|X| Stephen D. Lebovitz (term expires 2004),
|X| Claude M. Ballard (term expires 2005),
|X| Gary L. Bryenton (term expires 2005),
|X| Leo Fields (term expires 2005), and
|X| Winston W. Walker (term expires 2004).
2. An amendment to the Company's Amended and Restated Certificate of
Incorporation to increase the number of authorized shares of the
Company's preferred stock, $0.01 par value, from 5,000,000 shares to
15,000,000 shares was approved (Common stock: 18,622,284 votes for and
4,764,369 against; Series A Preferred Stock: 1,456,555 votes for and
88,579 against; Series B Preferred Stock: 1,107,842 votes for and
9,350 against).
3. The adoption of an Amended and Restated Stock Incentive Plan for the
Company was approved (20,811,948 votes for and 2,545,071 against).
33
ITEM 5: Other Information
None
ITEM 6: Exhibits and Reports on Form 8-K
A. Exhibits
10.1 Form of Stock Restriction Agreement for restricted stock
awards with annual installment vesting, see page 36.
10.2 Amended and Restated CBL & Associates Properties, Inc. Stock
Incentive Plan(t) page 38.
10.2.1 Form of Stock Restriction Agreement for restricted stock
awards with annual installment vesting, see page 58.
31.1 Certification pursuant to Securities Exchange Act Rule
13a-14(a) by the Chief Executive Officer, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
see page 61.
31.2 Certification pursuant to Securities Exchange Act Rule
13a-14(a) by the Chief Financial Officer, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
see page 62.
32.1 Certification pursuant to 18 U.S.C Section 1350 by the Chief
Executive Officer, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, see page 63.
32.2 Certification pursuant to 18 U.S.C. Section 1350 by the
Chief Financial Officer as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, see page 64.
t A management contract or compensatory plan or arrangement
required to be filed pursuant to Item 14(c) of this report.
B. Reports on Form 8-K
The following items were reported:
The outline from the Company's July 25, 2003 conference call with
analysts and investors regarding earnings, the Company's earnings
release and the Company's supplemental information package (Items
9 and 12) were furnished on July 25, 2003.
The disclosures required by Regulation G related to the Company's
2002 Annual Report on Form 10-K, which was filed on March 21,
2003, were filed on August 5, 2003.
34
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ John N. Foy
--------------------------------------------------------
Vice Chairman of the Board, Chief Financial Officer and
Treasurer
(Authorized Officer of the Registrant,
Principal Financial Officer)
Date: August 14, 2003
35