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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 JUNE 30, 2004
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 Number)
incorporation or organization)
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 for such shorter period that the Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 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 August 4, 2004, there were 30,851,794 shares of common stock, par value
$0.01 per share, outstanding.
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...........31
ITEM 4: Controls and Procedures..............................................32
PART II - OTHER INFORMATION...............................................32
ITEM 1: Legal Proceedings....................................................32
ITEM 2: Changes in Securities, Use of Proceeds and Issuer Purchase of
Equity Securities....................................................32
ITEM 3: Defaults Upon Senior Securities......................................32
ITEM 4: Submission of Matters to a Vote of Security Holders..................33
ITEM 5: Other Information....................................................33
ITEM 6: Exhibits and Reports on Form 8-K.....................................33
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 period ended June 30, 2004, 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. Annual Report on Form 10-K, as
amended, for the year ended December 31, 2003.
3
CBL & Associates Properties, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
June 30, December 31,
2004 2003
------------- --------------
ASSETS
Real estate assets:
Land.............................................................. $ 604,904 $ 578,310
Buildings and improvements........................................ 4,155,864 3,678,074
------------- --------------
4,760,768 4,256,384
Less accumulated depreciation................................... (519,045) (467,614)
------------- --------------
4,241,723 3,788,770
Real estate assets held for sale, net............................. 67,811 64,354
Developments in progress.......................................... 76,616 59,096
------------- --------------
Net investment in real estate assets............................ 4,386,150 3,912,220
Cash and cash equivalents........................................... 30,042 20,332
Cash in escrow...................................................... -- 78,476
Receivables:
Tenant, net of allowance for doubtful accounts of $3,237 in
2004 and 2003.................................................. 35,800 42,165
Other............................................................. 14,832 3,033
Mortgage and other notes receivable................................. 27,555 36,169
Investments in unconsolidated affiliates............................ 88,638 96,450
Other assets........................................................ 85,030 75,465
------------- --------------
$4,668,047 $4,264,310
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage and other notes payable.................................... $3,092,963 $2,709,348
Mortgage notes payable on real estate assets held for sale.......... 2,472 28,754
Accounts payable and accrued liabilities............................ 177,674 161,478
------------- --------------
Total liabilities................................................. 3,273,109 2,899,580
------------- --------------
Commitments and contingencies (Notes 2, 3 and 9) ...................
Minority interests.................................................. 540,894 526,993
------------- --------------
Shareholders' equity:
Preferred stock, $.01 par value, 15,000,000 shares authorized:
8.75% Series B Cumulative Redeemable Preferred Stock,
2,000,000 shares outstanding in 2004 and 2003.............. 20 20
7.75% Series C Cumulative Redeemable Preferred Stock,
460,000 shares outstanding in 2004 and 2003................ 5 5
Common stock, $.01 par value, 95,000,000 shares authorized,
30,837,720 and 30,323,476 shares issued and outstanding
in 2004 and 2003, respectively............................. 308 303
Additional paid - in capital...................................... 828,984 818,051
Deferred compensation............................................. (3,549) (1,607)
Retained earnings................................................. 28,276 20,965
------------- --------------
Total shareholders' equity...................................... 854,044 837,737
------------- --------------
$4,668,047 $4,264,310
============= ==============
The accompanying notes are an integral part of these balance sheets.
4
CBL & Associates Properties, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
REVENUES:
Minimum rents....................................... $114,044 $104,272 $223,031 $206,923
Percentage rents.................................... 1,474 1,198 8,168 7,521
Other rents......................................... 2,456 1,762 5,242 3,790
Tenant reimbursements............................... 50,657 49,961 98,839 97,797
Management, development and leasing fees............ 1,716 1,406 3,511 2,725
Other............................................... 5,849 3,798 10,296 7,149
----------- ----------- ----------- -----------
Total revenues.................................... 176,196 162,397 349,087 325,905
----------- ----------- ----------- -----------
EXPENSES:
Property operating.................................. 26,401 25,817 54,137 52,005
Depreciation and amortization....................... 33,026 27,593 65,759 53,807
Real estate taxes................................... 14,157 12,760 27,326 26,699
Maintenance and repairs............................. 10,217 9,585 20,503 20,109
General and administrative.......................... 7,992 6,644 16,225 12,997
Other............................................... 4,923 2,315 7,955 4,656
----------- ----------- ----------- -----------
Total expenses.................................... 96,716 84,714 191,905 170,273
----------- ----------- ----------- -----------
Income from operations.............................. 79,480 77,683 157,182 155,632
Interest income..................................... 706 592 1,586 1,165
Interest expense.................................... (42,798) (38,350) (83,232) (75,292)
Loss on extinguishment of debt...................... -- (167) -- (167)
Gain on sales of real estate assets................. 4,955 3,002 24,780 4,096
Equity in earnings of unconsolidated affiliates..... 2,682 731 5,546 2,487
Minority interest in earnings:
Operating partnership............................. (17,840) (17,979) (42,874) (38,616)
Shopping center properties........................ (1,819) (885) (3,058) (1,413)
----------- ----------- ----------- -----------
Income before discontinued operations............... 25,366 24,627 59,930 47,892
Operating income of discontinued operations......... 233 87 279 355
Gain on discontinued operations..................... 525 -- 520 2,935
----------- ----------- ----------- -----------
Net income.......................................... 26,124 24,714 60,729 51,182
Preferred dividends................................. (4,416) (3,692) (8,832) (7,384)
----------- ----------- ----------- -----------
Net income available to common shareholders......... $ 21,708 $ 21,022 $ 51,897 $ 43,798
=========== =========== =========== ===========
Basic per share data:
Income before discontinued operations,
net of preferred dividends.................. $ 0.69 $ 0.70 $ 1.68 $ 1.36
Discontinued operations......................... 0.02 0.00 0.02 0.11
----------- ----------- ----------- -----------
Net income available to common
shareholders................................. $ 0.71 $ 0.70 $ 1.70 $ 1.47
=========== =========== =========== ===========
Weighted average common shares
outstanding................................ 30,600 29,886 30,464 29,806
Diluted per share data:
Income before discontinued operations,
net of preferred dividends................... $ 0.66 $ 0.67 $ 1.61 $ 1.31
Discontinued operations......................... 0.02 0.01 0.03 0.11
----------- ----------- ----------- -----------
Net income available to common
shareholders................................. $ 0.68 $ 0.68 $ 1.64 $ 1.42
=========== =========== =========== ===========
Weighted average common and potential
dilutive common shares outstanding........... 31,755 31,066 31,686 30,942
The accompanying notes are an integral part of these statements.
5
CBL & Associates Properties, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
June 30,
----------------------------
2004 2003
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... $60,729 $51,182
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation................................................................ 47,063 41,057
Amortization ............................................................... 22,114 15,309
Amortization of debt premiums............................................... (2,057) --
Gain on sales of real estate assets......................................... (24,780) (4,106)
Gain on discontinued operations............................................. (520) (2,935)
Issuance of stock under incentive plan...................................... 1,268 1,203
Write-off of development projects........................................... 1,685 107
Accrual of deferred compensation............................................ 230 177
Amortization of deferred compensation....................................... 257 62
Loss on extinguishment of debt.............................................. -- 167
Minority interest in earnings............................................... 45,932 40,049
Amortization of above and below market leases............................... (1,171) --
Changes in:
Tenant and other receivables................................................ (4,362) (3,065)
Other assets................................................................ (6,585) (6,172)
Accounts payable and accrued liabilities.................................... 10,335 (8,047)
---------- ----------
Net cash provided by operating activities........................... 150,137 124,988
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of real estate assets and other assets....................... (339,676) (40,635)
Additions to real estate assets........................................... (40,260) (27,922)
Other capital expenditures................................................ (33,601) (73,156)
Capitalized interest...................................................... (2,051) (2,742)
Additions to other assets................................................. (1,746) (1,014)
Reduction of cash in escrow .............................................. 78,476 --
Proceeds from sales of real estate assets................................. 103,980 15,657
Additions to note receivable.............................................. (225) --
Payments received on mortgage notes receivable............................ 8,839 1,004
Additional investments in and advances to unconsolidated affiliates....... (13,043) (4,472)
Distributions in excess of equity in earnings of unconsolidated affiliates 9,784 148
Purchase of minority interest in the operating partnership................ (4,143) --
---------- ----------
Net cash used in investing activities............................... (233,666) (133,132)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage and other notes payable............................ 341,290 243,680
Principal payments on mortgage and other notes payable.................... (164,665) (144,871)
Additions to deferred financing costs..................................... (1,681) (3,331)
Proceeds from issuance of common stock.................................... 274 2,173
Proceeds from exercise of stock options................................... 9,968 5,425
Distributions to minority interests....................................... (38,898) (35,981)
Dividends paid............................................................ (53,049) (46,556)
---------- ----------
Net cash provided by financing activities........................... 93,239 20,539
---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS....................................... 9,710 12,395
CASH AND CASH EQUIVALENTS, beginning of period 20,332 13,355
---------- ----------
CASH AND CASH EQUIVALENTS, end of period...................................... $30,042 $25,750
========== ==========
SUPPLEMENTAL INFORMATION:
Cash paid for interest, net of amounts capitalized.......................... $81,460 $74,188
========== ==========
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 ownership, development, acquisition, leasing,
management and operation of regional shopping malls and community centers. CBL's
shopping center properties are located primarily in the Southeast and Midwest,
as well as in select markets in other regions of the United States.
CBL conducts substantially all of its business through CBL & Associates
Limited Partnership (the "Operating Partnership"). At June 30, 2004, the
Operating Partnership owned controlling interests in 61 regional malls, 24
associated centers (each adjacent to a regional shopping mall), 14 community
centers and CBL's corporate office building. The Operating Partnership
consolidates the financial statements of all entities in which it has a
controlling financial interest. The Operating Partnership owned non-controlling
interests in five regional malls, one associated center and 42 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 had one mall, which is owned in a joint venture, one
open-air shopping center, seven expansions and one community center under
construction at June 30, 2004. 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 June 30, 2004, CBL Holdings I, Inc., the sole
general partner of the Operating Partnership, owned a 1.7% general partner
interest in the Operating Partnership and CBL Holdings II, Inc. owned a 53.4%
limited partner interest for a combined interest held by CBL of 55.1%.
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 partner 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 limited partner interests when the Operating
Partnership acquired the majority of Jacobs' interests in 23 properties in
January 2001 and the balance of such interests in February 2002. At June 30,
2004, CBL's Predecessor owned a 15.6% limited partner interest, Jacobs owned a
21.4% limited partner interest and third parties owned a 7.9% limited partner
interest in the Operating Partnership. CBL's Predecessor also owned 2.6 million
shares of CBL's common stock at June 30, 2004, for a total combined effective
interest of 20.3% in the Operating Partnership.
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"). During March 2004, the Operating
Partnership acquired the 94% of the Management Company's common stock that was
owned by individuals who are directors and/or officers of CBL, resulting in the
Operating Partnership owning 100% of the Management Company's common stock. The
Operating Partnership paid $75 for the 94% of common stock acquired, which was
equal to the initial capital contribution of the individuals that owned the
interest. The Operating Partnership continues to own 100% of the Management
Company's preferred stock. As a result, the Company continues to consolidate the
Management Company.
7
CBL, the Operating Partnership and the Management Company are
collectively referred to herein as "the Company".
Note 2 - Investments In Unconsolidated Affiliates
At June 30, 2004, the Company had investments in the following nine
partnerships and joint ventures, which are accounted for using the equity method
of accounting:
Company's
Joint Venture Property Name Interest
- --------------------------------------------------------------------------------
Governor's Square IB Governor's Plaza 50.0%
Governor's Square Company Governor's Square 47.5%
Imperial Valley Mall L.P. Imperial Valley Mall 60.0%
Kentucky Oaks Mall Company Kentucky Oaks Mall 50.0%
Mall of South Carolina L.P. Coastal Grand 50.0%
Mall of South Outparcel L.P. Coastal Grand (vacant land) 50.0%
Mall Shopping Center Company Plaza del Sol 50.6%
Parkway Place L.P. Parkway Place 45.0%
Galileo America LLC Portfolio of 42 community centers 10.0%
Condensed combined financial statement information for the unconsolidated
affiliates is as follows:
Company's Share for the
Total for the Three Months Three Months
Ended June 30, Ended June 30,
------------------------------ ---------------------------
2004 2003 2004 2003
----------- ----------- ------------ -----------
Revenues $26,829 $ 9,770 $ 7,464 $ 5,799
Depreciation and amortization (6,393) (2,076) (1,565) (1,123)
Interest expense (6,473) (2,319) (1,658) (1,786)
Other operating expenses (7,517) (2,913) (2,206) (2,159)
Discontinued operations 215 -- 21 --
Gain on sales of real estate assets 2,414 -- 626 --
----------- ----------- ------------ -----------
Net income $ 9,075 $ 2,462 $ 2,682 $ 731
=========== =========== ============ ===========
Company's Share for the
Total for the Six Months Six Months
Ended June 30, Ended June 30,
------------------------------ ---------------------------
2004 2003 2004 2003
----------- ----------- ------------ -----------
Revenues $51,881 $20,516 $13,816 $11,954
Depreciation and amortization (11,582) (3,673) (2,762) (2,019)
Interest expense (12,388) (5,331) (3,077) (3,882)
Other operating expenses (13,382) (5,455) (3,669) (3.566)
Discontinued operations 215 -- 21 --
Gain on sales of real estate assets 3,589 -- 1,217 --
----------- ----------- ------------ -----------
Net income $18,333 $ 6,057 $ 5,546 $ 2,487
=========== =========== ============ ===========
The second phase of the Company's joint venture transaction with Galileo
America, Inc. closed on January 5, 2004, when the Company sold its interest in
six community centers for $92,375, which consisted of $62,687 in cash, the
retirement of $25,953 of debt on one of the community centers, the joint
venture's assumption of $2,816 of debt and closing costs of $919. The real
estate assets and related mortgage notes payable of the properties in the second
phase were reflected as held for sale as of December 31, 2003. The Company did
not record any depreciation expense on these assets during 2004.
The Company has entered into master lease agreements with Galileo America
on certain of the first and second phase properties. The remaining aggregate
obligation under these master lease agreements was $6,694 at June 30, 2004. The
master lease arrangements are for various terms of up to fifteen years.
The third phase of the joint venture transaction is scheduled to close in
January 2005 and will include four community centers and one community center
expansion. The total purchase price for these community centers will be $86,800.
The real estate assets and related mortgage notes payable of the properties that
8
will be included in the third phase have been reflected as held for sale at June
30, 2004. The Company ceased recording depreciation expense on these assets in
January 2004 when it was determined these assets met the criteria to be
reflected as held for sale.
The results of operations of the properties included in the Galileo America
transaction are not reflected as discontinued operations since the Company has
continuing involvement through its 10% ownership interest and the agreement
under which the Company is the exclusive manager of the properties.
See Note 5 to the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2003, for a
more complete description of the Galileo America transaction.
In January 2003, the Financial Accounting Standards Board ("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. Previously, entities were generally consolidated by an enterprise when
it had a controlling financial interest through ownership of a majority voting
interest in the entity. The Company adopted the provisions of FASB
Interpretation No. 46 effective January 1, 2004.
The Company determined that one unconsolidated affiliate, PPG Venture I
Limited Partnership ("PPG"), is a variable interest entity and that the Company
is the primary beneficiary. The Company began consolidating the assets,
liabilities and results of operations of PPG effective January 1, 2004. The
Company initially measured the assets, liabilities and noncontrolling interest
of PPG at the carrying amounts at which they would have been carried in the
consolidated financial statements as if FASB Interpretation No. 46 had been
effective when the Company first met the conditions to be the primary
beneficiary, which was the inception of PPG. The Company owns a 10% interest in
PPG, which owns one associated center and two community centers. At June 30,
2004, PPG had non-recourse, fixed-rate debt of $37,974 that was secured by the
real estate assets it owns, which had a net carrying value of $50,366.
Note 3 - Mortgage and Other Notes Payable
Mortgage and other notes payable consisted of the following at June 30,
2004 and December 31, 2003, respectively:
June 30, 2004 December 31, 2003
------------------------------ ---------------------------
Weighted Weighted
Average Average
Interest Interest
Amount Rate(1) Amount Rate(1)
--------------- ----------- -------------- -----------
Fixed-rate debt:
Non-recourse loans on operating properties $ 2,366,070 6.56% $ 2,256,544 6.65%
--------------- --------------
Variable-rate debt:
Recourse term loans on operating properties 238,825 2.25% 105,558 2.67%
Construction loans 9,140 2.91% - -
Lines of credit 481,400 2.24% 376,000 2.23%
--------------- --------------
Total variable-rate debt 729,365 2.25% 481,558 2.33%
Total -------------- --------------
$ 3,095,435 5.55% $ 2,738,102 5.87%
============== ==============
(1) Weighted-average interest rate before amortization of deferred
financing costs.
See Note 6 for a description of debt assumed in connection with
acquisitions completed during the six months ended June 30, 2004.
9
Unsecured Line of Credit
The Company has a short-term, unsecured line of credit that is used for
acquisition purposes and bears interest at LIBOR plus 1.30%. The total available
under this line of credit is $130,000, of which $62,400 was outstanding at June
30, 2004. The unsecured line of credit matures September 30, 2004. Borrowings
under the unsecured line of credit had a weighted average interest rate of 2.68%
at June 30, 2004.
Secured Lines of Credit
The Company has four secured lines of credit that are used for
construction, acquisition, and working capital purposes. Each of these lines is
secured by mortgages on certain of the Company's operating properties. The
following summarizes certain information about the secured lines of credit as of
June 30, 2004:
Total Total Maturity
Available Outstanding Date
- ----------------------------------------------------
$ 373,000 $ 327,000 February 2006
80,000 62,000 June 2005
20,000 20,000 March 2007
10,000 10,000 April 2005
- -------------------------------------
$ 483,000 $ 419,000
=====================================
Borrowings under the secured lines of credit had a weighted average
interest rate of 2.17% at June 30, 2004.
Letters of Credit
At June 30, 2004, the Company had additional secured lines of credit with a
total commitment of $25,652 that can only be used for issuing letters of credit.
The total outstanding under these lines of credit was $12,573 at June 30, 2004.
Covenants and Restrictions
Eighteen malls, six associated centers and the office building are owned by
special purpose entities that are included in the Company's consolidated
financial statements. The sole business purpose of the special purpose entities
is to own and operate these properties, each of which is 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.
As of June 30, 2004, the Company had $950 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
4.7 years at June 30, 2004 and 5.3 years at December 31, 2003.
10
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. The Company's interest rate cap agreement on
$40,000 of variable-rate debt expired in May 2004. The Company had no derivative
instruments at June 30, 2004.
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:
Associated Community
Three Months Ended June 30, 2004 Malls Centers Centers All Other Total
- -------------------------------------- ----------- ------------ ----------- ----------- -----------
Revenues $160,078 $ 6,547 $ 4,836 $ 4,735 $ 176,196
Property operating expenses (1) (51,472) (1,535) (1,540) 3,772 (50,775)
Interest expense (39,464) (1,192) (778) (1,364) (42,798)
Other expense -- -- -- (4,923) (4,923)
Gain on sales of real estate assets 479 -- 4,487 (11) 4,955
----------- ------------ ----------- ----------- -----------
Segment profit and loss $ 69,621 $ 3,820 $ 7,005 $ 2,209 82,655
=========== ============ =========== ===========
Depreciation and amortization expense (33,026)
General and administrative expense (7,992)
Interest income 706
Equity in earnings and minority
interest in earnings (16,977)
-----------
Income before discontinued operations $ 25,366
===========
Capital expenditures (2) $301,532 $ 47 $ 1,203 $ 22,345 $ 325,080
Associated Community
Three Months Ended June 30, 2003 Malls Centers Centers All Other Total
- -------------------------------------- ----------- ------------ ----------- ----------- -----------
Revenues $ 139,111 $ 5,803 $ 14,683 $ 2,800 $ 162,397
Property operating expenses (1) (47,376) (1,298) (3,475) 3,987 (48,162)
Interest expense (34,493) (948) (2,035) (874) (38,350)
Other expense -- -- -- (2,315) (2,315)
Gain on sales of real estate assets 1,270 -- 1,732 -- 3,002
----------- ------------ ----------- ----------- -----------
Segment profit and loss $ 58,512 $ 3,557 $ 10,905 $ 3,598 76,572
=========== ============ =========== ===========
Depreciation and amortization expense (27,593)
General and administrative expense (6,644)
Interest income 592
Loss on extinguishment of debt (167)
Equity in earnings and minority
interest in earnings (18,133)
-----------
Income before discontinued operations $ 24,627
===========
Capital expenditures (2) $ 97,969 $ 9,463 $ 4,313 $ 5,673 $ 117,418
11
Associated Community
Six Months Ended June 30, 2004 Malls Centers Centers All Other Total
- -------------------------------------- ----------- ------------ ----------- ----------- -----------
Revenues $ 317,691 $ 14,489 $ 8,449 $ 8,458 $ 349,087
Property operating expenses (1) (104,742) (3,084) (2,675) 8,535 (101,966)
Interest expense (76,790) (2,396) (1,519) (2,527) (83,232)
Other expense -- -- -- (7,955) (7,955)
Gain on sales of real estate assets 1,026 -- -- 23,754 24,780
----------- ------------ ----------- ----------- -----------
Segment profit and loss $ 137,185 $ 9,009 $ 4,255 $ 30,265 180,714
=========== ============ =========== ===========
Depreciation and amortization expense (65,759)
General and administrative expense (16,225)
Interest income 1,586
Equity in earnings and minority
interest in earnings (40,386)
-----------
Income before discontinued operations $ 59,930
===========
Total assets $4,184,680 $214,492 $160,226 $108,649 $4,668,047
Capital expenditures (2) $ 523,655 $ 433 $ 5,605 $ 41,053 $ 570,746
Associated Community
Six Months Ended June 30, 2003 Malls Centers Centers All Other Total
- -------------------------------------- ----------- ------------ ----------- ----------- -----------
Revenues $ 280,022 $ 11,199 $ 29,563 $ 5,121 $ 325,905
Property operating expenses (1) (95,271) (2,635) (7,197) 6,290 (98,813)
Interest expense (67,341) (1,900) (3,962) (2,089) (75,292)
Other expense -- -- -- (4,656) (4,656)
Gain on sales of real estate assets 1,261 -- -- 2,835 4,096
----------- ------------ ----------- ----------- -----------
Segment profit and loss $ 118,671 $ 6,664 $ 18,404 $ 7,501 151,240
=========== ============ =========== ===========
Depreciation and amortization expense (53,807)
General and administrative expense (12,997)
Interest income 1,165
Loss on extinguishment of debt (167)
Equity in earnings and minority
interest in earnings (37,542)
-----------
Income before discontinued operations $ 47,892
===========
Total assets $3,182,195 $189,142 $442,704 $135,666 $3,949,707
Capital expenditures (2) $ 134,454 $ 15,026 $ 11,002 $ 8,700 $ 169,182
(1) Property operating expenses include property operating expenses, real
estate taxes and maintenance and repairs. (2) Amounts include acquisitions
of real estate assets and investments in unconsolidated affiliates.
Developments in progress are included in the All Other category.
Note 6 - Acquisitions
On March 12, 2004, the Company acquired Honey Creek Mall in Terre Haute, IN
for a purchase price, including transaction costs, of $83,114, which consisted
of $50,114 in cash and the assumption of $33,000 of non-recourse debt that bears
interest at a stated rate of 6.95% and matures in May 2009. The Company recorded
a debt premium of $3,146, computed using an estimated market interest rate of
4.75%, since the debt assumed was at an above-market interest rate compared to
similar debt instruments at the date of acquisition.
On March 12, 2004, the Company acquired Volusia Mall in Daytona Beach, FL
for a purchase price, including transaction costs, of $118,493, which consisted
of $63,686 in cash and the assumption of $54,807 of non-recourse debt that bears
interest at a stated rate of 6.70% and matures in March 2009. The Company
recorded a debt premium of $4,615, computed using an estimated market interest
rate of 4.75%, since the debt assumed was at an above-market interest rate
compared to similar debt instruments at the date of acquisition.
12
On April 8, 2004, the Company acquired Greenbrier Mall in Chesapeake, VA
for a cash purchase price, including transaction costs, of $107,450. The
purchase price was partially financed with a new recourse term loan of $92,650
that bears interest at LIBOR plus 100 basis points, matures in April 2006 and
has three one-year extension options that are at the option of the Company.
On April 21, 2004, the Company acquired Fashion Square, a community center
in Orange Park, FL for a cash purchase price, including transaction costs, of
$3,961.
On May 20, 2004, the Company acquired Chapel Hill Mall and its associated
center, Chapel Hill Suburban, in Akron, OH for a cash purchase price of $78,252,
including transaction costs. The purchase price was partially financed with a
new recourse term loan of $66,500 that bears interest at LIBOR plus 100 basis
points, matures in May 2006 and has three one-year extension options that are at
the option of the Company.
On June 22, 2004, the Company acquired Park Plaza Mall in Little Rock, AR
for a purchase price, including transaction costs, of $77,526, which consisted
of $36,213 in cash and the assumption of $41,313 of non-recourse debt that bears
interest at a stated rate of 8.69% and matures in May 2010. The Company recorded
a debt premium of $7,737, computed using an estimated market interest rate of
4.90%, since the debt assumed was at an above-market interest rate compared to
similar debt instruments at the date of acquisition.
The results of operations of the acquired properties 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,
during the six months ended June 30, 2004.
Land $ 26,112
Building and improvements 459,217
Above-market leases 1,086
In-place lease assets 6,453
----------
Total assets 492,868
Debt (129,120)
Debt premiums (15,498)
Below-market leases (8,574)
----------
Net assets acquired $ 339,676
==========
Lease-related intangibles from acquisitions of real estate assets are
amortized over the remaining terms of the related leases. Any 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 using the effective interest method.
Note 7- 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:
13
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2004 2003 2004 2003
----------- ---------- ---------- ---------
Weighted average shares outstanding 30,744 30,036 30,611 29,944
Effect of nonvested stock awards (144) (150) (147) (138)
----------- ---------- ---------- ---------
Denominator - basic earnings per share 30,600 29,886 30,464 29,806
Effect of dilutive securities:
Stock options, nonvested stock awards and
deemed shares related to deferred
compensation plans 1,155 1,180 1,222 1,136
----------- ---------- ---------- ---------
Denominator - diluted earnings per share 31,755 31,066 31,686 30,942
=========== ========== ========== =========
Note 8- Comprehensive Income
Comprehensive income includes all changes in shareholders' equity during
the period, except those resulting from investments by shareholders and
distributions to shareholders. Comprehensive income consisted of the following
components:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2004 2003 2004 2003
----------- ---------- ---------- ---------
Net income $26,124 $24,714 $60,729 $51,182
Gain on current period cash flow hedges -- 917 -- 1,771
----------- ---------- ---------- ---------
Comprehensive income $26,124 $25,631 $60,729 $52,953
=========== ========== ========== =========
Note 9- 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 June 30, 2004,
was $57,830, of which the Company has guaranteed $28,915. The guaranty will
expire when the related debt matures in December 2004. The Company did not
receive a fee for issuing this guaranty.
Under the terms of the partnership agreement of Mall of South Carolina
L.P., an unconsolidated affiliate in which the Company owns a 50% interest, the
Company has guaranteed 100% of the construction debt incurred to develop Coastal
Grand - Myrtle Beach in Myrtle Beach, SC. The total amount outstanding at June
30, 2004, was $75,933. 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 remaining $786
attributable to the Company's ownership interest is recorded as a reduction to
the Company's investment in the partnership. The Company recognized $262 of
revenue related to this guaranty during the six months ended June 30, 2004.
The Company has guaranteed 100% of the construction debt to be incurred by
Imperial Valley Mall L.P., an unconsolidated affiliate in which the Company owns
a 60% interest, to develop Imperial Valley Mall. The total amount outstanding at
June 30, 2004, was $11,293. The total commitment under the construction loan is
$70,000.
14
Note 10 - Shareholders' Equity and Minority Interests
On January 2, 2004, the Company repurchased 77,141 common units in the
Operating Partnership from a third party for $4,030. On June 28, 2004, the
Company repurchased 1,838 special common units in the Operating Partnership from
a third party for $89.
Note 11 - Stock-Based Compensation
Historically, the Company accounted for its stock-based compensation plans
under the recognition and measurement principles of Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees" (APB No. 25) and
related Interpretations. Effective January 1, 2003, the Company elected to begin
recording the expense associated with stock options granted after January 1,
2003, on a prospective basis in accordance with the fair value and transition
provisions of SFAS No. 123, "Accounting for Stock Based Compensation", as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure - An Amendment of FASB Statement No. 123." There were no stock
options granted during the six months ended June 30, 2004 and 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. Therefore, stock-based compensation expense included in net
income available to common shareholders in the six months ended June 30, 2004
and 2003 is less than that which would have been recognized if the fair value
method had been applied to all stock-based awards since the effective date of
SFAS No. 123. 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 all outstanding and unvested awards in each
period:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2004 2003 2004 2003
----------- ----------- ---------- ----------
Net income available to common shareholders, as reported $21,708 $21,022 $51,897 $43,798
Stock-based compensation expense included in reported
net income available to common shareholders 292 406 1,285 835
Total stock-based compensation expense determined under
fair value method (420) (554) (1,540) (1,136)
----------- ----------- ---------- ----------
Pro forma net income available to common shareholders $21,580 $20,874 $51,642 $43,497
=========== =========== ========== ==========
Net income available to common shareholders per share:
Basic, as reported $ 0.71 $ 0.70 $ 1.70 $ 1.47
=========== =========== ========== ==========
Basic, pro forma $ 0.71 $ 0.70 $ 1.70 $ 1.46
=========== =========== ========== ==========
Diluted, as reported $ 0.68 $ 0.68 $ 1.64 $ 1.42
=========== =========== ========== ==========
Diluted, pro forma $ 0.68 $ 0.67 $ 1.63 $ 1.41
=========== =========== ========== ==========
Note 12 - Noncash Investing and Financing Activities
The Company's noncash investing and financing activities were as follows
for the six months ended June 30, 2004 and 2003:
Six Months Ended
June 30,
-------------------------
2004 2003
-------------------------
Debt assumed to acquire property interests, including premiums $144,618 $ 40,000
=========================
Debt consolidated from application of FASB Interpretation No. 46 $38,147 $ --
=========================
15
Note 13 - Discontinued Operations
In June 2004, the Company sold a community center for a sales price of
$1,800 and recognized a gain on discontinued operations of $552. Total revenues
for this community center were $66 and $81 for the three months ended June 30,
2004 and 2003, respectively, and were $151 and $163 for the six months ended
June 30, 2004 and 2003, respectively. All prior periods presented have been
restated to reflect the operations of this community center as discontinued
operations.
Note 14 - Subsequent Event
On July 28, 2004, the Company acquired Monroeville Mall in the eastern
Pittsburgh suburb of Monroeville, PA, for a purchase price of $231,234, which
consisted of $36,275 in cash, the assumption of $134,004 of non-recourse debt
that bears interest at a stated rate of 5.73% and matures in January 2013 and
the issuance of 780,470 special common units in the Operating Partnership valued
at $60,955 ($78.10 per special common unit). The Company recorded a debt premium
of $3,589, computed using an estimated market interest rate of 5.30%, since the
debt assumed was at an above-market interest rate compared to similar debt
instruments at the date of acquisition. The results of operations of Monroeville
Mall will be included in the consolidated financial statements beginning July
28, 2004.
Note 15 - Reclassifications
Certain reclassifications have been made to prior periods' financial
information to conform to the current period presentation.
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and accompanying notes that are included in this Form 10-Q. In this
discussion, the terms "we", "us", "our", and the "Company" refer to CBL &
Associates Properties, Inc. and its subsidiaries.
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 we believe the expectations reflected in any forward-looking
statements are based on reasonable assumptions, we 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 our 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
our future business. We disclaim any obligation to update or revise any
forward-looking statements to reflect actual results or changes in the factors
affecting the forward-looking information.
EXECUTIVE OVERVIEW
We are a self-managed, self-administered, fully integrated real estate
investment trust ("REIT") that is engaged in the ownership, development,
acquisition, leasing, management and operation of regional shopping malls and
community centers. Our shopping center properties are located primarily in the
Southeast and Midwest, as well as in select markets in other regions of the
United States.
16
As of June 30, 2004, we owned controlling interests in 61 regional malls,
24 associated centers (each adjacent to a regional shopping mall), 14 community
centers and our corporate office building. We consolidate the financial
statements of all entities in which we have a controlling financial interest. As
of June 30, 2004, we owned non-controlling interests in five regional malls, one
associated center and 42 community centers. Because major decisions such as the
acquisition, sale or refinancing of principal partnership or joint venture
assets must be approved by one or more of the other partners, we do not control
these partnerships and joint ventures and, accordingly, account for these
investments using the equity method. We had one mall, which is owned in a joint
venture, one open-air shopping center, seven expansions and one community center
under construction as of June 30, 2004.
The majority of our revenue is derived from leases with retail tenants and
generally includes base minimum rents, percentage rents based on tenants' sales
volumes and reimbursements from tenants for expenditures, including property
operating expenses, real estate taxes and maintenance and repairs, as well as
certain capital expenditures. We also generate revenues from sales of outparcel
land at the properties and from sales of operating real estate assets when it is
determined that we can realize the maximum value of the assets. Proceeds from
such sales are generally used to reduce borrowings on the credit facilities.
The results of operations of our regional shopping malls and community
centers are impacted by the performance of the economy and consumer demand.
While the U.S. economy was in a down cycle for the past three years, there have
been signs of improvement in the past twelve months. Management reviews certain
statistics to evaluate the impact of economic trends on the performance of our
properties including occupancy rates, occupancy costs, re-leasing spreads and
tenant sales, which are discussed in the Operational Review section of this
discussion.
Bankruptcies and store closings by retail tenants are normal in the course
of our business. Between July 1, 2003 and June 30, 2004, there were 438,000
square feet of vacancies due to tenant bankruptcies and store closings, which
represent the loss of $7.5 million in annual base rents. However, the pace of
bankruptcies slowed in the second quarter of 2004 and we have now replaced
153,000 square feet of the vacancies. The annual base rents of $3.1 million for
these re-leased spaces represent an increase of 30% in annual base rents on
those spaces. We continue to enjoy an improving retail environment with mall
retailers experiencing higher sales growth and improving margins. During the six
months ended June 30, 2004, for mall stores of 10,000 square feet and less,
year-to-date same store sales increased 5.6% for those tenants that have
reported. The second quarter of 2004 was the fifth consecutive quarter with
positive same store sales growth.
We believe another significant factor that impacts our results of
operations and liquidity is interest rates. Because of the improvement in the
U.S. economy, there is now some concern that interest rates will rise. Our
strategy has consistently been to minimize the risk of rising interest rates by
obtaining long-term, non-recourse, fixed-rate debt on our stabilized properties.
As of June 30, 2004, our total variable-rate debt represents 26.4% of our total
debt. We believe that our conservative debt structure will minimize the impact
of an increase in interest rates.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended June 30, 2004 to the Three Months Ended
June 30, 2003
The following significant transactions impact the comparison of the results
of operations for the three months ended June 30, 2004 to the comparable period
ended June 30, 2003:
17
|X| The acquisition of eleven malls and three associated centers and the
opening of one mall, two associated centers and one community center since
April 1, 2003 (collectively referred to as the "New Properties").
Therefore, the three months ended June 30, 2004, include revenues and
expenses related to these properties whereas the comparable period a year
ago does not include a full three months of operations, if any. The New
Properties are as follows:
Project Name Location Date Acquired/Opened
- --------------------------------------- --------------------------------- ---------------------
Acquisitions:
- -------------
Sunrise Mall Brownsville, TX May 2003
Sunrise Commons Brownsville, TX May 2003
Cross Creek Mall Fayetteville, NC September 2003
River Ridge Mall Lynchburg, VA October 2003
Valley View Mall Roanoke, VA October 2003
Southpark Mall Colonial Heights, VA December 2003
Harford Mall Bel Air, MD December 2003
Harford Annex Bel Air, MD December 2003
Honey Creek Mall Terre Haute, IN March 2004
Volusia Mall Daytona Beach, FL March 2004
Greenbrier Mall Chesapeake, VA April 2004
Chapel Hill Mall Akron, OH May 2004
Chapel Hill Suburban Akron, OH May 2004
Park Plaza Mall Little Rock, AK June 2004
Developments:
- -------------
The Shoppes at Hamilton Place Chattanooga, TN May 2003
Wilkes-Barre Township Marketplace Wilkes-Barre Township, PA March 2004
Coastal Grand-Myrtle Beach (50/50 Myrtle Beach, SC March 2004
joint venture)
The Shoppes at Panama City Panama City, FL March 2004
|X| The sale in October 2003 of 41 community centers to Galileo America LLC
("Galileo America"). Six additional community centers were sold to Galileo
America in January 2004. Since we have a significant continuing involvement
with these properties through our 10% ownership interest in Galileo America
and the agreement under which we will be the exclusive manager of the
properties, the results of operations of these properties have not been
reflected in discontinued operations. Therefore, the three months ended
June 30, 2004, do not include a significant amount of revenues and expenses
related to these properties, whereas the three months ended June 30, 2003,
includes a full period of revenues and expenses related to these
properties.
Revenues
The $13.8 million increase in revenues resulted primarily from:
|X| an increase in minimum rents and tenant reimbursements of $24.5 million
attributable to the New Properties,
|X| an increase in minimum rents and tenant reimbursements of $1.7 million as a
result of the consolidation of PPG Venture I Limited Partnership, which was
previously accounted for as an unconsolidated affiliate using the equity
method, as a result of the implementation of a new accounting
pronouncement,
|X| an increase in percentage rents of $0.3 million, which primarily resulted
from an increase of $0.2 million from the New Properties,
|X| an increase in other rents of $0.7 million, which is primarily the result
of an increase in sponsorship income,
|X| an increase in other revenues of $2.1 million primarily due to an increase
in the revenues of our taxable REIT subsidiary,
|X| an increase of $0.3 million in management, development and leasing fees,
resulting primarily from management fees from Galileo America,
|X| a decrease in minimum rents and tenant reimbursements of $11.9 million
related to the community centers that were sold to Galileo America, and
18
|X| a net decrease in minimum rents and tenant reimbursements of $3.9 million
from the remaining properties, which is primarily the result of our cost
recovery percentage decreasing to 99.8% for the second quarter of 2004
compared to 103.7% for the second quarter of 2003.
Expenses
The $2.6 million increase in property operating expenses, including real
estate taxes and maintenance and repairs, resulted from:
|X| an increase of $8.0 million attributable to the New Properties,
|X| an increase of $0.5 million as a result of the consolidation of PPG Venture
I Limited Partnership
|X| a decrease of $2.9 million related to the community centers that were sold
to Galileo America and
|X| a decrease of $3.0 million in operating expenses at the remaining
properties.
The increase of $5.4 million in depreciation and amortization expense was
primarily due to:
|X| an increase of $7.1 million attributable to the New Properties,
|X| an increase of $0.3 million attributable to the consolidation of PPG
Venture I Limited Partnership,
|X| an increase of $0.4 million as a result of the ongoing capital expenditures
for renovations, expansions, tenant allowances and deferred maintenance at
the existing properties and
|X| a decrease of $2.4 million related to the community centers that were sold
to Galileo America.
General and administrative expenses increased $1.3 million primarily as a
result of an increase in expense for state taxes of $0.9 million. Also
contributing to the increase were annual increases in salaries and benefits of
existing personnel and the timing of bonus payments.
Other expense increased due to an increase of $1.2 million in write-offs of
abandoned projects and an increase in operating expenses of our taxable REIT
subsidiary.
Interest Income
The increase in interest income of $0.1 million results from the increase
in the amount of mortgage and other notes receivable outstanding compared to the
prior year period.
Interest Expense
Interest expense increased by $4.4 million primarily due to the additional
debt related to the New Properties and the conversion of $196.0 million of
variable-rate debt to higher fixed-rate debt during the third quarter of 2003.
Gain on Sales of Real Estate Assets
The net gain on sales of $5.0 million in the three months ended June 30,
2004 was primarily related to a gain of $4.5 million on the centers that have
been sold to Galileo America. The remaining $0.5 million of gain relates to
sales of two outparcels that were at consolidated properties. The gain on sales
of $3.0 million in the three months ended June 30, 2003 resulted from gains on
sales of ten outparcels and an option on land.
Equity in Earnings of Unconsolidated Affiliates
The increase of $2.0 million in equity in earnings of unconsolidated
affiliates is the result of our 10% share of Galileo America's earnings and the
opening of Coastal Grand-Myrtle Beach in March 2004.
19
Discontinued Operations
Discontinued operations in the second quarter of 2004 result from the sale
of Uvalde Plaza, a community in Uvalde, TX. Discontinued operations in the
second quarter of 2003 represent the true-up of estimated costs related to the
sale of Capital Crossing in the first quarter of 2003 to the actual amounts that
became known in the second quarter of 2003.
Comparison of the Six Months Ended June 30, 2004 to the Six Months Ended June
30, 2003
The following significant transactions impact the comparison of the results
of operations for the six months ended June 30, 2004 to the comparable period
ended June 30, 2003:
|X| The acquisition of eleven malls and three associated centers and the
opening of one mall, two associated centers and one community center since
January 1, 2003 (collectively referred to as the "New Properties").
Therefore, the six months ended June 30, 2004, include revenues and
expenses related to these properties whereas the comparable period a year
ago does not include a significant amount of operations, if any. The New
Properties are as follows:
Project Name Location Date Acquired/Opened
- --------------------------------------- --------------------------------- ---------------------
Acquisitions:
- -------------
Sunrise Mall Brownsville, TX May 2003
Sunrise Commons Brownsville, TX May 2003
Cross Creek Mall Fayetteville, NC September 2003
River Ridge Mall Lynchburg, VA October 2003
Valley View Mall Roanoke, VA October 2003
Southpark Mall Colonial Heights, VA December 2003
Harford Mall Bel Air, MD December 2003
Harford Annex Bel Air, MD December 2003
Honey Creek Mall Terre Haute, IN March 2004
Volusia Mall Daytona Beach, FL March 2004
Greenbrier Mall Chesapeake, VA April 2004
Chapel Hill Mall Akron, OH May 2004
Chapel Hill Suburban Akron, OH May 2004
Park Plaza Mall Little Rock, AK June 2004
Developments:
- -------------
The Shoppes at Hamilton Place Chattanooga, TN May 2003
Wilkes-Barre Township Marketplace Wilkes-Barre Township, PA March 2004
Coastal Grand-Myrtle Beach (50/50 Myrtle Beach, SC March 2004
joint venture)
The Shoppes at Panama City Panama City, FL March 2004
|X| The sale in October 2003 of 41 community centers to Galileo America LLC
("Galileo America"). Six additional community centers were sold to Galileo
America in January 2004. Since we have a significant continuing involvement
with these properties through our 10% ownership interest in Galileo America
and the agreement under which we will be the exclusive manager of the
properties, the results of operations of these properties have not been
reflected in discontinued operations. Therefore, the six months ended June
30, 2004, do not include a significant amount of revenues and expenses
related to these properties, whereas the six months ended June 30, 2003,
includes a full period of revenues and expenses related to these
properties.
Revenues
The $23.2 million increase in revenues resulted primarily from:
|X| an increase in minimum rents and tenant reimbursements of $41.7 million
attributable to the New Properties,
|X| an increase in minimum rents and tenant reimbursements of $3.2 million as a
result of the consolidation of PPG Venture I Limited Partnership, which was
previously accounted for as an unconsolidated affiliate using the equity
method, as a result of the implementation of a new accounting
pronouncement,
20
|X| an increase in percentage rents of $0.6 million, which resulted from an
increase at the existing properties of $0.3 million and an increase of $0.3
million from the New Properties,
|X| an increase in other rents of $1.5 million, which is primarily the result
of an increase in sponsorship income,
|X| an increase in other revenues of $3.1 million primarily due to an increase
in the revenues of our taxable REIT subsidiary,
|X| an increase of $0.8 million in management, development and leasing fees,
primarily resulting from management fees from Galileo America and
development fees from unconsolidated affiliates,
|X| a decrease in minimum rents and tenant reimbursements of $24.8 million
related to the community centers that were sold to Galileo America, and
|X| a net decrease in minimum rents and tenant reimbursements of $2.9 million
from the remaining properties, which is primarily the result of our cost
recovery percentage decreasing to 96.9% for the first six months of 2004
compared to 99.0% for the first six months of 2003
Expenses
The $3.2 million increase in property operating expenses, including real
estate taxes and maintenance and repairs, resulted from:
|X| an increase of $14.0 million attributable to the New Properties,
|X| an increase of $1.2 million as a result of the consolidation of PPG Venture
I Limited Partnership
|X| a decrease of $6.0 million related to the community centers that were sold
to Galileo America and
|X| a decrease of $6.0 million in operating expenses at the remaining
properties.
The increase of $12.0 million in depreciation and amortization expense was
primarily due to:
|X| an increase of $13.0 million attributable to the New Properties,
|X| an increase of $0.6 million attributable to the consolidation of PPG
Venture I Limited Partnership,
|X| an increase of $2.8 million as a result of the ongoing capital expenditures
for renovations, expansions, tenant allowances and deferred maintenance at
the existing properties and
|X| a decrease of $4.4 million related to the community centers that were sold
to Galileo America.
General and administrative expenses increased $3.2 million primarily as a
result of an increase in expense for state taxes of $1.1 million. Also
contributing to the increase were annual increases in salaries and benefits of
existing personnel and the timing of bonus payments.
Other expense increased due to an increase of $1.7 million in write-offs of
abandoned projects and an increase in operating expenses of our taxable REIT
subsidiary.
Interest Income
The increase in interest income of $0.4 million results from the increase
in the amount of mortgage and other notes receivable outstanding compared to the
prior year period.
21
Interest Expense
Interest expense increased by $7.9 million primarily due to the additional
debt related to the New Properties and the conversion of $196.0 million of
variable-rate debt to higher fixed-rate debt during the third quarter of 2003.
Gain on Sales of Real Estate Assets
The net gain on sales of $24.8 million in the six months ended June 30,
2004 was primarily related to a gain of $22.8 million on the centers that have
been sold to Galileo America. The remaining $2.0 million of gain relates to
sales of four outparcels. The gain on sales of $4.1 million in the six months
ended June 30, 2003 resulted from gains on sales of twelve outparcels and two
options on land.
Equity in Earnings of Unconsolidated Affiliates
The increase of $3.1 million in equity in earnings of unconsolidated
affiliates is the result of our 10% share of Galileo America's earnings and the
opening of Coastal Grand-Myrtle Beach in March 2004.
Discontinued Operations
Discontinued operations in the six months ended June 30, 2004 result from
the sale of Uvalde Plaza, a community center in Uvalde, TX. Discontinued
operations in the six months ended June 30, 2003 represent the net operating
income from Capital Crossing, a community center in Raleigh, NC, which was sold
during the first quarter of 2003.
Operational Review
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. Additionally, 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.
We classify our 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"). Non-Stabilized Malls
currently include The Lakes Mall in Muskegon, MI, which opened in August 2001;
Parkway Place in Huntsville, AL, which opened in October 2002; and Coastal
Grand-Myrtle Beach in Myrtle Beach, SC, which opened in March 2004.
We derive a significant amount of our revenues from the mall properties.
The sources of our revenues by property type were as follows:
Three Months Ended June 30,
---------------------------------
2004 2003
----------------- ---------------
Malls 90.9% 85.7%
Associated centers 3.7% 3.6%
Community centers 2.7% 9.0%
Mortgages, office building and other 2.7% 1.7%
22
Sales and Occupancy Costs
Mall store sales (for those tenants who occupy 10,000 square feet or less
and have reported sales) in the Stabilized Malls increased by 5.6% on a
comparable per square foot basis to $135.95 per square foot for the second
quarter of 2004 compared with $128.73 per square foot for same period in 2003.
Mall store sales increased by 3.4% on a comparable per square foot basis to
$311.51 per square foot for the twelve months ended June 30, 2004, from $301.23
per square foot for the twelve months ended June 30, 2003.
Occupancy costs as a percentage of sales for the Stabilized Malls were
13.7% and 14.5% for the second quarter of 2004 and 2003, respectively.
Occupancy
The occupancy of the portfolio was as follows:
June 30,
-------------------------------------
2004 2003
------------------ ------------------
Total portfolio occupancy 91.1% 91.5%
Total mall portfolio: 91.1% 91.7%
Stabilized Malls 91.4% 92.2%
Non-Stabilized Malls 85.1% 77.8%
Associated centers 89.3% 91.7%
Community centers (1) 92.6% 89.1%
(1) Excludes the community centers that were sold in Phases I and II of the
Galileo Transaction
The occupancy of the Associated Centers declined primarily due to the loss
of a 36,000 square foot Just For Feet Store at the Village at Rivergate in
Nashville, TN, as well as both a 46,000 square foot Appliance Factory Warehouse
and a 15,000 square foot The Fresh Market at Hamilton Corner in Chattanooga, TN.
These two associated centers are under redevelopment with replacement prospects
that should open in 2005, one of which is currently paying rent.
Leasing
Average annual base rents per square foot were as follows for each property
type:
At June 30,
-------------------------------------
2004 2003
------------------ ------------------
Stabilized Malls $25.26 $23.98
Non-Stabilized Malls 27.01 26.52
Associated centers 9.70 9.88
Community centers (1) 7.99 8.70
(1) Excludes the community centers that were sold in Phases I and II of the
Galileo Transaction.
The following table shows the positive results we were able to achieve
through new and renewal leasing during the second quarter of 2004 for spaces
that were previously occupied:
Base Rent Base Rent
Per Square Per Square
Foot Foot
Square Feet Prior Lease (1) New Lease (2) Increase
------------ --------------- ------------- -----------
Stabilized Malls 366,289 $24.74 $26.41 6.8%
Associated centers 4,000 13.60 14.62 7.5%
Community centers (3) 9,040 9.73 12.34 26.8%
(1)Represents the rent that was in place at the end of the lease term.
(2)Average base rent over the term of the new lease.
(3)Excludes the community centers that were sold in Phases I and II of the Galileo Transaction.
23
The 6.8% increase for the Stabilized Malls includes the impact of some
specific situations where we are re-merchandising and re-tenanting properties.
In these situations, we have entered into renewals of one to two years in order
to relocate the effected tenants. While this results in a short-term negative
impact on renewal leasing results, it provides us with an opportunity for better
long-term growth in rental revenues once the re-merchandising and re-tenanting
is completed.
LIQUIDITY AND CAPITAL RESOURCES
There was $30.0 million of unrestricted cash and cash equivalents as of
June 30, 2004, an increase of $9.7 million from December 31, 2003. Cash flows
from operations are used to fund short-term liquidity and capital needs such as
tenant construction allowances, capital expenditures and payments of dividends
and distributions. For longer-term liquidity needs such as acquisitions, new
developments, renovations and expansions, we typically rely on property specific
mortgages (which are generally non-recourse), construction and term loans,
revolving lines of credit, common stock, preferred stock, joint venture
investments and a minority interest in the Operating Partnership.
Cash Flows
Cash provided by operating activities increased by $25.1 million to $150.1
million primarily due to the operations of the New Properties, offset by a
decrease related to the community centers that were sold in Phases I and II of
the Galileo America transaction.
Cash used by investing activities increased by $100.5 million to $233.7
million for the six months ended June 30, 2004, compared to $133.1 million for
the same period in 2003. Cash used to acquire real estate assets was $299.0
million higher in the six months ended June 30, 2004 compared to the six months
ended June 30, 2003 due to a larger volume of acquisitions during the 2004
period. This amount was partially offset by an increase from cash in escrow of
$78.5 million that was used to fund these acquisitions. The net cash used to
acquire real estate assets was also offset by cash inflows related to (i) an
increase of $88.3 million in proceeds from sales of real estate assets that was
primarily from Phase II of the Galileo America transaction, (ii) an increase of
$7.8 million related to two notes receivable that were retired and (iii) an
increase of $9.6 million related to the excess of distributions from
unconsolidated affiliates over our equity in earnings of those unconsolidated
affiliates.
Cash provided by financing activities increased by $72.7 million to $93.2
million for the six months ended June 30, 2004, compared to $20.5 million in the
comparable period of 2003. The increase primarily results from an increase in
proceeds from borrowings of $97.6 million while principal payments only
increased $19.8 million. The higher level of proceeds from borrowings is
primarily related to borrowings on our lines of credit and two new short-term
loans used to fund the acquisitions completed during 2004.
Debt
The following tables summarize debt based on our pro rata ownership share
(including our pro rata share of unconsolidated affiliates and excluding
minority investors' share of consolidated properties) because we believe this
provides investors a clearer understanding of our total debt obligations and
liquidity (in thousands):
24
Weighted
Average
Minority Unconsolidated Interest
Consolidated Interests Affiliates Total Rate(1)
------------- ---------------- --------------- ------------- ---------------
June 30, 2004:
Fixed-rate debt:
Non-recourse loans on operating properties $2,366,070 $(53,365) $ 58,885 $2,371,590 6.56%
------------- ---------------- --------------- ------------- ---------------
Variable-rate debt:
Recourse term loans on operating properties 238,825 -- 109,748 348,573 2.49%
Construction loans 9,140 -- 11,293 20,433 2.94%
Lines of credit 481,400 -- -- 481,400 2.24%
------------- ---------------- --------------- ------------- ---------------
Total variable-rate debt 729,365 -- 121,041 850,406 2.36%
------------- ---------------- --------------- ------------- ---------------
Total $3,095,435 $(53,365) $ 179,926 $3,221,996 5.45%
============= ================ =============== ============= ===============
December 31, 2003:
Fixed-rate debt:
Non-recourse loans on operating properties $2,256,544 $ (19,577) $ 57,985 $2,294,952 6.64%
------------- ---------------- --------------- ------------- ---------------
Variable-rate debt:
Recourse term loans on operating properties 105,558 -- 30,335 135,893 2.73%
Construction loans -- -- 46,801 46,801 2.94%
Lines of credit 376,000 -- -- 376,000 2.23%
------------- ---------------- --------------- ------------- ---------------
Total variable-rate debt 481,558 -- 77,136 558,694 2.39%
------------- ---------------- --------------- ------------- ---------------
Total $2,738,102 $ (19,557) $ 135,121 $2,853,646 5.81%
============= ================ =============== ============= ===============
(1) Weighted average interest rate before amortization of deferred financing
costs.
We currently have four secured credit facilities with total availability of
$483.0 million, of which $419.0 million was outstanding as of June 30, 2004. The
secured credit facilities bear interest at LIBOR plus 1.00%.
We have a short-term, unsecured credit facility of $130.0 million that
matures September 30, 2004 and bears interest at LIBOR plus 1.30%. We obtained
this credit facility to provide additional funds for the acquisitions that were
completed during the fourth quarter of 2003. There was $62.4 million outstanding
under this facility at June 30, 2004.
We also have secured lines of credit with total availability of $25,652
million that can only be used to issue letters of credit. There was $12,573
million outstanding under these lines at June 30, 2004.
We assumed one loan totaling $41.3 million in connection with the
acquisitions completed during the second quarter of 2004. This loan bears
interest at a fixed rate of 8.69% and matures in 2010. Since the stated interest
rate on the fixed-rate loan was above market rates for similar debt instruments
at the date of acquisition, a debt premium of $7.7 million was recorded to
reflect the assumed debt at estimated fair value.
We obtained two short-term, variable-rate loans to fund part of the
purchase price for two separate acquisitions. The loans were for $92.7 million,
which matures in April 2006, and $66.5 million, which matures in May 2006. Both
loans bear interest at LIBOR plus 100 basis points and have three-one year
extension options that are at the option of the Company.
The secured and unsecured credit facilities contain, among other
restrictions, certain financial covenants including the maintenance of certain
coverage ratios, minimum net worth requirements, and limitations on cash flow
distributions. We were in compliance with all financial covenants and
restrictions under our credit facilities at June 30, 2004. Additionally, certain
property-specific mortgage notes payable require the maintenance of debt service
coverage ratios. At June 30, 2004, the properties subject to these mortgage
notes payable were in compliance with the applicable ratios.
25
We expect to refinance the majority of mortgage and other notes payable
maturing over the next five years with replacement loans. Based on our pro rata
share of total debt, there is $212.5 million of debt that is scheduled to mature
before June 30, 2005. There are extension options in place that will extend the
maturity of $41.1 million of this debt beyond June 30, 2005. We expect to either
retire or refinance the remaining $171.4 million of maturing loans.
Equity
As a publicly traded company, we have access to capital through both the
public equity and debt markets. We have an effective shelf registration
statement authorizing us to publicly issue shares of preferred stock, common
stock and warrants to purchase shares of common stock with an aggregate public
offering price up to $562.0 million, of which approximately $447.0 million was
available at June 30, 2004.
We anticipate that the combination of equity and debt sources will, for the
foreseeable future, provide adequate liquidity to continue our capital programs
substantially as in the past and make distributions to our shareholders in
accordance with the requirements applicable to real estate investment trusts.
Our policy is to maintain a conservative debt-to-total-market
capitalization ratio in order to enhance our access to the broadest range of
capital markets, both public and private. Based on our share of total
consolidated and unconsolidated debt and the market value of equity, our
debt-to-total-market capitalization (debt plus market-value equity) ratio was as
follows at June 30, 2004 (in thousands, except stock prices):
Shares
Outstanding Stock Price (1) Value
------------------ ----------------- -----------------
Common stock and operating partnership units 55,981 $55.00 $3,078,955
8.75% Series B Cumulative Redeemable Preferred Stock 2,000 $50.00 100,000
7.75% Series C Cumulative Redeemable Preferred Stock 460 $250.00 115,000
-----------------
Total market equity 3,293,955
Company's share of total debt 3,221,996
-----------------
Total market capitalization $6,515,951
=================
Debt-to-total-market capitalization ratio 49.4%
=================
(1) Stock price for common stock and operating partnership units equals the
closing price of the common stock on June 30, 2004. The stock price for the
preferred stock represents the face value of each respective series of
preferred stock.
Capital Expenditures
We expect to continue to have access to the capital resources necessary to
expand and develop our business. Future development and acquisition activities
will be undertaken as suitable opportunities arise. We do not expect to pursue
these opportunities unless adequate sources of funding are available and a
satisfactory budget with targeted returns on investment has been internally
approved.
An annual capital expenditures budget is prepared for each property that is
intended to provide for all necessary recurring and non-recurring capital
expenditures. We believe that property operating cash flows, which include
reimbursements from tenants for certain expenses, will provide the necessary
funding for these expenditures.
26
Developments and Expansions
The following development projects were under construction at June 30, 2004
(dollars in thousands):
Our Share of
Gross Our Share Cost as of Projected
Property Location Leasable Area Of Costs June 30, 2004 Opening Date
- ---------------------------- ------------------ --------------- ------------ --------------- ----------------
Mall
- ----
Imperial Valley Mall El Centro, CA 752,000 $45,557 $20,278 March 2005
Mall Expansions
- ---------------
Cherryvale Mall Rockford, IL 94,000 3,183 2,498 August 2004
East Towne Mall Madison, WI 139,000 21,206 11,505 October 2004
West Towne Mall Madison, WI 115,000 21,541 6,163 October 2004
Arbor Place Rich's-Macy's Douglasville, GA 140,000 10,000 4,206 November 2004
The Lakes Mall Muskegon, MI 45,000 4,771 1,286 November 2004
Open Air Center
- ---------------
Southaven Towne Center Southaven, MS 407,000 23,885 12,630 October 2005
Associated Center Expansion
- ---------------------------
CoolSprings Crossing Nashville, TN 10,000 1,415 13 November 2004
Community Center
- ----------------
Charter Oak Marketplace Hartford, CT 334,000 12,836 7,781 November 2004
Community Center Expansion
- --------------------------
Coastal Way-Circuit City Spring Hill, FL 22,000 1,820 130 September 2004
--------------- ------------ ---------------
2,058,000 $146,214 $66,490
=============== ============ ===============
There is a construction loan in place for the costs of the new mall
development. The costs of the remaining projects will be funded with operating
cash flows and the credit facilities.
We have entered into a number of option agreements for the development of
future regional malls, open air centers and community centers. Except for the
projects discussed under Developments and Expansions above, we do not have any
other material capital commitments.
Acquisitions
On March 12, 2004, we acquired Honey Creek Mall in Terre Haute, IN for a
purchase price, including transaction costs, of $83.1 million, which consisted
of $50.1 million in cash and the assumption of $33.0 million of non-recourse
debt that bears interest at a stated rate of 6.95% and matures in May 2009. We
recorded a debt premium of $3.1 million, computed using an estimated market
interest rate of 4.75%, since the debt assumed was at an above-market interest
rate compared to similar debt instruments at the date of acquisition.
On March 12, 2004, we acquired Volusia Mall in Daytona Beach, FL for a
purchase price, including transaction costs, of $118.5 million, which consisted
of $63.7 million in cash and the assumption of $54.8 million of non-recourse
debt that bears interest at a stated rate of 6.70% and matures in March 2009. We
recorded a debt premium of $4.6 million, computed using an estimated market
interest rate of 4.75%, since the debt assumed was at an above-market interest
rate compared to similar debt instruments at the date of acquisition.
On April 8, 2004, we acquired Greenbrier Mall in Chesapeake, VA for a cash
purchase price, including transaction costs, of $107.3 million. The purchase
price was partially financed with a new recourse term loan of $92.7 million that
bears interest at LIBOR plus 100 basis points and matures in April 2006.
27
On April 21, 2004, we acquired Fashion Square, a community center in Orange
Park, FL for a cash purchase price, including transaction costs, of $4.0
million.
On May 20, 2004, we acquired Chapel Hill Mall and its associated center,
Chapel Hill Suburban, in Akron, OH for a cash purchase price of $78.3 million,
including transaction costs. The purchase price was partially financed with a
new recourse term loan of $66.5 million that bears interest at LIBOR plus 100
basis points and matures in May 2006.
On June 22, 2004, we acquired Park Plaza Mall in Little Rock, AR for a
purchase price, including transaction costs, of $77.5 million, which consisted
of $36.2 million in cash and the assumption of $41.3 million of non-recourse
debt that bears interest at a stated rate of 8.69% and matures in May 2010. We
recorded a debt premium of $7.7 million, computed using an estimated market
interest rate of 4.90%, since the debt assumed was at an above-market interest
rate compared to similar debt instruments at the date of acquisition.
On July 28, 2004, the Company acquired Monroeville Mall in the eastern
Pittsburgh suburb of Monroeville, PA, for a purchase price of $231.2 million,
which consisted of $36.2 million in cash, the assumption of $134.0 million of
non-recourse debt that bears interest at a stated rate of 5.73% and matures in
January 2013 and the issuance of 780,470 special common units in the Operating
Partnership valued at $60.95 million. The Company recorded a debt premium of
$3.6 million, computed using an estimated market interest rate of 5.30%, since
the debt assumed was at an above-market interest rate compared to similar debt
instruments at the date of acquisition. The results of operations of Monroeville
Mall will be included in the consolidated financial statements beginning July
28, 2004.
Dispositions
The second phase of the joint venture transaction with Galileo America,
Inc. closed on January 5, 2004, when we sold interests in six community centers
for $92.4 million, which consisted of $62.7 million in cash, the retirement of
$26.0 million of debt on one of the community centers, the joint venture's
assumption of $2.8 million of debt and closing costs of $0.9 million. The real
estate assets and related mortgage notes payable of the properties in the second
phase were reflected as held for sale as of December 31, 2003. We did not record
any depreciation expense on these assets during the six months ended June 30,
2004.
The third phase of the joint venture transaction is scheduled to close in
January 2005 and will include five community centers. The total purchase price
for these community centers will be $86.8 million.
We sold Uvalde Plaza, a community center in Uvalde, TX, and recognized a
gain of $0.4 million during the second quarter of 2004.
Other Capital Expenditures
Including our share of unconsolidated affiliates' capital expenditures and
excluding minority investor's share of capital expenditures, we spent $13.5
million during the six months ended June 30, 2004 for tenant allowances, which
generate increased rents from tenants over the terms of their leases. Deferred
maintenance expenditures were $7.4 million for the six months ended June 30,
2004 and included $3.1 million for roof repairs and replacements. Renovation
expenditures were $13.2 million for the six months ended June 30, 2004.
28
Deferred maintenance expenditures are generally 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.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are disclosed in Note 2 to the
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2004. The following discussion
describes our most critical accounting policies, which are those that are both
important to the presentation of our financial condition and results of
operations and that require significant judgment or use of complex estimates.
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.
We receive 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.
We receive management, leasing and development fees from third parties and
unconsolidated affiliates. Management fees are charged as a percentage of
revenues (as defined in the management agreement) 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
lease renewals and are recognized as revenue when earned. Development and
leasing fees received from unconsolidated affiliates during the development
period are recognized as revenue to the extent of the third-party partners'
ownership interest. Fees to the extent of our ownership interest are recorded as
a reduction to our investment in the unconsolidated affiliate.
Gains on sales of real estate assets are recognized when it is determined
that the sale has been consummated, the buyer's initial and continuing
investment is adequate, our receivable, if any, is not subject to future
subordination, and the buyer has assumed the usual risks and rewards of
ownership of the asset. When we have an ownership interest in the buyer, gain is
recognized to the extent of the third party partner's ownership interest and the
portion of the gain attributable to our ownership interest is deferred.
Real Estate Assets
We capitalize 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.
Ordinary repairs and maintenance are expensed as incurred. Major replacements
and improvements are capitalized and depreciated over their estimated useful
lives.
29
All acquired real estate assets are accounted for using the purchase method
of accounting and accordingly, the results of operations are included in the
consolidated statements of operations from the respective dates of acquisition.
The purchase price is allocated to (i) tangible assets, consisting of land,
buildings and improvements, and tenant improvements, (ii) and identifiable
intangible assets generally consisting of above- and below-market leases and
in-place leases. We use estimates of fair value based on estimated cash flows,
using appropriate discount rates, and other valuation methods to allocate the
purchase price to the acquired tangible and intangible assets. Liabilities
assumed generally consist of mortgage debt on the real estate assets acquired.
Assumed debt with a stated interest rate that is significantly different from
market interest rates is recorded at its fair value based on estimated market
interest rates at the date of acquisition.
Depreciation is computed on a straight-line basis over estimated lives of
40 years for buildings, 10 to 20 years for certain improvements and 7 to 10
years for equipment and fixtures. Tenant improvements are capitalized and
depreciated on a straight-line basis over the term of the related lease.
Lease-related intangibles from acquisitions of real estate assets are amortized
over the remaining terms of the related leases. Any 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 using the effective interest method.
Carrying Value of Long-Lived Assets
We periodically evaluate long-lived assets to determine if there has been
any impairment in their carrying values and record 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. If
it is determined that an impairment has occurred, the excess of the asset's
carrying value over its estimated fair value will be charged to operations.
There were no impairment charges in the six months ended June 30, 2004 and 2003.
IMPACT OF INFLATION
In the last three years, inflation has not had a significant impact on the
Company because of the relatively low inflation rate. Substantially all tenant
leases do, however, contain provisions designed to protect the Company from the
impact of inflation. These provisions include clauses enabling the Company to
receive percentage rent based on tenant's gross sales, which generally increase
as prices rise, and/or escalation clauses, which generally increase rental rates
during the terms of the leases. In addition, many of the leases are for terms of
less than ten years, which may enable the Company to replace existing leases
with new leases at higher base and/or percentage rents if rents of the existing
leases are below the then existing market rate. Most of the leases require
tenants to pay their share of operating expenses, including common area
maintenance, real estate taxes and insurance, thereby reducing the Company's
exposure to increases in costs and operating expenses resulting from inflation.
FUNDS FROM OPERATIONS
Funds From Operations ("FFO") is a widely used measure of the operating
performance of real estate companies that supplements net income determined in
accordance with generally accepted accounting principles ("GAAP"). The National
Association of Real Estate Investment Trusts ("NAREIT") defines FFO as net
income (computed in accordance with GAAP) excluding gains or losses on sales of
operating properties, plus depreciation and amortization, and after adjustments
for unconsolidated partnerships and joint ventures. Adjustments for
unconsolidated partnerships and joint ventures are calculated on the same basis.
We define FFO available for distribution as defined above by NAREIT less
dividends on preferred stock. Our method of calculating FFO may be different
from methods used by other REITs and, accordingly, may not be comparable to such
other REITs.
30
We believe that FFO provides an additional indicator of the operating
performance of our 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 with market conditions, we believe that FFO enhances
investors' understanding of our operating performance. The use of FFO as an
indicator of financial performance is influenced not only by the operations of
our properties and interest rates, but also by our capital structure.
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 flows from operations as defined by accounting
principles 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 our
operating performance or to cash flow as a measure of liquidity.
FFO increased 2.7% for the six months ended June 30, 2004 to $138.4 million
compared to $134.7 million for the same period in 2003. The New Properties
generated 96% of the growth in FFO. Consistently high portfolio occupancy and
recoveries of operating expenses as well as increases in rental rates from
renewal and replacement leasing accounted for the remaining 4% growth in FFO.
The calculation of FFO is as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- --------------------------
2004 2003 2004 2003
------------ ------------ -------------- -----------
Net income available to common shareholders $21,708 $21,022 $51,897 $43,798
Depreciation and amortization from consolidated properties 33,026 27,593 65,759 53,807
Depreciation and amortization from unconsolidated affiliates 1,547 1,123 2,743 2,019
Depreciation and amortization from discontinued operations 8 97 20 205
Minority interest in earnings of operating partnership 17,840 17,979 42,874 38,616
Minority investors' share of depreciation and amortization
in shopping center properties (304) (275) (597) (541)
Gain on disposal of operating real estate assets (4,484) -- (23,565) --
Gain on discontinued operations (525) -- (520) (2,935)
Depreciation and amortization of non-real estate assets (78) (133) (213) (266)
------------ ------------ -------------- -----------
FUNDS FROM OPERATIONS $68,738 $67,406 $138,398 $134,703
============ ============ ============== ===========
DILUTED WEIGHTED AVERAGE SHARES AND
POTENTIAL DILUTIVE COMMON SHARES
WITH OPERATING PARTNERSHIP UNITS
FULLY CONVERTED 56,901 56,748 56,832 56,625
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 June 30, 2004, a 0.5% increase or decrease
in interest rates on this variable-rate debt would decrease or increase annual
cash flows by approximately $4.3 million and, after the effect of capitalized
interest, annual earnings by approximately $3.8 million.
31
Based on the Company's proportionate share of consolidated and
unconsolidated debt at June 30, 2004, a 0.5% increase in interest rates would
decrease the fair value of debt by approximately $57.1 million, while a 0.5%
decrease in interest rates would increase the fair value of debt by
approximately $58.7 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.
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings
None
ITEM 2: Changes is Securities, Use of Proceeds and Issuer Purchase of
Equity Securities
The following table presents information with respect to
repurchases of common stock made by us during the three months
ended June 30, 2004:
Maximum Number of
Average Total Number of Shares that May Yet
Total Number Price Shares Purchased as Be Purchased
of Shares Paid per Part of a Publicly Under the
Period Purchased (1) Share (2) Announced Plan Plan
--------------------- --------------- ---------------- --------------------- ---------------------
April 1-30, 2004 -- -- -- --
May 1-31, 2004 1,254 $50.525 -- --
June 1-30, 2004 -- -- -- --
--------------- ---------------- --------------------- ---------------------
Total 1,254 $50.525 -- --
=============== ================ ===================== =====================
(1) Represents shares surrendered to the Company by employees to
satisfy federal and state income tax withholding requirements
related to the vesting of shares of restricted stock issued under
the CBL & Associates Properties, Inc. 1993 Stock Incentive Plan.
(2) Represents the market value of the common stock on the vesting
date for the shares of restricted stock, which was used to
determine the number of shares required to be surrendered to
satisfy income tax withholding requirements.
ITEM 3: Defaults Upon Senior Securities
None
32
ITEM 4: Submission of Matters to a Vote of Security Holders
The Company held it Annual Meeting of Shareholders on May 10,
2004. The matters that were submitted to a vote of
shareholders and the related results are as follow:
1. The following directors were re-elected to three-year terms that
expire in 2007:
|X| Stephen D. Lebovitz (25,902,422 votes for and 1,752,946
votes against or withheld)
|X| Winston W. Walker (24,022,038 votes for and 3,633,330 votes
against or withheld)
The following additional directors are presently serving
three-year terms, which continue beyond the 2004 Annual Meeting
of Shareholders:
|X| Charles B. Lebovitz (term expires in 2005),
|X| Claude M. Ballard (term expires in 2005),
|X| Gary L. Bryenton (term expires in 2005),
|X| Leo Fields (term expires in 2005)
|X| John N. Foy (term expires in 2006),
|X| Martin J. Cleary (term expires in 2006).
See Item 5 below for information related to William J. Poorvu.
2. Deloitte & Touche was ratified as the Company's independent
public accountants for the Company's fiscal year ending December
31, 2004 (24,148,774 votes for and 3,506,594 votes against or
withheld).
ITEM 5: Other Information
William J. Poorvu retired from the Board of Directors on July
29, 2004, to devote attention to other interests. The Company
intends to fill the vacant Board seat at a future Board
meeting.
ITEM 6: Exhibits and Reports on Form 8-K
A. Exhibits
3.5 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of CBL & Associates Properties, Inc. (a)
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 36.
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 37.
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 38.
33
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 39.
- ---------------------------------
(a) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003.
B. Reports on Form 8-K
The following items were reported:
The information required by Rule 3-14 of Regulation S-K related to the
acquisitions completed by the Company during 2003 was filed on July 9,
2004.
The outline from the Company's July 28, 2004 conference call with
analysts and investors regarding earnings for the quarter ended June
30, 2004, the Company's earnings release and the Company's
supplemental information package were furnished on July 30, 2003.
34
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CBL & ASSOCIATES PROPERTIES, INC.
/s/ John N. Foy
---------------------------------------------------------------
John N. Foy
Vice Chairman of the Board, Chief Financial Officer and
Treasurer
(Authorized Officer of the Registrant,
Principal Financial Officer)
Date: August 9, 2004
35