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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
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, TN 37421-6000
- -------------------------------------------------------------------------------
(Address of principal executive office, including zip code)
Registrant's telephone number, including area code (423) 855-0001
-------------------
N/A
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 twelve (12) months (or such shorter period that the Registrant was
required to file such report) and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES |X| NO |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
YES |X| NO |_|
As of November 11, 2003, there were 30,251,431shares of common stock, par value
$0.01 per share, outstanding.
1
CBL & Associates Properties, Inc.
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements..........................................3
----------------------------
Consolidated Balance Sheets...........................................4
---------------------------
Consolidated Statements Of Operations.................................5
-------------------------------------
Consolidated Statements of Cash Flows.................................6
-------------------------------------
Notes to Unaudited Consolidated Financial Statements..................7
----------------------------------------------------
ITEM 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations...............16
------------------------------------------------------
ITEM 3: Quantitative and Qualitative Disclosures
About Market Risk...........................................32
-------------------------------------------------
ITEM 4: Controls and Procedures.....................................32
--------------------------------
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings........................................33
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ITEM 2: Changes in Securities and Use of Proceeds................33
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ITEM 3: Defaults Upon Senior Securities..........................33
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ITEM 4: Submission of Matters to a Vote of Security Holders......33
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ITEM 5: Other Information........................................33
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ITEM 6: Exhibits and Reports on Form 8-K.........................33
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SIGNATURE....................................................................35
2
CBL & Associates Properties, Inc.
ITEM 1: Financial Statements
The accompanying financial statements are unaudited; however, they have
been prepared in accordance with accounting principles generally accepted in the
United States of America 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 of America 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 September 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 CBL &
Associates Properties, Inc.'s 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)
September 30, December 31,
2003 2002
---------------- ----------------
ASSETS
Real estate assets:
Land.............................................................. $ 620,818 $ 570,818
Buildings and improvements........................................ 3,683,102 3,394,787
---------------- ----------------
4,303,920 3,965,605
Less accumulated depreciation................................... (510,047) (434,840)
---------------- ----------------
3,793,873 3,530,765
Developments in progress.......................................... 102,099 80,720
---------------- ----------------
Net investment in real estate assets............................ 3,895,972 3,611,485
Cash and cash equivalents........................................... 25,188 13,355
Receivables:
Tenant, net of allowance for doubtful accounts of $2,889 in
2003 and $2,861 in 2002........................................ 41,947 37,994
Other............................................................. 5,130 3,692
Mortgage and other notes receivable................................. 21,900 23,074
Investments in unconsolidated affiliates............................ 77,152 68,232
Other assets........................................................ 63,240 37,282
---------------- ----------------
$ 4,130,529 $ 3,795,114
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage and other notes payable.................................... $ 2,618,216 $ 2,402,079
Accounts payable and accrued liabilities............................ 157,837 151,332
---------------- ----------------
Total liabilities................................................. 2,776,053 2,553,411
---------------- ----------------
Minority interests.................................................. 494,439 500,513
---------------- ----------------
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
7.75% Series C Cumulative Redeemable Preferred Stock,
460,000 shares outstanding in 2003 and none in 2002 ....... 5 --
Common stock, $.01 par value, 95,000,000 shares authorized,
30,210,653 and 29,797,469 shares issued and outstanding
in 2003 and 2002, respectively.................................. 302 298
Additional paid - in capital...................................... 878,919 765,686
Accumulated other comprehensive loss.............................. -- (2,397)
Deferred compensation............................................. (1,706) --
Accumulated deficit............................................... (17,530) (22,444)
---------------- ----------------
Total shareholders' equity...................................... 860,037 741,190
---------------- ----------------
$ 4,130,529 $ 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 Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
2003 2002 2003 2002
------------- ------------ -------------- ------------
REVENUES:
Rentals:
Minimum rents..................................... $106,341 $95,012 $313,813 $280,439
Percentage rents.................................. 2,228 2,093 9,756 10,608
Other rents....................................... 1,624 1,277 5,415 5,033
Tenant reimbursements................................ 50,470 43,172 152,644 125,497
Management, development and leasing fees............. 1,221 1,754 3,946 5,507
Other................................................ 3,592 3,135 10,741 11,097
------------- ------------ -------------- ------------
Total revenues..................................... 165,476 146,443 496,315 438,181
------------- ------------ -------------- ------------
EXPENSES:
Property operating................................... 26,575 24,664 82,886 74,151
Depreciation and amortization........................ 28,385 24,084 82,362 70,183
Real estate taxes.................................... 13,149 11,946 39,947 34,732
Maintenance and repairs.............................. 9,636 9,266 29,792 26,711
General and administrative........................... 7,228 5,499 20,225 16,706
Other................................................ 2,703 2,282 7,359 8,089
------------- ------------ -------------- ------------
Total expenses..................................... 87,676 77,741 262,571 230,572
------------- ------------ -------------- ------------
Income from operations............................... 77,800 68,702 233,744 207,609
Interest income...................................... 639 841 1,804 1,824
Interest expense..................................... (38,051) (36,620) (113,369) (107,456)
Loss on extinguishment of debt....................... -- (210) (167) (3,399)
Gain on sales of real estate assets.................. 837 497 4,943 2,702
Equity in earnings of unconsolidated affiliates...... 922 2,353 3,410 6,455
Minority interest in earnings:
Operating partnership.............................. (17,235) (14,599) (55,851) (47,131)
Shopping center properties......................... (605) (389) (2,038) (2,522)
------------- ------------ -------------- ------------
Income before discontinued operations................ 24,307 20,575 72,476 58,082
Operating income (loss) of discontinued operations... (32) 417 46 1,428
Gain on discontinued operations...................... 633 165 3,568 1,572
------------- ------------ -------------- ------------
Net income........................................... 24,908 21,157 76,090 61,082
Preferred dividends.................................. (4,683) (3,692) (12,067) (7,319)
------------- ------------ -------------- ------------
Net income available to common shareholders.......... $20,225 $17,465 $64,023 $53,763
============= ============ ============== ============
Basic per share data:
Income before discontinued operations,
net of preferred dividends.................... $0.65 $0.57 $2.02 $1.79
Discontinued operations.......................... 0.02 0.02 0.12 0.11
------------- ------------ -------------- ------------
Net income available to common shareholders...... $0.67 $0.59 $2.14 $1.90
============= ============ ============== ============
Weighted average common shares outstanding 30,022 29,616 29,879 28,364
Diluted per share data:
Income before discontinued operations,
net of preferred dividends.................... $0.63 $0.55 $1.94 $1.74
Discontinued operations.......................... 0.02 0.02 0.12 0.10
------------- ------------ -------------- ------------
Net income available to common shareholders...... $0.65 $0.57 $2.06 $1.84
============= ============ ============== ============
Weighted average common and potential dilutive
common shares outstanding........................ 31,301 30,476 31,070 29,191
The accompanying notes are an integral part of these statements.
5
CBL & Associates Properties, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
---------------------------------
2003 2002
--------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $76,090 $61,082
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation................................................................ 62,817 56,566
Amortization................................................................ 23,066 15,713
Gain on sales of real estate assets......................................... (4,943) (2,702)
Gain on discontinued operations............................................. (3,568) (1,572)
Loss on extinguishment of debt.............................................. 167 3,399
Issuance of stock under incentive plan...................................... 1,617 1,503
Write-off of development projects........................................... 153 58
Deferred compensation....................................................... 269 --
Amortization of deferred compensation....................................... 155 --
Minority interest in earnings............................................... 57,889 49,646
Amortization of market value of acquired leases............................. (82) --
Changes in:
Tenant and other receivables................................................ (5,697) 1,017
Other assets................................................................ (16,242) (11,429)
Accounts payable and accrued liabilities.................................... 3,529 23,258
--------------- --------------
Net cash provided by operating activities........................... 195,220 196,539
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of real estate assets........................................ (85,416) (54,145)
Additions to real estate assets........................................... (69,950) (53,480)
Other capital expenditures................................................ (100,492) (70,362)
Capitalized interest...................................................... (4,512) (3,454)
Additions to other assets................................................. (7,083) (1,537)
Proceeds from sales of real estate assets................................. 19,831 83,358
Payments received on mortgage notes receivable............................ 1,174 1,809
Additions to mortgage notes receivable.................................... -- (5,819)
Distributions in excess of equity in earnings of unconsolidated affiliates 222 690
Additional investments in and advances to unconsolidated affiliates....... (9,142) (5,955)
--------------- --------------
Net cash used in investing activities............................... (255,368) (108,895)
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage and other notes payable............................ 383,959 565,362
Principal payments on mortgage and other notes payable.................... (282,276) (748,095)
Additions to deferred financing costs..................................... (4,462) (5,176)
Prepayment penalties on extinguishment of debt............................ -- (1,875)
Proceeds from issuance of common stock.................................... 3,574 117,121
Proceeds from issuance of preferred stock................................. 111,272 96,397
Proceeds from exercise of stock options................................... 5,969 4,737
Purchase of minority interest............................................. (21,013) --
Repurchase of preferred stock............................................. -- (5,000)
Distributions to minority investors....................................... (54,134) (48,929)
Dividends paid............................................................ (70,908) (53,578)
--------------- --------------
Net cash provided by (used in) financing activities................. 71,981 (79,036)
--------------- --------------
NET CHANGE IN CASH AND CASH EQUIVALENTS....................................... 11,833 8,608
CASH AND CASH EQUIVALENTS, beginning of period 13,355 10,137
--------------- --------------
CASH AND CASH EQUIVALENTS, end of period...................................... $25,188 $18,745
=============== ==============
SUPPLEMENTAL INFORMATION:
Cash paid for interest, net of amounts capitalized.......................... $111,761 $106,670
=============== ==============
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. ("CBL"), 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. CBL'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.
CBL conducts substantially all of its business through CBL & Associates
Limited Partnership (the "Operating Partnership"). At September 30, 2003, the
Operating Partnership owns controlling interests in 52 regional malls, 20
associated centers (each adjacent to a regional shopping mall), 61 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, three mall
expansions, one associated center, two community centers and one community
center expansion. The Operating Partnership also holds options to acquire
certain development properties owned by third parties.
CBL is the 100% owner of two qualified REIT subsidiaries, CBL Holdings
I, Inc. and CBL Holdings II, Inc. At September 30, 2003, CBL Holdings I, Inc.,
the sole general partner of the Operating Partnership, owned a 1.7% general
partnership interest in the Operating Partnership and CBL Holdings II, Inc.
owned a 52.8% limited partnership interest for a combined interest held by CBL
of 54.5%.
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
September 30, 2003, CBL's Predecessor owned a 15.8% limited partnership
interest, Jacobs owned a 21.6% limited partnership interest and third parties
owned an 8.1% limited partnership interest in the Operating Partnership. CBL's
Predecessor also owned 2.3 million shares of CBL's common stock at September 30,
2003, for a combined total interest of 19.9% 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 CBL's common stock or their
cash equivalent, at CBL's election. In such case, CBL assumes the limited
partner's ownership 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 CBL 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 CBL are subject to any right of mandatory redemption.
7
The Operating Partnership conducts CBL'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 CBL (with the exception of
one individual who is a member of the immediate family of a director of
CBL) and whose interests are aligned with those of CBL. 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 CBL's Board of Directors.
All of these factors result in Operating Partnership having a
controlling financial interest in the Management Company and, accordingly, the
Management Company is treated as a consolidated subsidiary.
CBL, the Operating Partnership and the Management Company are
collectively referred to herein as "the Company".
Note 2 - Investments In Unconsolidated Affiliates
The Company 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 Nine Months Nine Months
Ended September 30, Ended September 30,
--------------------------- --------------------------
2003 2002 2003 2002
------------- ----------- ----------- -----------
Revenues $30,354 $41,303 $17,725 $24,382
Depreciation and amortization (5,445) (5,099) (3,001) (3,137)
Interest expense (8,601) (10,767) (6,230) (7,301)
Other operating expenses (8,888) (11,921) (5,084) (7,489)
------------- ----------- ----------- -----------
Income from operations $7,420 $13,576 $3,410 $6,455
============= =========== =========== ===========
8
Note 3 - Mortgage and Other Notes Payables
Mortgage and other notes payable consisted of the following at
September 30, 2003 and December 31, 2002, respectively:
September 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 $2,233,582 6.76% $1,867,915 7.16%
Variable-rate debt:
Recourse term loans on operating properties 127,634 2.56% 290,954 3.98%
Lines of credit 257,000 2.12% 221,275 2.69%
Construction loans -- -- 21,935 3.08%
Total variable-rate debt 384,634 2.26% 534,164 3.41%
Total -------------- --------------
$2,618,216 6.10% $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 variable-rate
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. This debt was assumed subject to a pre-existing interest
rate cap of 5.50%.
As discussed in Note 6, on September 10, 2003, the Company assumed
$64,245 of non-recourse, fixed-rate debt in connection with its acquisition of
Cross Creek Mall. The debt bears interest at a rate of 7.40% and matures in
April 2012. Since the debt's stated interest rate of 7.40% was above market
rates for similar debt instruments at the date of acquisition, the Company has
recorded a debt premium of $10,209, which will be amortized as a reduction to
interest expense over the remaining term of the debt. Amortization of the debt
premium was not significant for the three months ended September 30, 2003.
On September 12, 2003, the Company closed four long-term, non-recourse,
fixed-rate mortgage loans totaling $196,000 that are secured by three of the
Company's regional malls and one associated center. The loans bear interest at
rates ranging from 4.52% to 5.45%, with a weighted average rate of 4.85%, and
have terms of five to ten years, with a weighted average term of 6.5 years.
In order to fund a portion of its acquisition of the four-mall portfolio
discussed in Note 15, the Company obtained a short-term, unsecured credit
facility of $130,000 that will bear interest at LIBOR plus 1.30% and mature on
January 31, 2004. This credit facility can be extended at the Company's option
for two additional periods of four months each. No amounts were outstanding
under this facility as of September 30, 2003. On October 1, 2003, the Company
borrowed $82,352 under this facility to fund the acquisition of the second and
third malls, which was subsequently repaid with proceeds from the sale to
Galileo America REIT discussed in Note 15.
9
The Company's secured credit facilities total $365,000, of which
$87,846 was available at September 30, 2003. In addition to the $257,000 of
outstanding borrowings, there was also $20,154 outstanding for letters of credit
under the secured credit facilities. Additionally, the Company had other credit
facilities totaling $19,585 that are used only for issuances of letters of
credit, of which $6,413 was available at September 30, 2003.
As of September 30, 2003, the Company had $10,267 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 5.6 years at September 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 as an unusual expense
in the accompanying consolidated statements of operations.
Seventeen malls, six 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 to own and operate these properties, which are each encumbered by a
commercial mortgage backed securities loan. The 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 September 30, 2003, the Company had an
interest rate cap of 5.50%, which expires May 7, 2004, that was in place on
$40,000 of variable-rate debt assumed in connection with the acquisition of
Sunrise Mall during the second quarter (see Note 6). At September 30, 2003, the
interest rate cap's fair value was $0.
During the quarter ended September 30, 2003, the Company had one
interest rate swap agreement that expired on August 30, 2003. Other
comprehensive income of $626 was recorded during the quarter related to the
reduction of this interest rate swap's fair value to zero due to its expiration.
The Company is exposed to credit losses if the counterparty to the cap
agreement is unable to perform; therefore, the Company continually monitors the
credit standing of the counterparty.
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 September 30, 2003 Malls Centers Centers All Other Total
- -------------------------------------- ------------ ------------ ------------ ----------- -----------
Revenues $138,347 $ 6,351 $ 15,800 $ 4,978 $ 165,476
Property operating expenses (1) (48,710) (1,563) (3,388) 4,301 (49,360)
Interest expense (34,734) (2,038) (2,013) 734 (38,051)
Other expense 0 0 0 (2,703) (2,703)
Gain on sales of real estate assets 539 0 1 297 837
------------ ------------ ------------ ----------- -----------
Segment profit and loss $ 55,442 $ 2,750 $ 10,400 $ 7,607 76,199
============ ============ ============ ===========
Depreciation and amortization (28,385)
General and administrative (7,228)
Interest income 639
Loss on extinguishment of debt --
Equity in earnings and minority
interest in earnings (16,918)
-----------
Income before discontinued operations $ 24,307
===========
Capital expenditures (2) $188,880 $ 3,062 $ 14,525 $ 4,066 $ 210,533
Associated Community
Three Months Ended September 30, 2002 Malls Centers Centers All Other Total
- -------------------------------------- ------------ ------------ ------------ ----------- -----------
Revenues $121,271 $ 4,595 $ 15,140 $ 5,437 $ 146,443
Property operating expenses (1) (43,058) (1,046) (3,897) 2,125 (45,876)
Interest expense (32,543) (921) (2,201) (955) (36,620)
Other expense -- -- -- (2,282) (2,282)
Gain on sales of real estate assets (2) -- (21) 520 497
------------ ------------ ------------ ----------- -----------
Segment profit and loss $ 45,668 $ 2,628 $ 9,021 $ 4,845 62,162
============ ============ ============ ===========
Depreciation and amortization (24,084)
General and administrative (5,499)
Interest income 841
Loss on extinguishment of debt (210)
Equity in earnings and minority
interest in earnings (12,635)
-----------
Income before discontinued operations $ 20,575
===========
Capital expenditures (2) $ 32,675 $ 1,829 $ 2,228 $ 7,885 $ 44,617
Associated Community
Nine Months Ended September 30, 2003 Malls Centers Centers All Other Total
- -------------------------------------- ------------ ------------ ------------ ----------- -----------
Revenues $417,868 $17,551 $ 45,851 $15,045 $ 496,315
Property operating expenses (1) (143,973) (4,198) (10,513) 6,059 (152,625)
Interest expense (101,970) (3,938) (6,002) (1,459) (113,369)
Other expense -- -- -- (7,359) (7,359)
Gain (loss) on sales of real estate
assets 534 -- 754 3,655 4,943
------------ ------------ ------------ ----------- -----------
Segment profit and loss $172,459 $ 9,415 $ 30,090 $15,941 227,905
============ ============ ============ ===========
Depreciation and amortization (82,362)
General and administrative (20,225)
Interest income 1,804
Loss on extinguishment of debt (167)
Equity in earnings and minority
interest in earnings (54,479)
-----------
Income before discontinued operations $ 72,476
===========
Total assets (2) $3,351,809 $189,643 $479,600 $109,477 $4,130,529
Capital expenditures (2) $ 326,742 $ 18,303 $ 31,528 $ 4,438 $ 381,011
11
Associated Community
Nine Months Ended September 30, 2002 Malls Centers Centers All Other Total
- -------------------------------------- ------------ ------------ ------------ ----------- -----------
Revenues $ 365,882 $ 14,026 $ 44,962 $ 13,311 $ 438,181
Property operating expenses (1) (127,800) (3,248) (11,629) 7,083 (135,594)
Interest expense (91,517) (2,853) (7,243) (5,843) (107,456)
Other expense -- -- -- (8,089) (8,089)
Gain (loss) on sales of real estate
assets (286) -- 68 2,920 2,702
------------ ------------ ------------ ----------- -----------
Segment profit and loss $ 146,279 $ 7,925 $ 26,158 $ 9,382 189,744
============ ============ ============ ===========
Depreciation and amortization (70,183)
General and administrative (16,706)
Interest income 1,824
Loss on extinguishment of debt (3,399)
Equity in earnings and minority
interest in earnings (43,198)
-----------
Income before discontinued operations $ 58,082
===========
Total assets (2) $2,856,626 $125,901 $442,572 $122,556 $3,547,655
Capital expenditures (2) $ 227,291 $ 4,232 $ 28,606 $ 44,401 $ 304,530
(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.
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 total
purchase price of $80,686 consisted of $40,686 in cash and the assumption of
$40,000 of variable-rate debt. See Note 3 for a description of the assumed debt.
On September 10, the Company acquired Cross Creek Mall in Fayetteville,
NC for a purchase price of $116,729, which consisted of $52,484 in cash and the
assumption of $64,245 of non-recourse, fixed-rate debt. See Note 3 for a
description of the terms of the assumed debt.
The results of operations of Sunrise Mall, Sunrise Commons and Cross
Creek Mall have been included in the consolidated financial statements since
their respective dates of acquisition. The following table summarizes the
estimated fair values of the assets acquired and liabilities assumed as of the
respective acquisition dates.
Land $ 30,757
Building and improvements 168,637
Above-market lease assets 2,629
In-place lease assets 5,539
-----------
Total assets 207,562
Debt (64,245)
Debt premium (10,209)
-----------
Net assets acquired $ 93,108
===========
In September 2003, the Company acquired the remaining 25% ownership
interest in Waterford Commons, a community center in Waterford, CT, for $2,736
in cash.
As a result of the application of SFAS No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets", to real
estate assets acquired after January 1, 2002, the Company recorded a net
reduction in revenues of $17 and $0 related to the amortization of above and
below market lease assets during the three months ended September 30, 2003 and
2002, respectively. The Company recorded a net increase of $82 and $0 for the
nine months ended September 30, 2003 and 2002, respectively.
12
Note 7 - Discontinued Operations
During the nine months ended September 30, 2003, the Company sold three
community centers for $9,970 and recognized a net gain on discontinued
operations of $3,568. Total revenues from these community centers were $38 and
$258 for the three months ended September 30, 2003 and 2002, respectively, and
$306 and $792 for the nine months ended September 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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
---------------- -------------- --------------- --------------
Weighted average shares outstanding 30,186 29,714 30,001 28,461
Effect of nonvested stock awards (164) (98) (122) (97)
Denominator - basic earnings per share 30,022 29,616 29,879 28,364
Effect of dilutive securities:
Stock options, nonvested stock awards and
deemed shares related to deferred
compensation plans 1,279 860 1,191 827
---------------- -------------- --------------- --------------
Denominator - diluted earnings per share 31,301 30,476 31,070 29,191
================ ============== =============== ==============
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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
---------------- -------------- --------------- --------------
Net income $24,908 $21,157 $76,090 $61,082
Gain on current period cash flow hedges 626 799 2,397 3,407
---------------- -------------- --------------- --------------
Comprehensive income $25,534 $21,956 $78,487 $64,489
================ ============== =============== ==============
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 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 September 30,
2003, was $58,470, of which the Company has guaranteed $29,235. The guaranty
will expire when the related debt matures in December 2003. The Company did not
receive a fee for issuing this guaranty.
13
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 $131 of revenue related to this guaranty during the three months
ended September 30, 2003 and $175 during the nine months ended September 30,
2003.
Note 11 - Shareholders' Equity and Minority Interest
On August 22, 2003, the Company issued 4,600,000 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
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 discussed in Note 15 and for general corporate purposes, including funding
future developments, expansions and acquisitions.
On September 15, 2003, the Company repurchased 460,083 common units in
the Operating Partnership from a former executive of the Company who retired in
1997 for $21,013.
Note 12 - Stock-Based Compensation
Historically, the Company has accounted for stock options using the
intrinsic value method of Accounting Principles Board Opinion 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 nine months ended
September 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:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
2003 2002 2003 2002
------------- ------------ ------------ ------------
Net income available to common shareholders, as reported $ 20,225 $ 17,465 $ 64,023 $ 53,763
Compensation expense determined under fair value method (150) (163) (451) (488)
------------- ------------ ------------ ------------
Pro forma net income available to common shareholders $ 20,075 $ 17,302 $ 63,572 $ 53,275
============= ============ ============ ============
Earnings per share:
Basic, as reported $ 0.67 $ 0.59 $ 2.14 $ 1.90
============= ============ ============ ============
Basic, pro forma $ 0.67 $ 0.58 $ 2.13 $ 1.88
============= ============ ============ ============
Diluted, as reported $ 0.65 $ 0.57 $ 2.06 $ 1.84
============= ============ ============ ============
Diluted, pro forma $ 0.64 $ 0.57 $ 2.05 $ 1.83
============= ============ ============ ============
In May 2003, the company granted 43,425 shares of restricted stock to
employees under the Company's stock incentive plan. The shares are restricted in
that the employee may not sell or otherwise transfer the shares until the
restrictions lapse. The restrictions on the shares lapse in equal annual
installments over five years. The Company recorded deferred compensation of
$1,870, which is being amortized on a straight-line basis to compensation
expense over the five-year period the restrictions lapse. The Company recognized
$102 and $164 of expense related to these shares during the three months and
nine months ended September 30, 2003.
14
Note 13 - 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, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the 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 ARB No. 51".
The interpretation 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. On
October 8, 2003, the FASB deferred the effective date of the consolidation
provisions of FASB Interpretation No. 46 until the quarter ending December 31,
2003, for entities formed prior to January 1, 2003. Although the Company is
still evaluating the impact of the interpretation, the Company believes it is
reasonably possible that an unconsolidated affiliate that is currently accounted
for using the equity method may be a variable interest entity under the
provisions of the interpretation. The Company owns a 10% interest and has a
total investment of $19,435 in this unconsolidated affiliate, which owns one
associated center and two community centers.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. In particular, SFAS No. 149 clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
as discussed in SFAS No. 133 and it clarifies when a derivative contains a
financing component that warrants special reporting in the statement of cash
flows. SFAS No. 149 is effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated after June 30, 2003 and
is to be applied prospectively. The Company does not believe that the
implementation of SFAS No. 149 will materially change the Company's accounting
for the kinds of derivatives that the Company has typically obtained in the
course of its regular financing activities.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity",
which specifies that instruments within its scope are obligations of the issuer
and, therefore, the issuer must classify them as liabilities. Financial
instruments within the scope of the pronouncement include mandatorily redeemable
financial instruments, obligations to repurchase the issuer's equity shares by
transferring assets, and certain obligations to issue a variable number of
shares. SFAS No. 150 is effective for all financial instruments entered into or
modified after May 31, 2003. However, on October 29, 2003, the FASB indefinitely
deferred the provisions of SFAS No. 150 related to noncontrolling interests in
limited-life subsidiaries. As a result, the implementation of SFAS No. 150 did
not have a significant impact on the Company as of September 30, 2003.
15
Note 14 - Noncash Investing and Financing Activities
The Company's noncash investing and financing activities were as
follows for the nine months ended September 30, 2003 and 2002:
Nine Months Ended
September 30,
-------------------------
2003 2002
-------------------------
Debt assumed to acquire property interests $ 114,454 $ 77,103
=========================
Issuance of minority interest to acquire property interests $ -- $ 24,303
=========================
Note 15 - Subsequent Events
Acquisitions
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 Company closed on the first mall on September 10, 2003, which is
discussed in Note 6. On October 1, 2003, the Company closed on the second and
third malls for a total purchase price of $147,275, which consisted of $79,722
in cash and the assumption of $67,553 of non-recourse, fixed-rate debt. The
loans mature in 2007 and 2012 and have a weighted average interest rate of 8.6%.
Since the interest rates on these loans were above market rates for similar debt
instruments at the date of acquisition, the Company has recorded total debt
premiums of $11,631, which will be amortized as a reduction to interest expense
over the remaining terms of the these loans. The fourth and final mall is
scheduled to close in the fourth quarter of 2003.
Dispositions
On September 24, 2003, the Company formed a joint venture with Galileo
America REIT, the U.S. affiliate of Australia-based Galileo America Shopping
Trust, to invest in power and community centers throughout the United States.
The Company will contribute, in three phases, 90% of its interests in 51 power
and community centers for a total price of $516,000.
On October 23, 2003, the parties completed the first phase of the
transaction when the Company sold its interests in 41 power and community
centers to the joint venture for $393,925, which consisted of $255,518 in cash,
the payoff of $24,922 of debt on one of the community centers that was sold to
the joint venture, the joint venture's assumption of $93,037 in debt and $20,448
representing the 10% interest in the joint venture that the Company retained.
The Company used the remaining cash proceeds to reduce outstanding borrowings
under the Company's credit facilities.
The second phase of the transaction is scheduled to close in January
2004 and the third phase is scheduled to close in January 2005.
Pursuant to a long-term agreement, the Company will be the exclusive
manager for all of the joint venture's properties in the United States, and will
be entitled to management, leasing, acquisition, disposition and financing fees.
On October 6, 2003, the Company sold a community center for $760 and
recognized a loss of $323.
16
Preferred Stock Redemption
On October 29, 2003, the Company exercised its option to redeem all
2,675,000 of the outstanding shares of its 9.0% Series A cumulative redeemable
preferred stock at its liquidation preference of $25.00 per share. The
liquidation preference, plus accrued and unpaid dividends, will be paid on
November 28, 2003. In accordance with Emerging Issues Task Force Topic D-42,
issuance costs of $2,181 related to the Series A preferred stock that were
recorded as a reduction of additional paid-in capital when the Series A
preferred stock was issued will be reflected as an additional preferred dividend
in the Company's consolidated statement of operations upon redemption.
Note 16 - 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.
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.
17
RESULTS OF OPERATIONS
Comparison of Results of Operations for the Three Months Ended September 30,
2003 to the Results of Operations for the Three Months Ended September 30, 2002
The following significant transactions impact the comparison of the
results of operations for the three months ended September 30, 2003 to the
comparable period ended September 30, 2002:
|X| The Company has opened or acquired eight properties since November 1,
2002 (the "Eight New Properties"). Therefore, the three months ended
September 30, 2003, include revenues and expenses related to these
properties whereas the comparable period a year ago does not include
any. The Eight New Properties are as follows:
Open/Acquisition
Project Name Location Type of Addition Date
- ------------------------------- -------------------- ---------------------- -----------------
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
Waterford Commons Waterford, CT New development September 2003
|X| In December 2002, the Company acquired the remaining 35% ownership interest
in East Towne Mall, West Towne Mall and West Towne Crossing in Madison, WI
(the "New Consolidated Properties"). These properties were consolidated
during the third quarter of 2003, but were accounted for as unconsolidated
affiliates during the third quarter of 2002.
(Dollars in Thousands)
2003 2002 $ Variance % Variance
------------- ------------- ------------ -----------
Total revenues $165,476 $146,443 $19,033 13.0%
Expenses:
Property operating, real estate taxes and
maintenance and repairs 49,360 45,876 3,484 7.6%
Depreciation and amortization 28,385 24,084 4,301 17.9%
General and administrative 7,228 5,499 1,729 31.4%
Other 2,703 2,282 421 18.4%
------------- ------------- ------------ -----------
Total expenses 87,676 77,741 9,935 12.8%
------------- ------------- ------------ -----------
Income from operations 77,800 68,702 9,098 13.2%
Interest income 639 841 (202) (24.0)%
Interest expense (38,051) (36,620) (1,431) 3.9%
Loss on extinguishment of debt -- (210) 210 (100.0)%
Gain on sales of real estate assets 837 497 340 68.4%
Equity in earnings of unconsolidated affiliates 922 2,353 (1,431) (60.8)%
Minority interest in earnings:
Operating partnership (17,235) (14,599) (2,636) 18.1%
Shopping center properties (605) (389) (216) 55.5%
------------- ------------- ------------ -----------
Income before discontinued operations 24,307 20,575 3,732 18.1%
Income from discontinued operations 601 582 19 3.3%
------------- ------------- ------------ -----------
Net income 24,908 21,157 3,751 17.7%
Preferred dividends (4,683) (3,692) (991) 26.8%
------------- ------------- ------------ -----------
Net income available to common shareholders $20,225 $17,465 $2,760 15.8%
============= ============= ============ ===========
Revenues
The $19.0 million increase in revenues resulted primarily from:
|X| an increase in minimum rents and tenant reimbursements of $15.3 million
attributable to the Eight New Properties and the New Consolidated
Properties,
|X| an increase in minimum rents and tenant reimbursements of $5.2 million from
the Company's remaining properties, including a reduction in lease
termination fees of $0.5 million to $0.5 million in the third quarter of
2003 compared to $1.0 million in the third quarter of 2002. The Company's
cost recovery percentage increased to 100.0% for the third quarter of 2003
compared to 92.5% for the third quarter of 2002 due to increases in
occupancy and the recovery of capital expenditures from tenants,
|X| an increase in percentage rents of $0.1 million, which resulted from a
decline at the Company's existing properties of $0.1 million offset by an
increase of $0.2 million from the Eight New Properties and the New
Consolidated Properties,
18
|X| an increase in other revenues of $0.5 million due to an increase in the
revenues of the Company's taxable REIT subsidiary, and
|X| a reduction of $0.5 million in management, development and leasing fees,
which resulted from a decrease in management and leasing fees related to
the New Consolidated Properties.
Expenses
The $3.5 million increase in property operating expenses, including real
estate taxes and maintenance and repairs, resulted from:
|X| an increase of $4.3 million attributable to the Eight New Properties and
the New Consolidated Properties and
|X| a decrease of $0.8 million in general operating expenses at the Company's
remaining properties.
The increase of $4.3 million in depreciation and amortization expense was
primarily due to:
|X| an increase of $3.1 million attributable to the Eight New Properties and
the New Consolidated Properties 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 at the remaining properties.
General and administrative expenses increased $1.7 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 decrease in interest income of $0.2 million results from the decrease
in the amount of mortgage and other notes receivable outstanding compared to the
prior year period. The decrease in mortgage and other notes receivable primarily
relates to mortgage notes receivable from buyers of real estate assets the
Company has sold that were repaid and normal amortization of the remaining
notes.
Interest Expense
Interest expense increased by $1.9 million primarily due to the additional
debt related to the Eight New Properties and the New Consolidated Properties.
Loss on Extinguishment of Debt
The loss on extinguishment of debt of $0.2 recognized during the third
quarter of 2002 resulted from the write-off of unamortized deferred financing
costs related to a loan that was retired before its scheduled maturity date.
Gain on Sales of Real Estate Assets
The net gain on sales of $0.8 million in the third quarter of 2003 was
primarily from gains on sales of two outparcels and a loss on one outparcel. The
gain on sales of $0.5 million in the third quarter of 2002 resulted from gains
on sales of two outparcels.
19
Equity in Earnings of Unconsolidated Affiliates
The consolidation of the New Consolidated Properties during 2003
accounted for the $1.4 million decline in equity in earnings of unconsolidated
affiliates.
Discontinued Operations
Discontinued operations in the third quarter of 2003 represent the net
operating loss of two community centers that were each sold for a gain in August
2003. Discontinued operations in the third quarter of 2002 represent the net
operating income for the three community centers sold during 2003 plus five
community centers and one office building that were sold during the year ended
December 31, 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.
Comparison of Results of Operations for the Nine Months Ended September 30, 2003
to the Results of Operations for the Nine Months Ended September 30, 2002
The following significant transactions impact the comparison of the results
of operations for the nine months ended September 30, 2003 to the comparable
period ended September 30, 2002:
|X| The Company has opened or acquired ten properties since May 1, 2002 (the
"Ten New Properties). Therefore, the nine months ended September 30, 2003,
include a greater amount of revenues and expenses for these properties than
the comparable period a year ago. The Ten New Properties 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
Waterford Commons Waterford, CT New development September 2003
|X| In December 2002, the Company acquired the remaining 35% ownership
interest in the New Consolidated Properties. The New Consolidated
Properties were consolidated during the first nine months of 2003, but
were accounted for as unconsolidated affiliates during the first nine
months of 2002.
20
(Dollars in Thousands)
2003 2002 $ Variance % Variance
------------- ------------- ------------ ------------
Total revenues $496,315 $438,181 $58,134 13.3 %
------------- ------------- ------------ ------------
Expenses:
Property operating, real estate taxes and
maintenance and repairs 152,625 135,594 17,031 12.6 %
Depreciation and amortization 82,362 70,183 12,179 17.4 %
General and administrative 20,225 16,706 3,519 21.1 %
Other 7,359 8,089 (730) (9.0)%
------------- ------------- ------------ ------------
Total expenses 262,571 230,572 31,999 13.9 %
------------- ------------- ------------ ------------
Income from operations 233,744 207,609 26,135 12.6 %
Interest income 1,804 1,824 (20) (1.1)%
Interest expense (113,369) (107,456) (5,913) 5.5 %
Loss on extinguishment of debt (167) (3,399) 3,232 (95.1)%
Gain on sales of real estate assets 4,943 2,702 2,241 82.9 %
Equity in earnings of unconsolidated affiliates 3,410 6,455 (3,045) (47.2) %
Minority interest in earnings:
Operating partnership (55,851) (47,131) (8,720) 18.5 %
Shopping center properties (2,038) (2,522) 484 (19.2)%
------------- ------------- ------------ ------------
Income before discontinued operations 72,476 58,082 14,394 24.8 %
Income from discontinued operations 3,614 3,000 614 20.5 %
------------- ------------- ------------ ------------
Net income 76,090 61,082 15,008 24.6 %
Preferred dividends (12,067) (7,319) (4,748) 64.9 %
------------- ------------- ------------ ------------
Net income available to common shareholders $64,023 $53,763 $10,260 19.1 %
============= ============= ============ ============
Revenues
The $58.1 million increase in revenues resulted primarily from:
|X| an increase in minimum rents and tenant reimbursements of $44.4 million
attributable to the Ten New Properties and the New Consolidated Properties,
|X| an increase in minimum rents and tenant reimbursements of $16.0 million
from the Company's remaining properties, including a reduction in lease
termination fees of $3.5 million to $2.1 million in the first nine months
of 2003 compared to $5.6 million for the same period in 2002. The Company's
cost recovery percentage increased to 100.0% for the first nine months of
2003 compared to 92.6% for the comparable period of 2002 due to increases
in occupancy and the recovery of capital expenditures from tenants,
|X| a reduction in percentage rents of $0.9 million, which resulted from a
decline at the Company's existing properties of $1.6 million offset by an
increase of $0.7 million from the addition of the properties discussed
above,
|X| a reduction of $1.6 million in management, development and leasing fees,
related to the New Consolidated Properties and
|X| a reduction in other revenues of $0.4 million due to a decline in revenues
of the Company's taxable REIT subsidiary.
Expenses
The $17.0 million increase in property operating expenses, including real
estate taxes and maintenance and repairs, resulted from:
|X| an increase of $14.9 million attributable to the Ten New Properties and the
New Consolidated Properties and
|X| an increase of $2.1 million in general operating expenses at the Company's
remaining properties.
The increase of $12.2 million in depreciation and amortization expense was
primarily due to:
|X| an increase of $9.2 million attributable to the Ten New Properties and the
New Consolidated Properties and
21
|X| an increase of $3.0 million as a result of the ongoing capital expenditures
made by the Company for renovations, expansions, tenant allowances and
deferred maintenance at the remaining properties.
General and administrative expenses increased $3.5 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
Interest income remained essentially the same in 2003 compared to 2002.
Interest Expense
Interest expense increased $5.9 million primarily because of the additional
debt related to the Ten New Properties and the New Consolidated Properties.
Loss on Extinguishment of Debt
The loss on extinguishment of debt of $167,000 recognized during the first
nine 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 nine months of 2002
consisted of prepayment penalties of $1.5 million and the write-off of $1.9
million of unamortized deferred financing costs.
Gain on Sales of Real Estate Assets
The net gain on sales of $4.9 million in 2003 resulted from gains on
sales of 14 outparcels and two options on land offset by a loss on one
outparcel. The net gain on sales of $2.7 million in 2002 resulted from gains on
seven 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 $3.0
million was due to a reduction of $3.4 million related to the New Consolidated
Properties, offset by improvements in the operations of the remaining
unconsolidated affiliates.
Discontinued Operations
Discontinued operations in 2003 represent the operating income of three
community centers that were sold for a gain during the nine months ended
September 30, 2003. Discontinued operations in 2002 relate to these three
community centers plus five community centers and one office building that were
sold during the year ended December 31, 2002. Two community centers and the
office building were sold for gains and one community center was sold at a loss
during the first nine 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.
22
The Company's consolidated revenues were derived from the Company's
property types as follows for the nine months ended September 30, 2003:
Malls 84.2%
Associated centers 3.5%
Community centers 9.2%
Mortgages, office building and other 3.1%
Sales and Occupancy Costs
For those tenants who occupy 10,000 square feet or less and have
reported sales, mall shop sales in the Stabilized Malls increased by 0.4% on a
comparable per square foot basis to $195.89 per square foot for the nine months
ended September 30, 2003 from $195.12 per square foot for the nine months ended
September 30, 2002.
Total sales volume in the mall portfolio, including Non-Stabilized
Malls, increased 2.7% to $2.255 billion for the nine months ended September 30,
2003 from $2.195 billion for the nine months ended September 30, 2002.
Occupancy costs as a percentage of sales for the Stabilized Malls for
the nine months ended September 30, 2003 and 2002, were 13.9% and 13.8%,
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 September 30,
---------------------------------
2003 2002
----------------- ---------------
Total portfolio occupancy 92.4% 92.8%
Total mall portfolio 91.7% 91.8%
Stabilized Malls (53) 92.1% 92.1%
Non-Stabilized Malls (2) 80.2% 87.0%
Associated centers 90.6% 95.8%
Community centers 94.2% 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 94.8% at September 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.
23
Average Base Rents
Average base rents per square foot for the portfolio were as follows:
At September 30,
---------------------------
Percentage
Increase
2003 2002 (Decrease)
----------- ----------- ------------
Stabilized Malls $24.76 $23.08 7.3%
Non-Stabilized Malls 26.48 21.39 23.8%
Associated centers 9.77 9.85 (0.8)%
Community centers 9.52 9.66 (1.4)%
Leasing Results
The Company achieved the following results from new and renewal leasing
for the nine months ended September 30, 2003, compared to the base rent at the
end of the lease term for spaces previously occupied:
CASH FLOWS
Cash provided by operating activities decreased $1.3 million during the
nine months ended September 30, 2003 compared to the comparable prior year
period due to an increase in other assets, an increase in accounts receivable
and a decrease in accounts payable and accrued liabilities. These were offset by
the additional operations of the Ten New Properties and the New Consolidated
Properties.
Cash used in investing activities increased $146.5 million primarily
due to increases in the amount of real estate assets acquired, capital
expenditures related to ongoing renovations of properties and a significant
decrease in the amount of proceeds received on sales of real estate assets.
Cash provided by financing activities was $72.0 million in 2003 as
compared to cash used in financing activities of $79.0 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 the issuance of common
stock, an increase in distributions to minority investors, an increase in the
amount of dividends paid and the repurchase of the minority interest held by a
former executive of the Company.
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.
24
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 are
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.
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 46.9% at September 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, of which $447.0 million remains after the Company's
offering of Series C preferred stock that is discussed below.
In August 2003, the Company issued 4,600,000 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
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.
On September 15, 2003, the Company repurchased 460,083 common units in
the Operating Partnership from a former executive of the Company who retired in
1997 for $21.0 million.
As of September 30, 2003, the minority interest in the Operating
Partnership includes the 15.8% 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 19.9%.
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 21.6% interest in the Operating Partnership. Other third-party
interests may be exchanged for approximately 4.5 million shares of common stock,
which represents an 8.1% interest in the Operating Partnership.
25
The Company's total market equity was as follows as of September 30,
2003 (in thousands, except per share data):
Market
Shares Price(1) Value
--------------- ------------- ---------------
Common stock 30,211 $ 49.90 $1,507,529
Operating Partnership units 25,223 49.90 1,258,628
--------------- ---------------
Common stock, if fully converted 55,434 2,766,157
=============== ---------------
Preferred Stock:
Series A 2,675 25.00 66,875
Series B 2,000 50.00 100,000
Series C 460 250.00 115,000
--------------- ---------------
5,135 281,875
=============== ---------------
Total market equity $3,048,032
===============
(1) For common stock and operating units, represents closing price of common
stock on September 30, 2003. For preferred stock, represents liquidation
preference of applicable series of preferred stock.
The Company's executive and senior officers' and directors' ownership
interests had a market value of approximately $550.5 million at September 30,
2003.
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
September 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)
-------------- ---------------- ------------- ----------- ----------
Fixed-rate debt:
Non-recourse loans on operating properties $2,233,582 $37,543 $(19,720) $2,251,405 6.78%
Variable-rate debt:
Recourse term loans on operating properties 127,634 29,235 -- 156,869 2.57%
Lines of credit 257,000 -- -- 257,000 2.12%
Construction loans -- 29,571 -- 29,571 2.87%
Total variable-rate debt 384,634 58,806 -- 443,440 2.33%
-------------- --------------- ------------- -----------
Total $2,618,216 $96,349 $(19,720) $2,694,845 6.05%
============== =============== ============= ===========
(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 payments based on a 25-year amortization schedule.
26
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.
As discussed under Acquisitions, the Company assumed $40.0 million 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 loan was assumed subject to a pre-existing interest
rate cap of 5.50%. On September 10, 2003, the Company assumed $64,245 of debt in
connection with its acquisition of Cross Creek Mall. The debt bears interest at
a fixed rate of 7.40% and matures in April 2012. Since the debt's stated
interest rate of 7.40% was above market rates for similar debt instruments at
the date of acquisition, the Company has recorded a debt premium of $10,209,
which will be amortized as a reduction to interest expense over the remaining
term of the debt.
On September 12, 2003, the Company closed four long-term, non-recourse
fixed-rate mortgage loans totaling $196,000 that are secured by three of the
Company's regional malls and one associated center. The loans bear interest at
rates ranging from 4.52% to 5.45%, with a weighted average rate of 4.85%, and
have terms of five to ten years, with a weighted average term of 6.5 years.
In order to fund a portion of its acquisition of the four-mall
portfolio discussed under Acquisitions, the Company obtained a short-term,
unsecured credit facility of $130,000 that will bear interest at LIBOR plus
1.30% and mature on January 31, 2004. This credit facility can be extended at
the Company's option for two additional periods of four months each. No amounts
were outstanding under this facility as of September 30, 2003. On October 1,
2003, the Company borrowed $82,352 under this facility to fund the acquisitions
of the second and third malls, which was subsequently repaid with proceeds from
the sale to Galileo America REIT discussed under Dispositions.
The Company's secured credit facilities total $365.0 million, of which
$87.8 million was available at September 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 $6.4 million was available at September 30, 2003.
As of September 30, 2003, total commitments under construction loans
were $104.8 million, of which $75.2 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 $12.8
million available in unfunded construction loans on operating properties that
can be used to replenish working capital previously used for construction.
The Company 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 had one interest rate swap agreement on $80.0
million of variable-rate debt that expired on August 30, 2003.
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.
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
27
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)
MALL EXPANSIONS
- -----------------------------------
Arbor Place Rich's-Macy's Douglasville, GA 140,000 November 2004
East Towne Mall Madison, WI 139,000 November 2004
West Towne Mall Madison, WI 94,000 November 2004
ASSOCIATED CENTER
- -----------------------------------
The Shoppes of Panama City Panama City, FL 57,000 February 2004
COMMUNITY CENTERS
- -----------------------------------
Charter Oak Marketplace Hartford, CT 312,000 November 2004
Garden City Plaza Expansion Garden City, KS 26,500 April 2004
Wilkes-Barre Township Marketplace Wilkes-Barre Township, PA 281,000 May 2004
The following renovation projects are currently under construction:
Property Location Projected Completion Date
- --------------------- -------------------- --------------------------
Eastgate Mall Cincinnati, OH November 2003
East Towne Mall Madison, WI November 2003
West Towne Mall Madison, WI 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%.
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 acquired Cross Creek Mall on September 10, 2003 for a
purchase price of $116.7 million, including closing costs. The purchase price
consisted of $52.5 million in cash and the assumption of $64.2 million of
non-recourse, fixed-rate debt. The debt bears interest at a fixed rate of 7.40%
28
and matures in April 2012. Since the interest rate of 7.40% was above market
rates for similar debt instruments at the date of acquisition, the Company has
recorded a debt premium of $10.2 million, which will be amortized as a reduction
to interest expense over the remaining term of the debt.
On October 1, 2003, the Company closed on River Ridge Mall and Valley
View Mall for a total purchase price of $147.3 million, which consisted of $79.7
million in cash and the assumption of $67.6 million of debt. The loans mature in
2007 and 2012 and have a weighted average interest rate of 8.6%. Since the
interest rates on these loans were above market rates for similar debt
instruments at the date of acquisition, the Company has recorded total debt
premiums of $11.6 million, which will be amortized as a reduction to interest
expense over the remaining terms of the these loans. The fourth mall, Southpark
Mall, is scheduled to close in 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 $4.9 million during the nine months
ended September 30, 2003.
In August 2003, the Company sold two community centers, Signal Hills
Village in Statesville, NC, and Chester Plaza in Richmond, VA, for a total of
$2.2 million and recognized a gain of $0.6 million.
On October 6, 2003, the Company sold Colleton Square, a community
center in Walterboro, SC, for $0.8 million and recognized a loss of $0.3
million.
On September 24, 2003, the Company formed a joint venture with Galileo
America REIT, the U.S. affiliate of Australia-based Galileo America Shopping
Trust, to invest in power and community centers throughout the United States.
The Company will contribute, in three phases, 90% of its interests in 51 power
and community centers for a total price of $516.0 million.
On October 23, 2003, the parties completed the first phase of the
transaction when the Company sold its interests in 41 power and community
centers to the joint venture for $393.9 million, which consisted of $255.5
million in cash, the payoff of $24.9 million of debt on one of the community
centers that was sold to the joint venture, the joint venture's assumption of
$93.0 million in debt and $20.4 million representing the 10% interest in the
joint venture that the Company retained. The Company used the cash proceeds to
reduce outstanding borrowings under the Company's credit facilities.
The second phase of the transaction is scheduled to close in January
2004 and the third phase is scheduled to close in January 2005.
Pursuant to a long-term agreement, the Company will be the exclusive
manager for all of the joint venture's properties in the United States, and will
be entitled to management, leasing, acquisition, disposition and financing fees.
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
29
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.
For capital expenditures at operating properties, including its share of
unconsolidated affiliates' capital expenditures and excluding minority
investor's share of capital expenditures, the Company spent $24.3 million during
the first nine 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 $54.6 million
for the first nine months of 2003. Renovation expenditures, which include some
deferred maintenance items, were $22.9 million for the nine months ended
September 30, 2003, a portion of which is recovered from tenants. Deferred
maintenance expenditures and renovation expenditures included $7.7 million
for the resurfacing and the improved lighting of parking lots and $7.8 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.
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.
Revenue Recognition
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. Development and leasing fees received from
unconsolidated affiliates during the development period are recognized as
revenue only to the extent of the third-party partners' ownership interest. Fees
to the extent of the Company's ownership interest are recorded as a reduction to
the Company's investment in the unconsolidated affiliate.
30
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.
Capitalization
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. 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 liabilities assumed generally consist
of mortgage debt on the real estate assets acquired.
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 terms of the respective leases. Any debt premium or discount
related to the difference between the face value of the debt assumed and its
fair value is amortized to interest expense over the remaining term of the debt.
Carrying Value of Real Estate Assets
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 September 30, 2003, the Company did not own any real estate
assets that were impaired.
ACCOUNTING FOR STOCK OPTIONS
See Note 12 to the unaudited consolidated financial statements for a
description of the Company's accounting for stock options.
RECENT ACCOUNTING PRONOUNCEMENTS
As described in Note 13 to the unaudited consolidated financial
statements, the FASB has issued certain statements that were effective January
1, 2003.
31
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.
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 September 30, 2003, FFO increased $8.8
million, or 15.4%, to $65.8 million from $57.0 million for the same period in
2002. For the nine months ended September 30, 2003, FFO increased by $28.6
million, or 16.7%, to $200.5 million as compared to $171.9 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 $0.5 million and $1.0 million in the three months ended
September 30, 2003 and 2002, respectively, and $2.1 million and $5.6 million in
the nine months ended September 30, 2003 and 2002, respectively. Gains on sales
of outparcels were $0.8 million and $0.5 million in the three months ended
September 30, 2003 and 2002, respectively, and $4.9 million and $2.7 million in
the nine months ended September 30, 2003 and 2002, respectively.
32
The Company's calculation of FFO is as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2003 2002 2003 2002
------------- ----------- ----------- ------------
Net income available to common shareholders $20,225 $17,465 $64,023 $53,763
Depreciation and amortization from consolidated properties 28,385 24,084 82,362 70,183
Depreciation and amortization from unconsolidated affiliates 982 1,365 3,001 3,137
Depreciation and amortization from discontinued operations 6 98 41 590
Minority interest in earnings of operating partnership 17,235 14,599 55,851 47,131
Minority investors' share of depreciation and amortization
in shopping center properties (282) (307) (823) (1,001)
Gain on discontinued operations (633) (165) (3,568) (1,572)
Depreciation and amortization of non-real estate assets (117) (128) (383) (355)
------------- ----------- ----------- ------------
FUNDS FROM OPERATIONS $65,801 $57,011 $200,504 $171,876
============= =========== =========== ============
DILUTED WEIGHTED AVERAGE SHARES AND
POTENTIAL DILUTIVE COMMON SHARES
WITH OPERATING PARTNERSHIP UNITS
FULLY CONVERTED 56,884 55,227 56,719 54,013
ITEM 3: Quantitative and Qualitative Disclosures 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.
Based on the Company's proportionate share of consolidated and
unconsolidated variable rate debt at September 30, 2003, a 0.5% increase or
decrease in interest rates on this variable-rate debt would decrease or increase
annual cash flows by approximately $2.2 million and, after the effect of
capitalized interest, annual earnings by approximately $1.9 million.
Based on the Company's proportionate share of consolidated and
unconsolidated debt at September 30, 2003, a 0.5% increase in interest rates
would decrease the fair value of debt by approximately $56.8 million, while a
0.5% decrease in interest rates would increase the fair value of debt by
approximately $58.6 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.
33
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings
None
ITEM 2: Changes in Securities and Use of Proceeds
None
ITEM 3: Defaults Upon Senior Securities
None
ITEM 4: Submission of Matters to a Vote of Security Holders
None
ITEM 5: Other Information
None
ITEM 6: Exhibits and Reports on Form 8-K
A. Exhibits
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 37.
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 38.
32.1 Certification pursuant to Securities Exchange Act Rule 13a-14(b)
by the Chief Executive Officer, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, see page 39.
32.2 Certification pursuant to Securities Exchange Act Rule 13a-14(b)
by the Chief Financial Officer as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, see page 40.
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 for the quarter ended
June 30, 2003, the Company's earnings release and the Company's
supplemental information package 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
The Company's announcement that it had entered into purchase
agreements to acquire 100% of the interests in four regional
shopping malls was filed on August 15, 2003.
The opinion regarding legality, opinion regarding tax matters and
consent of counsel pertaining to the Company's shelf registration
statement (filed on June 10, 2003), the related prospectus (dated
June 10, 2003) and the related prospectus supplement (dated
August 6, 2003), related to the Company's public offering of its
7.75% Series C cumulative redeemable preferred stock were filed
on August 22, 2003.
The underwriting agreement (dated August 6, 2003), pricing
agreement (dated August 6, 2003) and press release related to the
Company's public offering of its 7.75% Series C Cumulative
Redeemable Preferred Stock were filed on August 26, 2003. The
related certificate of designations of the Company's 7.75% Series
C Cumulative Redeemable Preferred Stock was incorporated by
reference from the Company's registration statement on Form 8-A,
which was filed on August 21, 2003.
The Company filed a Form 8-K on September 19, 2003 that updated
Items 6, 7, 8 and 15 of the Company's Annual Report on Form 10-K
for the year ended December 31, 2002 to reflect (i) the
application of the requirements of Statement of Financial
Accounting Standards ("SFAS") No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" and (ii) the
adoption of SFAS No. 145, "Rescission of SFAS Nos. 4, 44 and 64,
Amendment of SFAS No. 13, and Technical Corrections".
The Company's announcement that it had formed a joint venture
with Galileo America REIT, the transcript of the Company's
prepared remarks from a conference call held on September 24,
2003 to discuss this joint venture and certain supplemental
information concerning the properties included in the transaction
were filed on September 25, 2003.
The outline from the Company's October 29, 2003 conference call
with analysts and investors regarding earnings for the quarter
ended September 30, 2003, the Company's earnings release and the
Company's supplemental information package were furnished on
October 29, 2003.
35
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.
CBL & ASSOCIATES PROPERTIES, INC.
/s/ John N. Foy
---------------------------------------------------
Vice Chairman of the Board, Chief Financial Officer
and Treasurer
(Authorized Officer of the Registrant,
Principal Financial Officer)
Date: November 14, 2003
36
Exhibit 31.1
CERTIFICATION
I, Charles B. Lebovitz, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of CBL &
Associates Properties, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this quarterly report
our conclusions about the effectiveness of the disclosure
controls and procedures as of the end of the period covered by
this quarterly report based on such evaluation; and
(c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
(5) The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: November 14, 2003
/s/ Charles B. Lebovitz
------------------------------------
Charles B. Lebovitz, Chief Executive Officer
37
Exhibit 31.2
CERTIFICATION
I, John N. Foy, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of CBL &
Associates Properties, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this quarterly report
our conclusions about the effectiveness of the disclosure
controls and procedures as of the end of the period covered by
this quarterly report based on such evaluation; and
(c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
(5) The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: November 14, 2003
/s/ John N. Foy
-----------------------------------
John N. Foy, Chief Financial Officer
38
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CBL & ASSOCIATES PROPERTIES,
INC. (the "Company") on Form 10-Q for the three months ending September 30, 2003
as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Charles B. Lebovitz, Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. ss. 1350 (as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002), that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Charles B. Lebovitz
- ------------------------------------
Charles B. Lebovitz, Chief Executive Officer
November 14, 2003
- ------------------------------------
Date
39
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CBL & ASSOCIATES PROPERTIES,
INC. (the "Company") on Form 10-Q for the three months ending September 30, 2003
as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, John N. Foy, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350 (as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002), that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ John N. Foy
- ------------------------------------
John N. Foy, Vice Chairman of the Board,
Chief Financial Officer and Treasurer
November 14, 2003
- ------------------------------------
Date
40