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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 November 3, 2004, there were 31,225,621 shares of common stock, par value
$0.01 per share, outstanding.
1
CBL & Associates Properties, Inc.
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements..............................................3
Consolidated Balance Sheets.......................................4
Consolidated Statements of Operations.............................5
Consolidated Statements of Cash Flows.............................6
Notes to Unaudited Consolidated Financial Statements..............7
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................16
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk.......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..............32
ITEM 5: Other Information................................................32
ITEM 6: Exhibits.........................................................32
SIGNATURE..................................................................34
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 September 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)
September 30, December 31,
2004 2003
------------- ------------
ASSETS
Real estate assets:
Land.............................................................. $ 626,550 $ 578,310
Buildings and improvements........................................ 4,389,275 3,678,074
------------- ------------
5,015,825 4,256,384
Less accumulated depreciation................................... (549,099) (467,614)
------------- ------------
4,466,726 3,788,770
Real estate assets held for sale, net............................. 67,610 64,354
Developments in progress.......................................... 102,176 59,096
------------- ------------
Net investment in real estate assets............................ 4,636,512 3,912,220
Cash and cash equivalents........................................... 27,238 20,332
Cash in escrow...................................................... -- 78,476
Receivables:
Tenant, net of allowance for doubtful accounts of $3,237 in
2004 and 2003.................................................. 37,232 42,165
Other............................................................. 11,009 3,033
Mortgage and other notes receivable................................. 35,116 36,169
Investments in unconsolidated affiliates............................ 76,046 96,450
Other assets........................................................ 94,783 75,465
------------- ------------
$4,917,936 $4,264,310
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage and other notes payable.................................... $3,292,186 $2,709,348
Mortgage notes payable on real estate assets held for sale.......... 2,362 28,754
Accounts payable and accrued liabilities............................ 185,593 161,477
------------- ------------
Total liabilities................................................. 3,480,141 2,899,579
------------- ------------
Commitments and contingencies (Notes 2, 3, 6 and 9) ................
Minority interests.................................................. 561,513 527,431
------------- ------------
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,
31,211,698 and 30,323,476 shares issued and outstanding
in 2004 and 2003, respectively............................. 312 303
Additional paid - in capital...................................... 853,822 817,613
Deferred compensation............................................. (3,295) (1,607)
Retained earnings................................................. 25,418 20,966
------------- ------------
Total shareholders' equity...................................... 876,282 837,300
------------- ------------
$4,917,936 $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 Nine Months Ended
September 30, September 30,
------------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------ ----------- ------------
REVENUES:
Minimum rents....................................... $ 121,300 $ 105,987 $ 344,177 $ 312,757
Percentage rents.................................... 2,289 2,228 10,457 9,749
Other rents......................................... 2,084 1,623 7,326 5,413
Tenant reimbursements............................... 60,183 48,208 158,989 145,980
Management, development and leasing fees............ 2,868 1,221 6,379 3,946
Other............................................... 5,503 3,592 15,799 10,740
------------ ------------ ----------- ------------
Total revenues.................................... 194,227 162,859 543,127 488,585
------------ ------------ ----------- ------------
EXPENSES:
Property operating.................................. 31,702 24,361 85,813 76,347
Depreciation and amortization....................... 38,023 28,286 103,754 82,065
Real estate taxes................................... 15,486 13,087 42,787 39,762
Maintenance and repairs............................. 11,337 9,606 31,825 29,708
General and administrative.......................... 8,280 7,228 24,505 20,225
Other............................................... 5,681 2,703 13,636 7,359
------------ ------------ ----------- ------------
Total expenses.................................... 110,509 85,271 302,320 255,466
------------ ------------ ----------- ------------
Income from operations.............................. 83,718 77,588 240,807 233,119
Interest income..................................... 836 639 2,422 1,805
Interest expense.................................... (46,042) (38,038) (129,274) (113,330)
Loss on extinguishment of debt...................... -- -- -- (167)
Gain on sales of real estate assets................. 1,522 837 26,302 4,933
Equity in earnings of unconsolidated affiliates..... 1,407 922 6,953 3,410
Minority interest in earnings:
Operating partnership............................. (16,624) (17,235) (59,498) (55,851)
Shopping center properties........................ (974) (597) (4,033) (2,011)
------------ ------------ ----------- ------------
Income before discontinued operations............... 23,843 24,116 83,679 71,908
Operating income of discontinued operations......... 12 159 385 614
Gain on discontinued operations..................... 325 633 845 3,568
------------ ------------ ----------- ------------
Net income.......................................... 24,180 24,908 84,909 76,090
Preferred dividends................................. (4,416) (4,683) (13,248) (12,067)
------------ ------------ ----------- ------------
Net income available to common shareholders......... $ 19,764 $ 20,225 $ 71,661 $ 64,023
============ ============ =========== =============
Basic per share data:
Income before discontinued operations,
net of preferred dividends.................. $ 0.63 $ 0.65 $ 2.30 $ 2.00
Discontinued operations......................... 0.01 0.02 0.04 0.14
------------ ------------ ----------- ------------
Net income available to common
shareholders................................. $ 0.64 $ 0.67 $ 2.34 $ 2.14
============ ============ =========== =============
Weighted average common shares
outstanding................................ 30,770 30,022 30,565 29,879
Diluted per share data:
Income before discontinued operations,
net of preferred dividends................... $ 0.61 $ 0.62 $ 2.22 $ 1.93
Discontinued operations......................... 0.01 0.03 0.04 0.13
------------ ------------ ----------- ------------
Net income available to common
shareholders................................. $ 0.62 $ 0.65 $ 2.26 $ 2.06
============ ============ =========== =============
Weighted average common and potential
dilutive common shares outstanding........... 31,983 31,301 31,777 31,070
The accompanying notes are an integral part of these statements.
5
CBL & Associates Properties, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
--------------------------------
2004 2003
--------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... $ 84,909 $ 76,090
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation................................................................ 71,826 62,817
Amortization ............................................................... 37,252 23,066
Amortization of debt premiums............................................... (3,601) --
Gain on sales of real estate assets......................................... (26,613) (4,943)
Gain on discontinued operations............................................. (845) (3,568)
Issuance of stock under incentive plan...................................... 1,422 1,617
Write-off of development projects........................................... 3,314 153
Accrual of deferred compensation............................................ 342 269
Amortization of deferred compensation....................................... 454 155
Loss on extinguishment of debt.............................................. -- 167
Minority interest in earnings............................................... 63,531 57,889
Amortization of above and below market leases............................... (2,275) (82)
Changes in:
Tenant and other receivables................................................ (1,971) (5,697)
Other assets................................................................ (7,905) (16,242)
Accounts payable and accrued liabilities.................................... 9,402 3,529
--------------- --------------
Net cash provided by operating activities........................... 229,242 195,220
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of real estate assets and other assets....................... (379,129) (85,416)
Additions to real estate assets........................................... (89,343) (69,950)
Other capital expenditures................................................ (57,600) (100,492)
Capitalized interest...................................................... (3,219) (4,512)
Additions to other assets................................................. (1,614) (7,083)
Reduction of cash in escrow .............................................. 78,476 --
Proceeds from sales of real estate assets................................. 117,748 19,831
Additions to note receivable.............................................. (9,529) --
Payments received on mortgage notes receivable............................ 10,582 1,174
Additional investments in and advances to unconsolidated affiliates....... (19,619) (9,142)
Distributions in excess of equity in earnings of unconsolidated affiliates 26,840 222
Purchase of minority interest in the operating partnership................ (5,450) (21,013)
--------------- --------------
Net cash used in investing activities............................... (331,857) (276,381)
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage and other notes payable............................ 518,981 383,959
Principal payments on mortgage and other notes payable.................... (278,973) (282,276)
Additions to deferred financing costs..................................... (5,468) (4,462)
Proceeds from issuance of common stock.................................... 334 3,574
Proceeds from issuance of preferred stock................................. -- 111,272
Proceeds from exercise of stock options................................... 12,766 5,969
Distributions to minority interests....................................... (58,297) (54,134)
Dividends paid............................................................ (79,822) (70,908)
--------------- --------------
Net cash provided by financing activities........................... 109,521 92,994
--------------- --------------
NET CHANGE IN CASH AND CASH EQUIVALENTS....................................... 6,906 11,833
CASH AND CASH EQUIVALENTS, beginning of period 20,332 13,355
--------------- --------------
CASH AND CASH EQUIVALENTS, end of period...................................... $ 27,238 $ 25,188
=============== ==============
SUPPLEMENTAL INFORMATION:
Cash paid for interest, net of amounts capitalized.......................... $ 126,450 $ 110,813
=============== ==============
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 September 30, 2004, the
Operating Partnership owned controlling interests in 62 regional malls, 25
associated centers (each adjacent to a regional shopping mall), 13 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 43 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, four mall
expansions, one open-air shopping center, three associated center expansions and
three community centers under construction at September 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 September 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 53.2%
limited partner interest for a combined interest held by CBL of 54.9%.
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 September
30, 2004, CBL's Predecessor owned a 15.4% limited partner interest, Jacobs owned
a 21.0% limited partner interest and third parties owned an 8.7% limited partner
interest in the Operating Partnership. CBL's Predecessor also owned 2.6 million
shares of CBL's common stock at September 30, 2004, for a total combined
effective interest of 20.0% 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 September 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-Myrtle Beach 50.0%
Mall of South Outparcel L.P. Coastal Grand-Myrtle Beach (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 43 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 September 30, Ended September 30,
-------------------------------- -----------------------------
2004 2003 2004 2003
--------------- -------------- ------------- --------------
Revenues $26,006 $9,838 $7,288 $5,771
Depreciation and amortization (7,120) (1,772) (1,862) (982)
Interest expense (6,492) (3,270) (1,658) (2,083)
Other operating expenses (6,557) (3,433) (1,883) (1,784)
Discontinued operations 1,431 -- 143 --
Gain on sales of real estate assets (1,111) -- (621) --
--------------- -------------- ------------- --------------
Net income $ 6,157 $ 1,363 $1,407 $ 922
=============== ============== ============= ==============
Company's Share for the
Total for the Nine Months Nine Months
Ended September 30, Ended September 30,
-------------------------------- -----------------------------
2004 2003 2004 2003
--------------- -------------- ------------- --------------
Revenues $78,970 $30,354 $21,104 $17,725
Depreciation and amortization (18,702) (5,445) (4,605) (3,001)
Interest expense (18,880) (8,601) (4,734) (6,230)
Other operating expenses (20,144) (8,888) (5,572) (5,084)
Discontinued operations 1,646 -- 164 --
Gain on sales of real estate assets 2,478 -- 596 --
--------------- -------------- ------------- --------------
Net income $25,368 $ 7,420 $ 6,953 $ 3,410
=============== ============== ============= ==============
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 $4,456 at September 30, 2004.
The master lease arrangements are for various terms of up to fifteen years.
The Company sold a community center expansion to Galileo America during
September 2004 for $3,447 in cash. The Company recognized gain of $1,313 to the
extent of the third party partner's ownership interest and deferred gain of $147
to the extent of the Company's ownership interest.
8
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
will be included in the third phase have been reflected as held for sale at
September 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 September 2004, Mall of South Carolina L.P. obtained a long-term,
non-recourse, fixed-rate mortgage loan totaling $118,000. The loan is comprised
of a $100,000 A-note to a financial institution that bears interest at 5.09%,
which matures in September 2014, and two 10-year B-notes of $9,000 each that
bear interest at 7.75% and mature in September 2014. The Company and its third
party partner in Mall of South Carolina L.P. each hold one of the B-notes. The
total net proceeds from these loans were used to retire $80,493 of outstanding
borrowings under the construction loan that partially financed the development
of Coastal Grand-Myrtle Beach.
Effective January 1, 2004, the Company adopted the provisions of Financial
Accounting Standards Board ("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 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 September
30, 2004, PPG had non-recourse, fixed-rate debt of $37,889 that was secured by
the real estate assets it owns, which had a net carrying value of $50,235.
Note 3 - Mortgage and Other Notes Payable
Mortgage and other notes payable consisted of the following at September
30, 2004 and December 31, 2003, respectively:
9
September 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 $ 2,489,892 6.49% $ 2,256,544 6.63%
Variable-rate debt:
Recourse term loans on operating properties 238,825 2.81% 105,558 2.67%
Construction loans 11,031 3.27% -- --
Lines of credit 554,800 2.77% 376,000 2.23%
---------------- ---------------
Total variable-rate debt 804,656 2.79% 481,558 2.33%
================ ===============
Total $ 3,294,548 5.59% $ 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 nine months ended September 30, 2004.
Unsecured Line of Credit
In August 2004, the Company entered into a new $400,000 unsecured credit
facility, which bears interest at LIBOR plus a margin of 100 to 145 basis points
based on the Company's leverage, as defined in the agreement. The credit
facility matures in August 2006 and has three one-year extension options, which
are at the Company's election. The Company drew on the credit facility to repay
all $102,400 of outstanding borrowings under the Company's previous $130,000
unsecured credit facility, which had an interest rate of LIBOR plus 1.30% and
was scheduled to mature in September 2004. At September 30, 2004, the
outstanding borrowings of $104,800 under the $400,000 credit facility had a
weighted average interest rate of 2.98%.
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
September 30, 2004:
Total Total Maturity
Available Outstanding Date
- ----------------------------------------------------
$ 373,000 $ 367,000 February 2006
80,000 53,000 June 2006
20,000 20,000 March 2007
10,000 10,000 April 2006
- -------------------------------------
$ 483,000 $ 450,000
=====================================
Borrowings under the secured lines of credit had a weighted average
interest rate of 2.72% at September 30, 2004.
Letters of Credit
At September 30, 2004, the Company had additional secured lines of credit
with a total commitment of $27,123 that can only be used for issuing letters of
credit. The total outstanding amount under these lines of credit was $15,269 at
September 30, 2004.
10
Covenants and Restrictions
Eighteen malls, five associated centers, two community 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 September 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
4.6 years at September 30, 2004 and 5.3 years at December 31, 2003.
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 had no derivative instruments at
September 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 September 30, 2004 Malls Centers Centers All Other Total
- -------------------------------------- ------------ ------------ ------------ ----------- -----------
Revenues $ 173,459 $ 7,437 $ 5,480 $ 7,851 $ 194,227
Property operating expenses (1) (58,887) (1,684) (1,319) 3,365 (58,525)
Interest expense (41,419) (1,215) (783) (2,625) (46,042)
Other expense -- -- -- (5,681) (5,681)
Gain(loss) on sales of real estate
assets (178) 327 1,369 4 1,522
------------ ------------ ------------ ----------- -----------
Segment profit and loss $ 72,975 $ 4,865 $ 4,747 $ 2,914 85,501
============ ============ ============ ===========
Depreciation and amortization expense (38,023)
General and administrative expense (8,280)
Interest income 836
Equity in earnings and minority
interest in earnings (16,191)
-----------
Income before discontinued operations $ 23,843
===========
Capital expenditures (2) $ 265,087 $ 36,366 $ 5,399 $ 5,289 $ 312,141
11
Associated Community
Three Months Ended September 30, 2003 Malls Centers Centers All Other Total
- -------------------------------------- ------------ ------------ ------------ ----------- -----------
Revenues $ 138,577 $ 6,351 $ 15,331 $ 2,600 $ 162,859
Property operating expenses (1) (49,236) (1,648) (3,278) 7,108 (47,054)
Interest expense (35,040) (2,038) (2,001) 1,041 (38,038)
Other expense -- -- -- (2,703) (2,703)
Gain(loss) on sales of real estate
assets 467 -- 371 (1) 837
------------ ------------ ------------ ----------- -----------
Segment profit and loss $ 54,768 $ 2,665 $ 10,423 $ 8,045 $ 75,901
============ ============ ============ ===========
Depreciation and amortization expense (28,286)
General and administrative expense (7,228)
Interest income 639
Loss on extinguishment of debt --
Equity in earnings and minority
interest in earnings (16,910)
-----------
Income before discontinued operations $ 24,116
===========
Capital expenditures (2) $ 188,880 $ 3,062 $ 14,525 $ 4,066 $ 210,533
Associated Community
Nine Months Ended September 30, 2004 Malls Centers Centers All Other Total
- -------------------------------------- ------------ ------------ ------------ ----------- -----------
Revenues $ 488,032 $ 21,926 $ 13,742 $ 19,427 $ 543,127
Property operating expenses (1) (164,714) (4,947) (4,043) 13,279 (160,425)
Interest expense (118,492) (3,611) (2,301) (4,870) (129,274)
Other expense -- -- -- (13,636) (13,636)
Gain on sales of real estate assets 848 327 24,933 194 26,302
------------ ------------ ------------ ----------- -----------
Segment profit and loss $ 205,674 $ 13,695 $ 32,331 $ 14,394 266,094
============ ============ ============ ===========
Depreciation and amortization expense (103,754)
General and administrative expense (24,505)
Interest income 2,422
Equity in earnings and minority
interest in earnings (56,578)
-----------
Income before discontinued operations $ 83,679
===========
Total assets $4,383,552 $244,366 $157,466 $132,552 $4,917,936
Capital expenditures (2) $ 788,742 $ 36,799 $ 11,004 $ 46,342 $ 882,887
Associated Community
Nine Months Ended September 30, 2003 Malls Centers Centers All Other Total
- -------------------------------------- ------------ ------------ ------------ ----------- -----------
Revenues $ 418,598 $ 17,551 $ 44,716 $ 7,720 $ 488,585
Property operating expenses (1) (145,375) (4,448) (10,434) 14,440 (145,817)
Interest expense (102,909) (3,938) (5,963) (520) (113,330)
Other expense -- -- -- (7,359) (7,359)
Gain(loss) on sales of real estate
assets 1,727 -- 3,208 (2) 4,933
------------ ------------ ------------ ----------- -----------
Segment profit and loss $ 172,041 $ 9,165 $ 31,527 $ 14,279 227,012
============ ============ ============ ===========
Depreciation and amortization expense (82,065)
General and administrative expense (20,225)
Interest income 1,805
Loss on extinguishment of debt (167)
Equity in earnings and minority
interest in earnings (54,452)
-----------
Income before discontinued operations $ 71,908
===========
Total assets $3,351,809 $ 89,643 $479,600 $109,477 $4,130,529
Capital expenditures (2) $ 326,742 $ 18,303 $ 31,528 $ 4,438 $ 381,011
(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.
12
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.
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 Company's election.
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 Company's election.
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.
On July 28, 2004, the Company acquired Monroeville Mall, and its associated
center, the Annex, in the eastern Pittsburgh suburb of Monroeville, PA, for a
total purchase price, including transaction costs, of $231,621, which consisted
of $39,455 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, an obligation of
$11,950 to pay for the fee interest in the land underlying the mall and
associated center on or before July 28, 2007, and the issuance of 780,470
special common units in the Operating Partnership with a fair value of $46,212
($59.21 per special common unit). The Company recorded a debt premium of $3,270,
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. These special common units receive a
minimum distribution of $5.0765 per unit per year for the first three years, and
a minimum distribution of $5.8575 per unit per year thereafter.
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 nine months ended September 30, 2004.
13
Land $ 48,976
Building and improvements 666,306
Above-market leases 1,712
In-place lease assets 11,352
---------
Total assets 728,346
Debt (263,124)
Debt premiums (18,768)
Below-market leases (9,162)
Land purchase obligation (11,950)
---------
Net assets acquired $425,343
=========
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.
The following unaudited pro forma financial information is for the three
months and nine months ended September 30, 2004. It presents the results of the
Company as if each of the 2004 acquisitions had occurred on January 1, 2004.
However, the unaudited pro forma financial information does not represent what
the consolidated results of operations or financial condition actually would
have been if the acquisitions had occurred on January 1, 2004. The pro forma
financial information also does not project the consolidated results of
operations for any future period. The pro forma results are as follows:
Three Months Nine Months
Ended Ended
September 30, 2004 September 30, 2004
----------------------------------------------
Total revenues $196,427 $577,076
Income before discontinued operations 23,921 85,488
Net income available to common shareholders 19,842 73,470
Basic per share data:
Income before discontinued operations, net of
preferred dividends 0.63 2.36
Net income available to common shareholders, net
of preferred dividends 0.64 2.40
Diluted per share data:
Income before discontinued operations, net of
preferred dividends 0.61 2.27
Net income available to common shareholders, net
of preferred dividends 0.62 2.31
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:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
--------------- --------------- --------------- --------------
Weighted average shares outstanding 30,954 30,186 30,709 30,001
Effect of nonvested stock awards (184) (164) (144) (122)
--------------- --------------- --------------- --------------
Denominator - basic earnings per share 30,770 30,022 30,565 29,879
Effect of dilutive securities:
Stock options, nonvested stock awards and
deemed shares related to deferred
compensation plans 1,213 1,279 1,212 1,191
--------------- --------------- --------------- --------------
Denominator - diluted earnings per share 31,983 31,301 31,777 31,070
=============== =============== =============== ==============
14
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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
--------------- --------------- --------------- --------------
Net income $ 24,180 $ 24,908 $ 84,909 $ 76,090
Gain on current period cash flow hedges -- 626 -- 2,397
--------------- --------------- --------------- --------------
Comprehensive income $ 24,180 $ 25,534 $ 84,909 $ 78,487
=============== =============== =============== ==============
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
potential exposure related to environmental cleanup will not materially affect
the Company's financial position or results of operations.
The Company has guaranteed 50% of the debt of Parkway Place L.P., an
unconsolidated affiliate in which the Company owns a 45% interest, which owns
Parkway Place in Huntsville, AL. The total amount outstanding at September 30,
2004, was $57,556, of which the Company has guaranteed $28,778. The guaranty
will expire when the related debt matures in December 2004, unless extended at
the Company's election. 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 had guaranteed 100% of the construction debt incurred to develop Coastal
Grand - Myrtle Beach in Myrtle Beach, SC. The Company received a fee of $1,571
for this guaranty when it was issued during the three months ended June 30,
2003. The Company was recognizing one-half of this fee as revenue pro rata over
the term of the guaranty until its expiration in May 2006, which represents the
portion of the fee attributable to the third-party partner's ownership interest.
As discussed in Note 2, Mall of South Carolina L.P. refinanced the construction
loan with new mortgage loans in September 2004. As a result, the Company
recognized one-half of the unamortized balance of the guaranty fee, or $328, as
revenue when the construction loan was retired. The remaining $328 attributable
to the Company's ownership interest was recorded as a reduction to the Company's
investment in the partnership. The Company recognized total revenue of $371 and
$131 related to this guaranty during the three months ended September 30, 2004
and 2003, respectively. The Company recognized total revenue of $502 and $175
related to this guaranty during the nine months ended September 30, 2004 and
2003, respectively.
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
September 30, 2004, was $24,396. The total commitment under the construction
loan is $70,000. The Company did not receive a fee for this guaranty.
The Company has issued performance bonds related to its development
projects that it would have to satisfy if the agreed upon work was not
performed. At September 30, 2004 the total amount outstanding on these bonds was
$16,135.
15
Note 10 - Shareholders' Equity and Minority Interests
During the nine months ended September 30, 2004, the Company repurchased
101,761 common units in the Operating Partnership from third parties for $5,449.
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." The Company has not
granted any stock options since January 1, 2003. The Company records
compensation expense for awards of common stock based on the fair value of the
common stock on the date of grant and the related vesting period, if any.
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 nine months ended September 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 September 30, Nine Months Ended September 30,
--------------------------------- -------------------------------
2004 2003 2004 2003
----------------- --------------- ---------------- --------------
Net income available to common shareholders, as reported $19,764 $ 20,225 $ 71,661 $ 64,023
Stock-based compensation expense included in
reported net income available to common shareholders 514 785 1,799 1,620
Total stock-based compensation expense determined
under fair value method (641) (935) (2,181) (2,071)
----------------- --------------- ---------------- --------------
Pro forma net income available to common shareholders $19,637 $ 20,075 $ 71,279 $ 63,572
================= =============== ================ ==============
Net income available to common shareholders per share:
Basic, as reported $ 0.64 $ 0.67 $ 2.34 $ 2.14
================= =============== ================ ==============
Basic, pro forma $ 0.64 $ 0.67 $ 2.33 $ 2.13
================= =============== ================ ==============
Diluted, as reported $ 0.62 $ 0.65 $ 2.26 $ 2.06
================= =============== ================ ==============
Diluted, pro forma $ 0.61 $ 0.64 $ 2.24 $ 2.05
================= =============== ================ ==============
Note 12 - Noncash Investing and Financing Activities
The Company's noncash investing and financing activities were as follows
for the nine months ended September 30, 2004 and 2003:
Nine Months Ended
September 30,
-------------------------
2004 2003
-------------------------
Debt assumed to acquire property interests, including premiums $ 281,892 $ 114,454
=========================
Issuance of minority interest in Operating Partnership to
acquire property interests $ 46,212 $ --
=========================
Debt consolidated from application of FASB Interpretation No. 46 $ 38,147 $ --
=========================
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. In July 2004,
the Company sold a community center for a sales price of $2,600 and recognized a
16
gain on discontinued operations of $328. Total revenues for these community
centers were $16 and $165 for the three months ended September 30, 2004 and
2003, respectively, and were $354 and $507 for the nine months ended September
30, 2004 and 2003, respectively. All prior periods presented have been restated
to reflect the operations of these community centers as discontinued operations.
Note 14 - 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.
As of September 30, 2004, we owned controlling interests in 62 regional
malls, 25 associated centers (each adjacent to a regional shopping mall), 13
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 September 30, 2004, we owned non-controlling interests in five
regional malls, one associated center and 43 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, four mall expansions, one open-air shopping center,
three associated center expansions and three community center under construction
as of September 30, 2004.
The majority of our revenues 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.
17
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 September 30, 2004, there were 451,900
square feet of vacancies due to tenant bankruptcies and store closings, which
represent the loss of $8.0 million in annual base rents. However, the pace of
bankruptcies slowed in the second quarter of 2004 and we have now replaced
206,700 square feet of the vacancies. The annual base rents for these re-leased
spaces represent an increase of 5.6% in annual base rents per square foot on
those spaces. We continue to enjoy an improving retail environment with mall
retailers experiencing higher sales growth and improving margins. During the
nine months ended September 30, 2004, for mall stores of 10,000 square feet and
less, year-to-date same store sales increased 4.0% for those tenants that have
reported. The third quarter of 2004 was the sixth 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 September 30, 2004, our total variable-rate debt represents 25.2% 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 September 30, 2004 to the Three Months
Ended September 30, 2003
The following significant transactions impact the comparison of the results
of operations for the three months ended September 30, 2004 to the comparable
period ended September 30, 2003:
|X| The acquisition of eleven malls and three associated centers and the
opening of one mall, one associated center and one community center since
September 10, 2003 (collectively referred to as the "New Properties").
Therefore, the three months ended September 30, 2004, include revenues and
expenses related to these properties for a greater period of time than the
comparable period a year ago. The New Properties are as follows:
Project Name Location Date Acquired / Opened
-------------------------------------- --------------------------------- ----------------------
Acquisitions:
-------------
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
Monroeville Mall Monroeville, PA July 2004
Monroeville Annex Monroeville, PA July 2004
18
Developments:
-------------
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| In October 2003, 41 community centers were sold 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
September 30, 2004, do not include a significant amount of revenues and
expenses related to these properties, whereas the three months ended
September 30, 2003, includes a full period of revenues and expenses related
to these properties.
Revenues
The $31.4 million increase in revenues resulted primarily from:
|X| an increase in rents and tenant reimbursements of $35.7 million
attributable to the New Properties,
|X| an increase in rents and tenant reimbursements of $2.6 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 rents and tenant reimbursements of $2.6 million from the
remaining properties,
|X| an increase in other revenues of $1.9 million primarily due to an increase
in the revenues of our taxable REIT subsidiary,
|X| an increase of $1.6 million in management, development and leasing fees,
resulting primarily from management fees from Galileo America, fees related
to the American Express gift card program and the recognition of the
remaining balance of the deferred guaranty fee on one of our joint ventures
since the related loan was retired, and
|X| a decrease in rents and tenant reimbursements of $13.0 million related to
the community centers that were sold to Galileo America.
Expenses
The $11.5 million increase in property operating expenses, including real
estate taxes and maintenance and repairs, resulted from:
|X| an increase of $12.1 million attributable to the New Properties,
|X| an increase of $0.4 million as a result of the consolidation of PPG Venture
I Limited Partnership
|X| an increase of $1.7 million in operating expenses at the remaining
properties, and
|X| a decrease of $2.7 million related to the community centers that were sold
to Galileo America.
The increase of $9.7 million in depreciation and amortization expense was
primarily due to:
|X| an increase of $8.8 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 $3.0 million as a result of the write-off of tenant
improvements related to closed tenants and 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.
19
General and administrative expenses increased $1.1 million primarily as a
result of annual increases in salaries and benefits of existing personnel and
the addition of new personnel.
Other expense increased due to an increase of $1.5 million in write-offs of
abandoned projects and an increase of $1.5 million in the operating expenses of
our taxable REIT subsidiary.
Interest Income
The increase in interest income of $0.2 million results from an increase in
the amount of mortgage and other notes receivable outstanding compared to the
prior year period.
Interest Expense
Interest expense increased by $8.0 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 in September 2003.
Gain on Sales of Real Estate Assets
The net gain on sales of $1.5 million in the three months ended September
30, 2004 was primarily related to a gain of $1.3 million on a center that was
sold to Galileo America. The remaining $0.2 million of net gain relates to sales
of three outparcels that were at consolidated properties. The net gain on sales
of $0.8 million in the three months ended September 30, 2003 resulted from the
sales of three outparcels.
Equity in Earnings of Unconsolidated Affiliates
The increase of $0.5 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 third quarter of 2004 result from the sale
of Keystone Crossing, a community center Tampa, FL. Discontinued operations in
the third quarter of 2003 include the results of operations of two community
centers sold during the third quarter of 2003 and of two community centers sold
during the nine months ended September 30, 2004.
Comparison of the Nine Months Ended September 30, 2004 to the Nine Months Ended
September 30, 2003
The following significant transactions impact the comparison of the results
of operations for the nine months ended September 30, 2004 to the comparable
period ended September 30, 2003:
|X| The acquisition of twelve malls and four 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
nine months ended September 30, 2004, include revenues and expenses related
to these properties for a greater period of time than the comparable period
a year ago. The New Properties are as follows:
20
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
Monroeville Mall Monroeville, PA July 2004
Monroeville Annex Monroeville, PA July 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| In October 2003, 41 community centers were sold to 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 nine months ended September 30, 2004, do not
include a significant amount of revenues and expenses related to these
properties, whereas the nine months ended September 30, 2003, includes a
full period of revenues and expenses related to these properties.
Revenues
The $54.5 million increase in revenues resulted primarily from:
|X| an increase in rents and tenant reimbursements of $78.5 million
attributable to the New Properties,
|X| an increase in rents and tenant reimbursements of $5.7 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| a net increase in rents and tenant reimbursements of $0.6 million from the
remaining properties.
|X| an increase in other revenues of $5.1 million primarily due to an increase
in the revenues of our taxable REIT subsidiary,
|X| an increase of $2.4 million in management, development and leasing fees,
primarily resulting from management fees from Galileo America, fees related
to the American Express gift card program and the recognition of the
remaining balance of the deferred guaranty fee on one of our joint ventures
since the related loan was retired, and
|X| a decrease in rents and tenant reimbursements of $37.8 million related to
the community centers that were sold to Galileo America.
21
Expenses
The $14.6 million increase in property operating expenses, including real
estate taxes and maintenance and repairs, resulted from:
|X| an increase of $27.4 million attributable to the New Properties,
|X| an increase of $1.6 million as a result of the consolidation of PPG Venture
I Limited Partnership
|X| a decrease of $8.8 million related to the community centers that were sold
to Galileo America and
|X| a decrease of $3.4 million in operating expenses at the remaining
properties.
The increase of $21.7 million in depreciation and amortization expense was
primarily due to:
|X| an increase of $21.4 million attributable to the New Properties,
|X| an increase of $0.8 million attributable to the consolidation of PPG
Venture I Limited Partnership,
|X| an increase of $6.3 million as a result of the write-off of tenant
improvements related to closed stores and ongoing capital expenditures for
renovations, expansions, tenant allowances and deferred maintenance at the
existing properties and
|X| a decrease of $6.8 million related to the community centers that were sold
to Galileo America.
General and administrative expenses increased $4.3 million as a result of
an increase in expense for state taxes of $1.4 million, annual increases in
salaries and benefits of existing personnel and the addition of new personnel.
Other expense increased due to an increase of $3.2 million in write-offs of
abandoned projects and an increase of $3.1 million in the operating expenses of
our taxable REIT subsidiary.
Interest Income
The increase in interest income of $0.6 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 $15.9 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 in September 2003.
Gain on Sales of Real Estate Assets
The net gain on sales of $26.3 million in the nine months ended September
30, 2004 was primarily related to a gain of $24.0 million on the centers that
have been sold to Galileo America. The remaining $2.3 million of gain relates to
sales of seven outparcels. The net gain on sales of $4.9 million in the nine
months ended September 30, 2003 resulted from gains on sales of fourteen
outparcels and two options on land, offset by a loss on one outparcel.
Equity in Earnings of Unconsolidated Affiliates
The increase of $3.5 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.
22
Discontinued Operations
Discontinued operations in the nine months ended September 30, 2004 result
from the sale of two community centers, Uvalde Plaza and Keystone Crossing.
Discontinued operations in the nine months ended September 30, 2003 relate to
the two community centers sold during 2004 and six community centers that were
sold during the year ended December 31, 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 September 30,
---------------------------------
2004 2003
----------------- ---------------
Malls 89.6% 85.1%
Associated centers 3.8% 3.9%
Community centers 2.8% 9.4%
Mortgages, office building and other 3.8% 1.6%
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 4.0% on a
comparable per square foot basis to $207.10 per square foot for the nine months
ended September 30, 2004 compared with $199.22 per square foot for same period
in 2003. Mall store sales increased by 2.9% on a comparable per square foot
basis to $313.04 per square foot for the trailing twelve months ended September
30, 2004, from $304.28 per square foot for the trailing twelve months ended
September 30, 2003.
Occupancy costs as a percentage of sales for the Stabilized Malls were
13.6% and 13.9% for the nine months ended September 30, 2004 and 2003,
respectively.
Occupancy
The occupancy of the portfolio was as follows:
September 30,
-------------------------------------
2004 2003
------------------ ------------------
Total portfolio occupancy 92.4% 91.4%
Total mall portfolio 92.7% 91.7%
Stabilized Malls 92.7% 92.1%
Non-Stabilized Malls 91.3% 80.2%
Associated centers 90.4% 91.8%
Community centers (1) 93.2% 88.6%
(1) Excludes the community centers that were sold in Phases I and II of the
Galileo Transaction
23
The occupancy of the Associated Centers declined primarily due to the loss
of both a 46,000 square foot Appliance Factory Warehouse and a 15,000 square
foot Fresh Market at Hamilton Corner in Chattanooga, TN. This associated center
is under redevelopment with replacement prospects that will open in the fourth
quarter of 2004 and in 2005.
Leasing
Average annual base rents per square foot were as follows for each property
type:
At September 30,
-------------------------------------
2004 2003
------------------ ------------------
Stabilized Malls $ 25.19 $ 24.76
Non-Stabilized Malls $ 26.62 $ 26.48
Associated centers $ 9.56 $ 9.77
Community centers (1) $ 7.98 $ 8.19
(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 achieved through new and
renewal leasing during the third quarter of 2004 for spaces that were previously
occupied:
Base Rent Base Rent
Per Square Per Square
Foot Foot Increase
Square Feet Prior Lease (1) New Lease (2) (Decrease)
------------- --------------- --------------- ------------
Stabilized Malls 515,982 $ 25.22 $ 26.19 3.8%
Associated centers 17,336 12.20 12.17 (0.2)%
Community centers (3) 9,600 9.80 10.83 10.5%
------------- --------------- --------------- ------------
542,918 $ 24.53 $ 25.47 3.8%
============= =============== =============== ============
(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.
The 3.8% 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 affected 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 $27.2 million of unrestricted cash and cash equivalents as of
September 30, 2004, an increase of $6.9 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 $34.1 million to $229.3
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.
24
Cash used in investing activities increased by $55.5 million to $331.9
million for the nine months ended September 30, 2004, compared to $276.4 million
for the same period in 2003. Cash used to acquire real estate assets was $311.6
million higher in the nine months ended September 30, 2004 compared to the nine
months ended September 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 $97.9 million in proceeds from sales of real estate assets
that was primarily from Phase II of the Galileo America transaction, (ii) an
increase of $9.2 million related to two notes receivable that were retired and
(iii) an increase of $16.4 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 $16.5 million to $109.5
million for the nine months ended September 30, 2004, compared to $93.0 million
in the comparable period of 2003. The increase primarily results from an
increase in proceeds from borrowings of $135.0 million combined with a decrease
in principal payments of $3.3 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. Cash
proceeds from exercises of employee stock options also increased $6.8 million.
This was offset primarily by a reduction in proceeds raised from the issuance of
stock of $114.5 million and an increase in dividends and distributions paid of
$13.1 million.
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):
Weighted
Average
Minority Unconsolidated Interest
Consolidated Interests Affiliates Total Rate(1)
------------- ---------------- --------------- ------------- ---------------
September 30, 2004:
Fixed-rate debt:
Non-recourse loans on operating properties $ 2,489,892 $ (53,144) $ 118,588 $2,555,336 6.46%
------------- ---------------- --------------- ------------- ---------------
Variable-rate debt:
Recourse term loans on operating properties 238,825 -- 33,778 272,603 2.88%
Construction loans 11,031 -- 24,396 35,427 3.43%
Lines of credit 554,800 -- -- 554,800 2.77%
------------- ---------------- --------------- ------------- ---------------
Total variable-rate debt 804,656 -- 58,174 862,830 2.83%
------------- ---------------- --------------- ------------- ---------------
Total $ 3,294,548 $ (53,144) $ 176,762 $3,418,166 5.54%
============= ================ =============== ============= ===============
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 $ (19,577) $ 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 $450.0 million was outstanding as of September 30,
2004. The secured credit facilities bear interest at LIBOR plus 1.00%.
25
In August 2004, we entered into a new $400.0 million unsecured credit
facility, which bears interest at LIBOR plus a margin of 100 to 145 basis points
based on our leverage, as defined in the agreement. The credit facility matures
in August 2006 and has three one-year extension options, which are at our
election. We used borrowings on the credit facility to repay all of the
outstanding borrowings under our previous $130.0 million unsecured credit
facility, which had an interest rate of LIBOR plus 1.30% and was scheduled to
mature in September 2004. At September 30, 2004, total outstanding borrowings of
$144.8 million under the new credit facility had a weighted average interest
rate of 2.98%.
We also have secured lines of credit with total availability of $27.1
million that can only be used to issue letters of credit. There was $15.3
million outstanding under these lines at September 30, 2004.
During the nine months ended September 30, 2004, we have assumed or
obtained $422.3 million of loans in connection with the acquisitions completed
during that time period. Additionally, we recorded debt premiums of $18.8
million in connection with these loans. Please see the Acquisitions section
below for a more complete description of each loan.
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 September 30, 2004. Additionally,
certain property-specific mortgage notes payable require the maintenance of debt
service coverage ratios. At September 30, 2004, the properties subject to these
mortgage notes payable were in compliance with the applicable ratios.
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 $230.0 million of debt that is scheduled to mature
before September 30, 2005. There are extension options in place that will extend
the maturity of $88.1 million of this debt beyond September 30, 2005. We expect
to either retire or refinance the remaining $141.9 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 September 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 September 30, 2004 (in thousands, except stock prices):
26
Shares
Outstanding Stock Price (1) Value
------------------ ----------------- -----------------
Common stock and operating partnership units 56,851 $ 60.95 $3,465,068
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 3,680,068
Company's share of total debt 3,418,166
-----------------
Total market capitalization $7,098,234
=================
Debt-to-total-market capitalization ratio 48.2%
=================
(1) Stock price for common stock and operating partnership units equals the
closing price of the common stock on September 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.
Developments and Expansions
The following development projects are under construction (dollars in
thousands):
Our Share of
Cost as of
Project Our Share September 30, Projected
Property Location Square Feet Of Costs 2004 Opening Date
- ------------------------------ ------------------- ------------- -------------- --------------- ---------------
Mall:
- -----
Imperial Valley Mall
(60/40 joint venture) El Centro, CA 752,000 $ 45,745 $29,795 March 2005
Mall Expansions:
- ----------------
East Towne Mall Madison, WI 115,000 20,473 15,850 October 2004
West Towne Mall Madison, WI 138,000 21,100 11,446 October 2004
The Lakes Mall Muskegon, MI 45,000 4,771 3,905 November 2004
Fayette Mall Lexington, KY 148,000 23,738 1,120 October 2005
Open Air Center:
- ----------------
Southaven Towne Center Southaven, MS 407,000 22,856 14,813 October 2005
Associated Center Expansions:
- -----------------------------
CoolSprings Crossing-Tweeter's Nashville, TN 10,000 1,415 31 March 2005
Hamilton Corner Chattanooga, TN 68,000 5,500 702 March 2005
Monroeville Village Monroeville, PA 75,000 20,686 5,698 November 2004/
May 2005
Community Center:
- -----------------
Charter Oak Marketplace Hartford, CT 334,000 12,819 10,781 November 2004
Cobblestone Village at Royal Palm Royal Palm, FL 225,000 9,091 1,156 June 2005
Chicopee Marketplace Chicopee, MA 156,000 19,551 612 August 2005
------------- -------------- ---------------
2,473,000 $ 207,745 $95,909
============= ============== ===============
There is a construction loan in place for the costs of the new mall
development and the open-air center. The costs of the remaining projects will be
funded with operating cash flows and the credit facilities.
27
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 $107.4 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, matures in April 2006 and has
three one-year extension options that are at the Company's election.
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, matures in May 2006 and has three one-year extension options that
are at the Company's election.
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, and its associated
center, the Annex, in the eastern Pittsburgh suburb of Monroeville, PA, for a
total purchase price, including transaction costs of $231.6 million, which
consisted of $39.4 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, an obligation of $12.0 million to purchase the fee interest in the
land underlying the mall and associated center on or before July 28, 2007, and
the issuance of 780,470 special common units in the Operating Partnership with a
fair value $46.2 million. The Company recorded a debt premium of $3.3 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. These special common units receive a
minimum distribution of $5.0765 per unit per year for the first three years, and
a minimum distribution of $5.8575 per unit per year thereafter.
28
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 nine months ended September
30, 2004.
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 $86.8
million.
We sold Uvalde Plaza, a community center in Uvalde, TX, and recognized a
gain of $0.6 million during the second quarter of 2004.
We sold Keystone Crossing, a community center in Tampa, FL, and recognized
a gain of $0.3 million during the third quarter of 2004. We also sold an
expansion to Coastal Way, a community center in Spring Hill, FL, and recognized
a gain of $1.5 million during the quarter.
Other Capital Expenditures
Including our share of unconsolidated affiliates' capital expenditures and
excluding minority investor's share of capital expenditures, we spent $26.9
million during the nine months ended September 30, 2004 for tenant allowances,
which generate increased rents from tenants over the terms of their leases.
Deferred maintenance expenditures were $11.8 million for the nine months ended
September 30, 2004 and included $2.4 million for roof repairs and replacements
and $4.0 million for resurfacing and improved lighting of parking lots.
Renovation expenditures were $19.7 million for the nine months ended September
30, 2004.
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, utilities and other recoverable operating expenses as
provided in the lease agreements. Tenant reimbursements are recognized as
29
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.
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
30
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 nine months ended September 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.
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.
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 7.3% for the nine months ended September 30, 2004 to $214.4
million compared to $199.9 million for the same period in 2003. The New
Properties generated 88% 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 12%
growth in FFO.
31
The calculation of FFO is as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net income available to common shareholders $19,764 $20,225 $ 71,661 $ 64,023
Depreciation and amortization from:
Consolidated properties 38,023 28,286 103,754 82,065
Unconsolidated affiliates 1,862 982 4,605 3,001
Discontinued operations 3 105 51 338
Minority interest in earnings of operating partnership 16,624 17,235 59,498 55,851
Minority investors' share of depreciation and amortization
in shopping center properties (302) (282) (899) (823)
Gain on disposal of:
Operating real estate assets (200) -- (23,765) --
Discontinued operations (325) (633) (845) (3,568)
Depreciation and amortization of non-real estate assets (214) (117) (427) (383)
------------ ------------ ------------ ------------
Funds from operations $75,235 $ 65,801 $ 213,633 $ 200,504
============ ============ ============ ============
Diluted weighted average shares and potential dilutive common
shares with operating partnership units fully converted 57,837 56,884 57,161 56,719
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 may elect to use derivative
financial instruments to manage its exposure to changes in interest rates, but
will not use them for speculative purposes. The Company's interest rate risk
management policy requires that derivative instruments be used for hedging
purposes only and that they be entered into only with major financial
institutions based on their credit ratings and other factors.
Based on the Company's proportionate share of consolidated and
unconsolidated variable rate debt at September 30, 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 $4.2 million.
Based on the Company's proportionate share of consolidated and
unconsolidated debt at September 30, 2004, a 0.5% increase in interest rates
would decrease the fair value of debt by approximately $61.2 million, while a
0.5% decrease in interest rates would increase the fair value of debt by
approximately $63.1 million.
The Company did not have any derivative financial instruments during the
three months ended September 30, 2004 or at September 30, 2004.
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-15. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective. No change
in the Company's internal control over financial reporting occurred during the
period covered by this quarterly report that materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
32
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings
None
ITEM 2: Changes in Securities, Use of Proceeds and Issuer Purchase of Equity
Securities
None
ITEM 3: Defaults Upon Senior Securities
None
ITEM 4: Submission of Matters to a Vote of Security Holders
None
ITEM 5: Other Information
None
ITEM 6: Exhibits
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 35.
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 36.
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 37.
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 38.
-----------------------------------------
(a) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003.
33
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: November 9, 2004
34
Exhibit 31.1
CERTIFICATION
I, Charles B. Lebovitz, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of CBL &
Associates Properties, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this quarterly report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered
by this quarterly report based on such evaluation; and
(c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
(5) The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: November 9, 2004
/s/ Charles B. Lebovitz
------------------------------------
Charles B. Lebovitz, Chief Executive Officer
35
Exhibit 31.2
CERTIFICATION
I, John N. Foy, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of CBL &
Associates Properties, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this quarterly report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered
by this quarterly report based on such evaluation; and
(c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
(5) The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: November 9, 2004
/s/ John N. Foy
-----------------------------------
John N. Foy, Chief Financial Officer
36
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CBL & ASSOCIATES PROPERTIES,
INC. (the "Company") on Form 10-Q for the nine months ending September 30, 2004
as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Charles B. Lebovitz, Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. ss. 1350 (as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002), that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Charles B. Lebovitz
- ------------------------------------
Charles B. Lebovitz, Chief Executive Officer
November 9, 2004
- ------------------------------------
Date
37
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CBL & ASSOCIATES PROPERTIES,
INC. (the "Company") on Form 10-Q for the nine months ending September 30, 2004
as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, John N. Foy, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350 (as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002), that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ John N. Foy
- ------------------------------------
John N. Foy, Vice Chairman of the Board,
Chief Financial Officer and Treasurer
November 9, 2004
- ------------------------------------
Date