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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 MARCH 31, 2005
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 incorporation (I.R.S. Employer Identification
or organization) Number)
2030 Hamilton Place Blvd., Suite 500, Chattanooga, TN 37421-6000
(Address of principal executive office, including zip code)
Registrant's telephone number, including area code (423) 855-0001
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or 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 May 2, 2005, there were 31,407,690 shares of common stock, par value $0.01
per share, outstanding.
CBL & Associates Properties, Inc.
1
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................14
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk...........................................25
ITEM 4: Controls and Procedures..............................................................................25
PART II - OTHER INFORMATION.................................................................................26
ITEM 1: Legal Proceedings....................................................................................26
ITEM 2: Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.....................26
ITEM 3: Defaults Upon Senior Securities......................................................................26
ITEM 4: Submission of Matters to a Vote of Security Holders..................................................26
ITEM 5: Other Information....................................................................................26
ITEM 6: Exhibits.............................................................................................26
SIGNATURE...................................................................................................27
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 March 31, 2005, 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 for
the year ended December 31, 2004.
3
CBL & Associates Properties, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
March 31, December 31,
2005 2004
--------------- ---------------
ASSETS
Real estate assets:
Land.............................................................. $ 659,719 $ 659,782
Buildings and improvements........................................ 4,689,107 4,670,462
--------------- ---------------
5,348,826 5,330,244
Less accumulated depreciation................................... (612,957) (575,464)
--------------- ---------------
4,735,869 4,754,780
Real estate assets held for sale, net............................. - 61,607
Developments in progress.......................................... 99,976 78,393
--------------- ---------------
Net investment in real estate assets............................ 4,835,845 4,894,780
Cash and cash equivalents........................................... 58,935 25,766
Receivables:
Tenant, net of allowance for doubtful accounts of $3,237 in
2005 and 2004.................................................. 34,183 38,409
Other............................................................. 12,214 13,706
Mortgage and other notes receivable................................. 29,889 27,804
Investments in unconsolidated affiliates............................ 94,704 84,782
Other assets........................................................ 113,010 119,253
--------------- ---------------
$ 5,178,780 $ 5,204,500
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage and other notes payable.................................... $ 3,369,302 $ 3,359,466
Mortgage notes payable on real estate assets held for sale.......... -- 12,213
Accounts payable and accrued liabilities............................ 186,365 212,064
--------------- ---------------
Total liabilities................................................. 3,555,667 3,583,743
--------------- ---------------
Commitments and contingencies (Notes 2, 3, and 7) ..................
Minority interests.................................................. 567,110 566,606
--------------- ---------------
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 2005 and 2004.............. 20 20
7.75% Series C Cumulative Redeemable Preferred Stock,
460,000 shares outstanding in 2005 and 2004................ 5 5
7.375% Series D Cumulative Redeemable Preferred Stock,
700,000 shares outstanding in 2005 and 2004................ 7 7
Common stock, $.01 par value, 95,000,000 shares authorized,
31,404,816 and 31,333,552 shares issued and outstanding
in 2005 and 2004, respectively............................. 314 313
Additional paid - in capital...................................... 1,027,589 1,025,792
Deferred compensation............................................. (2,883) (3,081)
Retained earnings................................................. 30,951 31,095
--------------- ---------------
Total shareholders' equity...................................... 1,056,003 1,054,151
--------------- ---------------
$ 5,178,780 $ 5,204,500
=============== ===============
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
March 31,
---------------------------------
2005 2004
-------------- -------------
REVENUES:
Minimum rents........................................................... $ 130,431 $ 108,450
Percentage rents........................................................ 8,099 6,685
Other rents............................................................. 3,125 2,786
Tenant reimbursements................................................... 60,786 47,996
Management, development and leasing fees................................ 3,045 1,795
Other................................................................... 5,419 4,447
-------------- -------------
Total revenues........................................................ 210,905 172,159
-------------- -------------
EXPENSES:
Property operating...................................................... 31,665 27,645
Depreciation and amortization........................................... 41,286 32,556
Real estate taxes....................................................... 15,451 13,081
Maintenance and repairs................................................. 12,345 10,194
General and administrative.............................................. 9,186 8,233
Loss on impairment of real estate assets................................ 262 --
Other................................................................... 3,430 3,032
-------------- -------------
Total expenses........................................................ 113,625 94,741
-------------- -------------
Income from operations.................................................. 97,280 77,418
Interest income......................................................... 1,683 880
Interest expense........................................................ (48,921) (40,434)
Loss on extinguishment of debt.......................................... (884) --
Gain on sales of real estate assets..................................... 2,714 19,825
Equity in earnings of unconsolidated affiliates......................... 3,091 2,864
Minority interest in earnings:
Operating partnership................................................. (20,826) (25,034)
Shopping center properties............................................ (1,397) (1,238)
-------------- -------------
Income before discontinued operations................................... 32,740 34,281
Operating income of discontinued operations............................. 305 329
Loss on discontinued operations......................................... (32) (5)
-------------- -------------
Net income.............................................................. 33,013 34,605
Preferred dividends..................................................... (7,642) (4,416)
-------------- -------------
Net income available to common shareholders............................. $ 25,371 $ 30,189
============== =============
Basic per share data:
Income before discontinued operations, net of preferred dividends... $ 0.80 $ 0.98
Discontinued operations............................................. 0.01 0.02
-------------- -------------
Net income available to common shareholders......................... $ 0.81 $ 1.00
============== =============
Weighted average common shares outstanding.......................... 31,224 30,324
Diluted per share data:
Income before discontinued operations, net of preferred dividends... $ 0.77 $ 0.95
Discontinued operations............................................. 0.01 0.01
-------------- -------------
Net income available to common shareholders......................... $ 0.78 $ 0.96
============== =============
Weighted average common and potential dilutive common shares
outstanding........................................................ 32,397 31,567
The accompanying notes are an integral part of these statements.
5
CBL & Associates Properties, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended
March 31,
-------------------------------
2005 2004
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... $ 33,013 $ 34,605
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation................................................................ 28,261 22,874
Amortization ............................................................... 15,046 11,625
Amortization of debt premiums............................................... (1,678) (932)
Gain on sales of real estate assets......................................... (2,714) (19,825)
Loss on discontinued operations............................................. 32 5
Write-off of development projects........................................... 121 441
Stock-based compensation expense............................................ 1,131 1,211
Loss on extinguishment of debt.............................................. 884 --
Minority interest in earnings............................................... 22,223 26,282
Amortization of above and below market leases............................... (1,531) (603)
Loss on impairment of real estate assets.................................... 262 --
Changes in:
Tenant and other receivables................................................ 4,997 (5,207)
Other assets................................................................ (846) (1,830)
Accounts payable and accrued liabilities.................................... (22,854) 10,107
------------- -------------
Net cash provided by operating activities........................... 76,347 78,753
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate assets........................................... (29,560) (18,965)
Acquisitions of real estate assets and other assets....................... -- (113,800)
Other capital expenditures................................................ (12,506) (11,892)
Capitalized interest...................................................... (1,283) (1,001)
Additions to other assets................................................. (1,989) (983)
Reduction of cash in escrow .............................................. -- 78,476
Proceeds from sales of real estate assets................................. 52,675 93,664
Payments received on mortgage notes receivable............................ 542 8,663
Additional investments in and advances to unconsolidated affiliates....... (9,542) (7,356)
Distributions in excess of equity in earnings of unconsolidated affiliates 3,189 8,039
Purchase of minority interest in the operating partnership................ -- (4,030)
------------- -------------
Net cash provided by investing activities........................... 1,526 30,815
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage and other notes payable............................ 45,334 58,000
Principal payments on mortgage and other notes payable.................... (33,892) (113,003)
Additions to deferred financing costs..................................... (693) (824)
Proceeds from issuance of common stock.................................... 151 147
Costs related to issuance of preferred stock.............................. (193) --
Proceeds from exercise of stock options................................... 1,379 6,891
Prepayment penalties on extinguishment of debt............................ (852) --
Purchase of minority interest in the Operating Partnership................ (6) --
Distributions to minority interests....................................... (22,186) (18,922)
Dividends paid to holders of preferred stock.............................. (8,287) (4,416)
Dividends paid to common shareholders..................................... (25,459) (21,984)
------------- -------------
Net cash used in financing activities............................... (44,704) (94,111)
------------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS....................................... 33,169 15,457
CASH AND CASH EQUIVALENTS, beginning of period 25,766 20,332
------------- -------------
CASH AND CASH EQUIVALENTS, end of period...................................... $ 58,935 $ 35,789
============= =============
SUPPLEMENTAL INFORMATION:
Cash paid for interest, net of amounts capitalized.......................... $ 48,428 $ 39,168
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 in 29 states, but primarily in the
southeastern and midwestern United States.
CBL conducts substantially all of its business through CBL & Associates
Limited Partnership (the "Operating Partnership"). At March 31, 2005, the
Operating Partnership owned controlling interests in 64 regional malls, 25
associated centers (each adjacent to a regional shopping mall), five 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 six regional malls, one associated center and 51 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 four mall expansions, one open-air shopping center,
one associated center, two community centers and one community center expansion
under construction at March 31, 2005. 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 March 31, 2005, CBL Holdings I, Inc., the sole
general partner of the Operating Partnership, owned a 1.6% general partner
interest in the Operating Partnership and CBL Holdings II, Inc. owned a 53.4%
limited partner interest for a combined interest held by CBL of 55.0%.
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 March 31,
2005, CBL's Predecessor owned a 15.4% limited partner interest, Jacobs owned a
20.9% limited partner interest and third parties owned an 8.7% limited partner
interest in the Operating Partnership. CBL's Predecessor also owned 2.7 million
shares of CBL's common stock at March 31, 2005, for a total combined effective
interest of 20.1% 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"). The Operating Partnership owns
100% of both of the Management Company's preferred stock and common stock.
CBL, the Operating Partnership and the Management Company are collectively
referred to herein as "the Company".
7
Note 2 - Investments In Unconsolidated Affiliates
At March 31, 2005, 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 51 community centers 8.3%
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 March 31, Ended March 31,
--------------------------- --------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenues $35,826 $24,639 $ 8,767 $ 6,311
Depreciation and amortization (7,914) (5,120) (1,710) (1,196)
Interest expense (8,898) (5,879) (2,522) (1,417)
Other operating expenses (8,595) (5,736) (2,379) (1,443)
Discontinued operations 454 170 38 17
Gain on sales of real estate assets 1,471 1,184 897 592
------------ ------------ ------------ ------------
Net income $12,344 $ 9,258 $ 3,091 $ 2,864
============ ============ ============ ============
The third phase of the Company's joint venture transaction with Galileo
America, Inc. closed on January 5, 2005, when the Company sold its interests in
two power centers, one community center and one community center expansion to
the joint venture, Galileo America LLC ("Galileo America"), for $58,600, which
consisted of $42,529 in cash, the joint venture's assumption of $12,141 of debt,
$3,596 representing the Company's interest in Galileo America and closing costs
of $334. The real estate assets and related mortgage notes payable of the
properties in the third phase were reflected as held for sale as of January 1,
2004, the date that it was determined these assets met the criteria to be
reflected as held for sale. The Company did not record any depreciation expense
on these assets during the three months ended March 31, 2005 and 2004. The
Company recognized a loss on impairment of real estate assets of $1,947 in
December 2004 and an additional loss on impairment of real estate assets of $262
during the three months ended March 31, 2005 related to the properties included
in the third phase.
The Company has entered into master lease agreements with Galileo America
on certain of the properties that have been sold to Galileo America since
October 2003. The remaining aggregate obligation under these master lease
agreements was $4,744 at March 31, 2005. The master lease arrangements are for
various terms of up to fifteen years.
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 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, 2004, for a
more complete description of the Galileo America transaction.
8
Note 3 - Mortgage and Other Notes Payable
Mortgage and other notes payable consisted of the following at March 31,
2005 and December 31, 2004, respectively:
March 31, 2005 December 31, 2004
---------------------------- ----------------------------
Weighted Weighted
Average Average
Interest Interest
Amount Rate(1) Amount Rate(1)
-------------- ---------- -------------- ----------
Fixed-rate debt:
Non-recourse loans on operating
properties $ 2,660,174 6.37% $ 2,688,186 6.38%
-------------- --------------
Variable-rate debt:
Recourse term loans on operating
properties 197,700 3.83% 207,500 3.45%
Construction loans 17,207 4.35% 14,593 3.94%
Lines of credit 494,221 3.56% 461,400 3.37%
-------------- --------------
Total variable-rate debt 709,128 3.65% 683,493 3.41%
-------------- --------------
Total $ 3,369,302 5.80% $ 3,371,679 5.78%
============== ==============
(1) Weighted-average interest rate including the effect of debt premiums, but
excluding amortization of deferred financing costs.
Unsecured Line of Credit
The Company has a $400,000 unsecured credit facility, which bears interest
at the London Interbank Offered Rate ("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. At March 31, 2005, the outstanding borrowings of
$30,000 under the unsecured credit facility had a weighted average interest rate
of 3.97%.
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
March 31, 2005:
Total Total Maturity
Available Outstanding Date
- ----------------------------------------------------
$ 373,000 $ 368,150 February 2006
100,000 66,071 June 2007
20,000 20,000 March 2007
10,000 10,000 April 2006
- -------------------------------------
$ 503,000 $ 464,221
=====================================
Borrowings under the secured lines of credit had a weighted average
interest rate of 3.53% at March 31, 2005.
Letters of Credit
At March 31, 2005, 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 $11,423 at
March 31, 2005.
9
Covenants and Restrictions
Nineteen 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.
The weighted average remaining term of the Company's consolidated debt was
4.4 years at March 31, 2005 and 4.7 years at December 31, 2004. Of the $428,363
of debt that will mature before March 31, 2006, the Company has extension
options that will extend the maturity date of $398,150 of that debt beyond March
31, 2006. The Company plans to either retire or obtain new financing for the
remaining $30,213 of debt maturing before March 31, 2006.
Note 4 - 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 March 31, 2005 Malls Centers Centers All Other Total
- -------------------------------------- ----------- ------------- ------------- --------------- ------------
Revenues $ 192,404 $ 8,489 $ 1,674 $ 8,338 $ 210,905
Property operating expenses (1) (61,191) (1,950) (409) 4,089 (59,461)
Interest expense (43,501) (1,292) (715) (3,413) (48,921)
Other expense -- -- -- (3,430) (3,430)
Gain on sales of real estate assets -- -- 1,063 1,651 2,714
----------- ------------- ------------- --------------- ------------
Segment profit and loss $ 87,712 $ 5,247 $ 1,613 $ 7,235 101,807
=========== ============== ============= ===============
Depreciation and amortization expense (41,286)
General and administrative expense (9,186)
Interest income 1,683
Loss on extinguishment of debt (884)
Loss on impairment of real estate
assets (262)
Equity in earnings of unconsolidated
affiliates 3,091
Minority interest in earnings (22,223)
------------
Income before discontinued operations $ 32,740
============
Total assets $4,654,115 $ 277,335 $ 89,574 $ 157,756 $5,178,780
Capital expenditures (2) $ 33,828 $ 5,962 $ 737 $ 14,709 $ 55,236
10
Associated Community
Three Months Ended March 31, 2004 Malls Centers Centers All Other Total
- -------------------------------------- ----------- ------------- ------------- --------------- ------------
Revenues $ 157,348 $ 8,191 $ 2,708 $ 3,912 $ 172,159
Property operating expenses (1) (53,263) (1,557) (864) 4,764 (50,920)
Interest expense (37,517) (1,263) (741) (913) (40,434)
Other expense -- -- -- (3,032) (3,032)
Gain on sales of real estate assets 548 -- 19,076 201 19,825
----------- ------------- ------------- --------------- ------------
Segment profit and loss $ 67,116 $ 5,371 $ 20,179 $ 4,932 97,598
=========== ============== ============= ===============
Depreciation and amortization expense (32,556)
General and administrative expense (8,233)
Interest income 880
Equity in earnings of unconsolidated
affiliates 2,864
Minority interest in earnings (26,272)
------------
Income before discontinued operations $ 34,281
============
Total assets $3,885,267 $ 203,397 $ 146,970 $ 132,870 $4,368,504
Capital expenditures (2) $ 222,123 $ 386 $ 4,402 $ 13,744 $ 240,655
(1) Property operating expenses include property operating expenses, real
estate taxes and maintenance and repairs.
(2) Amounts include acquisitions of real estate assets and investments in
unconsolidated affiliates. Developments in progress are included in the All
Other category.
Note 5- 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 March 31,
-----------------------------
2005 2004
------------- ------------
Weighted average shares outstanding 31,384 30,475
Effect of nonvested stock awards (160) (151)
------------- ------------
Denominator - basic earnings per share 31,224 30,324
Effect of dilutive securities:
Stock options, nonvested stock awards and deemed
shares related to deferred compensation plans 1,173 1,243
------------- ------------
Denominator - diluted earnings per share 32,397 31,567
============= ============
Note 6- 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 was equal to net income for
the three months ended March 31, 2005 and 2004.
Note 7- 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.
11
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 March 31, 2005,
was $53,324, of which the Company has guaranteed $26,662. The guaranty will
expire when the related debt matures in December 2005. The Company did not
receive a fee for issuing this guaranty.
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
March 31, 2005, was $48,070. The total commitment under the construction loan is
$67,082. The Company did not receive a fee for this guaranty.
The Company has issued various bonds that it would have to satisfy in the
event of non-performance. At March 31, 2005, the total amount outstanding on
these bonds was $10,539.
Note 8 - 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 three months ended March 31, 2005
and 2004 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 March 31,
----------------------------
2005 2004
------------ -----------
Net income available to common shareholders, as reported $25,371 $30,189
Stock-based compensation expense included in reported net
income available to common shareholders 1,142 992
Total stock-based compensation expense determined under
fair value method (1,247) (1,120)
------------ -----------
Pro forma net income available to common shareholders $25,266 $30,061
============ ===========
Net income available to common shareholders per share:
Basic, as reported $0.81 $1.00
============ ===========
Basic, pro forma $0.81 $0.99
============ ===========
Diluted, as reported $0.78 $0.96
============ ===========
Diluted, pro forma $0.78 $0.95
============ ===========
12
Note 9 - Noncash Investing and Financing Activities
The Company's noncash investing and financing activities were as follows
for the three months ended March 31, 2005 and 2004: Three Months Ended March 31,
-------------------------
2005 2004
-------------------------
Debt assumed to acquire property interests, including premiums $- $95,568
=========================
Debt consolidated from application of FASB Interpretation No. 46 $- $38,147
=========================
Note 10 - Discontinued Operations
In March 2005, the Company sold five community centers for an aggregate
sales price of $12,100. The Company previously recognized an aggregate loss on
impairment of real estate assets of $617 on these community centers in December
2004 and recognized an additional loss on impairment of $32 during the three
months ended March 31, 2005. Total revenues for these community centers were
$412 and $524 for the three months ended March 31, 2005 and 2004, respectively.
All prior periods presented have been restated to reflect the operations of
these community centers as discontinued operations.
Note 11 - Recent Accounting Pronouncements
In December 2004, the FASB released its final revised standard, SFAS No.
123 (Revised 2004), "Share-Based Payment." SFAS No. 123(R) requires that a
public entity measure the cost of equity based service awards based on the
grant-date fair value of the award. That cost will be recognized over the period
during which an employee is required to provide service in exchange for the
award or the vesting period. No compensation cost is recognized for equity
instruments for which employees do not render the requisite service. In April
2005, the Securities and Exchange Commission amended Regulation S-X to modify
the effective date so that SFAS No. 123(R) can be adopted beginning with the
first interim reporting period of the next fiscal year beginning after June 15,
2005 instead of the first interim period beginning after June 15, 2005. The
Company previously adopted the fair value 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" effective January 1, 2003. The Company does
not expect the adoption of this standard to have a material effect on its
financial position or results of operations.
Note 12 - Subsequent Event
In April 2005, the Company formed a joint venture with Jacobs to develop
Gulf Coast Town Center in Lee County (Ft. Myers/Naples), Florida. Under the
terms of the joint venture agreement, the Company has contributed approximately
$40,335 to a joint venture with Jacobs for a 50% interest in the joint venture,
the proceeds of which were used to refund the aggregate acquisition and
development costs incurred with respect to the project that were previously paid
by Jacobs. The Company will also provide any additional equity necessary to fund
the development of the property, as well as to fund up to an aggregate of
$30,000 of any operating deficits of the joint venture. The Company will receive
a preferred return of 11% on its invested capital in the joint venture and will,
after payment of such preferred return and repayment of the Company's invested
capital, share equally with Jacobs in the joint venture's profits.
The joint venture arrangement provides the Company with the right to put
its 50% ownership interest to Jacobs if certain approvals of tenants and
government entities that are required for the continued development of the
project are not obtained by the second anniversary of the joint venture
agreement. The put right provides that Jacobs will acquire the Company's 50%
ownership interest for an amount equal to the total unreturned equity funded by
the Company plus any accrued and unpaid preferred return on that equity.
13
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 in 29 states, but
primarily in the southeastern and midwestern United States.
As of March 31, 2005, we owned controlling interests in 64 regional malls,
25 associated centers (each adjacent to a regional shopping mall), five
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 March 31, 2005, we owned non-controlling interests in six
regional malls, one associated center and 51 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 four mall
expansions, one open-air shopping center, one associated center, two community
centers and one community center expansion under construction as of March 31,
2005.
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 our credit facilities.
14
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2005 TO THE THREE MONTHS ENDED
MARCH 31, 2004
The following significant transactions impact the comparison of the results
of operations for the three months ended March 31, 2005 to the results of
operations for the three months ended March 31, 2004:
|X| The acquisition of eight malls and two associated centers and the opening
of two malls and one associated center since January 1, 2004 (collectively
referred to as the "New Properties"). Therefore, the three months ended
March 31, 2005, 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:
-------------
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
Northpark Mall Joplin, MO November 2004
Mall del Norte Laredo, TX November 2004
Developments:
-------------
Coastal Grand-Myrtle Beach (50/50 Myrtle Beach, SC March 2004
joint venture)
The Shoppes at Panama City Panama City, FL March 2004
Imperial Valley Mall (60/40 joint El Centro, CA March 2005
venture)
|X| In January 2005, two power centers, one community center and one community
center expansion were sold to Galileo America LLC ("Galileo America").
Since we have a continuing involvement with these properties through our
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 March 31, 2005, do not include a
significant amount of revenues and expenses related to these properties,
whereas the three months ended March 31, 2004 include a full period of
revenues and expenses related to these properties.
|X| Properties that were in operation as of January 1, 2004 and March 31, 2005
are referred to as the "Comparable Properties."
Revenues
The $38.7 million increase in revenues resulted primarily from increases of
$28.8 million attributable to the New Properties and $9.6 million from the
Comparable Properties. The increase in revenues from the Comparable Properties
was attributable to our achieving higher occupancy combined with an increase in
average base rents from new and renewal leasing activity, percentage rents and
specialty income.
Our cost recovery ratio improved to 102% for the three months ended March
31, 2005, compared to 94% for the three months ended March 31, 2004. This
increase was driven by (i) an increase in total portfolio occupancy to 91.3% at
March 31, 2005 compared to 90.8% at March 31, 2004, (ii) increased profitability
15
related to utility reimbursements from tenants at the New Properties and certain
existing malls due to the implementation of efficiency optimizing utility
systems and (iii) a $6.1 million improvement in bad debt expenses and other
charges against revenues, as we recognized $1.4 million in the three months
ended March 31, 2005 for recoveries of accounts receivable that were previously
reserved for, compared with total bad debt expense and other charges against
revenues of $4.7 million in the three months ended March 31, 2004.
The increase in revenues was offset slightly by a decrease in revenues of
$1.6 million related to properties that have been sold to the Galileo America
joint venture.
Management, development and leasing fees increased $1.2 million, primarily
as a result of an increase in management and leasing fees from Galileo America,
which is directly related to the growth in Galileo America's portfolio.
Other revenues increased $1.0 million as a result of growth in our taxable
REIT subsidiary.
Expenses
The $8.5 million increase in property operating expenses, including real
estate taxes and maintenance and repairs, resulted from an increase of $9.7
million attributable to the New Properties, which was offset by a decrease of
$0.6 million from the Comparable Properties and $0.6 million from the properties
that have been sold to the Galileo America joint venture.
The $8.7 million increase in depreciation and amortization expense resulted
from increases of $7.2 million from the New Properties and $1.5 million from the
Comparable Properties. The increase attributable to the Comparable Properties is
due to ongoing capital expenditures for renovations, expansions, tenant
allowances and deferred maintenance.
General and administrative expenses increased $1.0 million primarily as a
result of annual increases in salaries and benefits of existing personnel and
the addition of new personnel.
Other expense increased $0.4 million due to an increase of $0.7 million in
the operating expenses of our taxable REIT subsidiary, offset by a decrease of
$0.3 million in write-offs of abandoned development projects.
Other Income and Expenses
The increase in interest income of $0.8 million results from an increase in
the amount of mortgage and other notes receivable outstanding compared to the
prior year period.
Interest expense increased by $8.5 million primarily due to the additional
debt associated with the New Properties as well as a slight increase in the
weighted average interest rate of our variable-rate debt.
Gain on Sales of Real Estate Assets
Gain on sales of real estate assets of $2.7 million in the three months
ended March 31, 2005 was primarily related to a gain of $1.7 million from sales
of two outparcels and a gain of $1.0 million from the recognition of deferred
gain related to properties that were previously sold to Galileo America. The
gain on sales of $19.8 million in the three months ended March 31, 2004 resulted
primarily from the sale of six community centers to Galileo America.
16
Equity in Earnings of Unconsolidated Affiliates
The increase of $0.2 million in equity in earnings of unconsolidated
affiliates is the result of an increase of $0.4 million in our share of the
earnings of Galileo America as a result of the continued growth in its portfolio
and an increase of $0.9 in our share of earnings from the sales of outparcels at
Imperial Valley Mall. This was offset by a decrease of $0.7 million in our share
of earnings of Coastal Grand-Myrtle Beach, which resulted primarily because of
the significant gains from outparcel sales that were recognized during the three
months ended March 31, 2004.
Discontinued Operations
Discontinued operations in the three months ended March 31, 2005 are
related to five community centers located throughout Michigan that were sold in
March 2005. Discontinued operations in the three months ended March 31, 2004
represent the true-up of estimated expenses to actual amounts for properties
sold during previous periods.
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 are referred to as stabilized malls and malls
that are in their initial lease-up phase are referred to as non-stabilized
malls. The non-stabilized malls currently include Parkway Place in Huntsville,
AL, which opened in October 2002; Coastal Grand-Myrtle Beach in Myrtle Beach,
SC, which opened in March 2004; and Imperial Valley Mall in El Centro, CA, which
opened in March 2005.
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 March 31,
---------------------------------
2005 2004
----------------- ---------------
Malls 91.2% 91.4%
Associated centers 4.0% 4.8%
Community centers 0.8% 1.6%
Mortgages, office building and other 4.0% 2.2%
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 4.5% on a
comparable per square foot basis for the three months ended March 31, 2005.
Occupancy costs as a percentage of sales for the stabilized malls were
13.9% and 14.2% for the three months ended March 31, 2005 and 2004,
respectively.
17
Occupancy
The occupancy of the portfolio was as follows:
March 31,
-------------------------------------
2005 2004
------------------ ------------------
Total portfolio occupancy 91.3% 90.8%
Total mall portfolio 91.5% 91.0%
Stabilized malls (67) 91.9% 91.5%
Non-stabilized malls (3) 81.8% 81.5%
Associated centers (26) 91.9% 88.7%
Community centers (5)* 82.9% 91.6%
* Excludes the community centers that were contributed to the Galileo America
joint venture
Leasing
Average annual base rents per square foot were as follows for each property
type:
At March 31,
-------------------------------------
2005 2004
------------------ ------------------
Stabilized malls $25.45 $25.03
Non-stabilized malls 26.92 27.37
Associated centers 10.05 10.05
Community centers * 14.55 10.45
* Excludes the community centers that were contributed to the Galileo America
joint venture.
The following table shows the positive results we achieved in increasing
the initial and average base rents through new and renewal leasing during the
first quarter of 2005 for small shop spaces less than 20,000 square feet that
were previously occupied, excluding junior anchors:
Base Rent
Per Initial Base Average Base
Square Foot Rent Per Rent Per
Prior Lease Square Foot % Change Square Foot % Change
Square Feet (1) New Lease (2) Initial New Lease (3) Average
------------- ------------- -------------- ----------- --------------- ----------
Stabilized Malls 688,306 $ 24.30 $ 24.60 1.2% $ 25.14 3.5%
Associated centers 26,466 11.83 16.80 42.0% 17.19 45.3%
Community centers (4) 11,200 8.18 8.34 2.0% 8.44 3.2%
Other 3,087 20.83 24.35 16.9% 24.97 19.9%
------------- ------------- -------------- ----------- --------------- ----------
729,059 $ 23.58 $ 24.07 2.1% $ 24.59 4.3%
============= ============= ============== =========== =============== ==========
(1) Represents the rent that was in place at the end of the lease term.
(2) Represents the rent in place at beginning of the lease terms.
(3) Average base rent over the term of the new lease.
(4) Excludes the community centers that were sold to the Galileo America joint
venture.
LIQUIDITY AND CAPITAL RESOURCES
There was $58.9 million of cash and cash equivalents as of March 31, 2005,
an increase of $33.2 million from December 31, 2004. 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.
18
Cash Flows
Cash provided by operating activities decreased by $2.4 million to $76.3
million, which was primarily the result of the timing of accounts payable and
accrued liabilities.
Debt
During the three months ended March 31, 2005, we borrowed $45.3 million
under mortgage and other notes payable and paid $33.9 million to reduce
outstanding borrowings under mortgage and other notes payable.
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 shopping center 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)
------------- ---------------- --------------- ------------- ---------------
March 31, 2005:
Fixed-rate debt:
Non-recourse loans on operating
properties $ 2,660,174 $(52,667) $ 107,219 $2,714,726 6.34%
------------- ---------------- --------------- -------------
Variable-rate debt:
Recourse term loans on operating
properties 197,700 - 80,057 277,757 3.92%
Construction loans 17,207 - - 17,207 4.35%
Lines of credit 494,221 - - 494,221 3.56%
------------- ---------------- --------------- -------------
Total variable-rate debt 709,128 - 80,057 789,185 3.70%
------------- ---------------- --------------- -------------
Total $ 3,369,302 $(52,667) $ 187,276 $3,503,911 5.75%
============= ================ =============== =============
December 31, 2004:
Fixed-rate debt:
Non-recourseloans on operating
properties $ 2,688,186 $(52,914) $ 104,114 $2,739,386 6.35%
------------- ---------------- --------------- -------------
Variable-rate debt:
Recourse term loans on operating 207,500 -- 29,415 236,915 3.40%
properties
Construction loans 14,593 -- 39,493 54,086 4.05%
Lines of credit 461,400 -- -- 461,400 3.37%
------------- ---------------- --------------- -------------
Total variable-rate debt 683,493 -- 68,908 752,401 3.44%
------------- ---------------- --------------- -------------
Total $ 3,371,679 $ (52,914) $ 173,022 $3,491,787 5.72%
============= ================ =============== =============
(1) Weighted average interest rate including the effect of debt premiums, but
excluding amortization of deferred financing costs.
In February 2005, we amended one of our secured credit facilities to
increase the total availability from $80.0 million to $100.0 million and to
extend the maturity by one year to June 2007. The interest rate remained at
LIBOR plus 1.00%.
We have four secured credit facilities with total availability of $503.0
million, of which $464.2 million was outstanding as of March 31, 2005. The
secured credit facilities bear interest at LIBOR plus 100 basis points.
We have one unsecured credit facility with total availability of $400.0
million, of which $30.0 million was outstanding as of March 31, 2005. The
unsecured credit facility bears interest at LIBOR plus a margin of 100 to 145
basis points based on our leverage.
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 $11.4
million outstanding under these lines at March 31, 2005.
19
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 March 31, 2005. Additionally,
certain property-specific mortgage notes payable require the maintenance of debt
service coverage ratios. At March 31, 2005, 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 $455.1 million of debt that is scheduled to mature
before March 31, 2006. There are extension options in place that will extend the
maturity of $398.2 million of this debt beyond March 31, 2006. We expect to
either retire or refinance the remaining $56.9 million of maturing loans.
Equity
During the three months ended March 31, 2005, we received $1.5 million in
proceeds from issuances of common stock related to exercises of employee stock
options and our dividend reinvestment plan.
During the three months ended March 31, 2005, we paid dividends of $33.7
million to holders of our common stock and our preferred stock, as well as $22.2
million in distributions to the minority interest investors in our Operating
Partnership and certain shopping center properties.
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 $272.0 million was
available at March 31, 2005.
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 March 31, 2005 (in thousands, except stock prices):
Shares
Outstanding Stock Price (1) Value
------------------ ----------------- -----------------
Common stock and operating partnership units 57,035 $ 71.51 $4,078,573
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
7.375% Series D Cumulative Redeemable Preferred Stock 700 $ 250.00 175,000
-----------------
Total market equity 4,468,573
Company's share of total debt 3,503,911
-----------------
Total market capitalization $7,972,484
=================
Debt-to-total-market capitalization ratio 44.0%
=================
(1) Stock price for common stock and operating partnership units equals the
closing price of the common stock on March 31, 2005. The stock price for
the preferred stock represents the face value of each respective series of
preferred stock.
20
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
Project Our Share Cost as of
Square Of Total March 31, Projected Initial
Property Location Feet Costs 2005 Opening Date Yield
- -------------------------------- ----------------- --------- ----------- ----------- -------------- -------
Mall Expansions:
- ----------------
The District at Monroeville Mall Monroeville, PA 75,000 $ 20,588 $ 13,674 Nov-04/May-05 8%
Citadel Mall Charleston, SC 46,000 6,549 1,539 August-05 9%
Fayette Mall Lexington, KY 144,000 25,532 8,715 October-05 11%
Burnsville Center Burnsville, MN 146,000 24,612 5,786 Nov-05/Mar-06 9%
Open-Air Center:
- ----------------
Southaven Towne Center Southaven, MS 437,600 26,303 24,089 October-05 10%
Associated Center:
- ------------------
Coastal Grand Crossing Myrtle Beach, SC 15,000 1,946 773 May-05 10%
Community Centers:
- ------------------
Cobblestone Village at Royal Palm Royal Palm, FL 225,000 10,003 6,880 July-05 9%
Chicopee Marketplace Chicopee, MA 156,000 19,743 9,019 September-05 9%
Community Center Expansion:
- ---------------------------
Fashion Square Orange Park, FL 18,000 6,066 671 July-05 10%
--------- ----------- -----------
1,262,600 $ 141,342 $ 71,146
========= =========== ===========
There is a construction loan in place for the costs of the open-air center.
The costs of the remaining projects will be funded with operating cash flows and
the credit facilities.
We have entered into a number of option agreements for the development of
future regional malls, open-air centers and community centers. Except for the
projects discussed under Developments and Expansions above, we do not have any
other material capital commitments.
Dispositions
We received a total of $52.7 million in cash proceeds from the sales of
real estate assets during the three months ended March 31, 2005. The third phase
of the joint venture transaction with Galileo America, which is discussed in
Note 2 to the unaudited consolidated financial statements, closed on January 5,
2004 and generated net cash proceeds of $42.5 million. We received $8.2 million
in cash proceeds and issued a note receivable for $2.6 million from the sale of
five community centers that are located in Michigan. We also received $2.0
million in cash proceeds from the sales of two outparcels.
21
Other Capital Expenditures
Including our share of unconsolidated affiliates' capital expenditures and
excluding minority investor's share of capital expenditures, we spent $8.7
million during the three months ended March 31, 2005 for tenant allowances,
which generate increased rents from tenants over the terms of their leases.
Deferred maintenance expenditures were $2.5 million for the three months ended
March 31, 2005 and included $1.2 million for roof repairs and replacements, $0.2
million for resurfacing and improved lighting of parking lots and $1.1 million
for other capital expenditures. Renovation expenditures were $1.3 million for
the three months ended March 31, 2005.
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, including rent holidays, 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
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.
22
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
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. See
Note 2 to the unaudited consolidated financial statements for a description of
the loss on impairment of real estate assets of $0.3 million that was recorded
in the three months ended March 31, 2005. There were no impairment charges in
the three months ended March 31, 2004.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB released its final revised standard, SFAS No.
123 (Revised 2004), "Share-Based Payment." SFAS No. 123(R) requires that a
public entity measure the cost of equity based service awards based on the
grant-date fair value of the award. That cost will be recognized over the period
during which an employee is required to provide service in exchange for the
award or the vesting period. No compensation cost is recognized for equity
instruments for which employees do not render the requisite service. In April
2005, the Securities and Exchange Commission amended Regulation S-X to modify
the effective date so that SFAS No. 123(R) can be adopted beginning with the
first interim reporting period of the next fiscal year beginning after June 15,
2005 instead of the first interim period beginning after June 15, 2005. The
Company previously adopted the fair value provisions of SFAS No. 123,
"Accounting for Stock Based Compensation", as amended by SFAS No. 148,
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"Accounting for Stock-Based Compensation - Transition and Disclosure - An
Amendment of FASB Statement No. 123" effective January 1, 2003. The Company does
not expect the adoption of this standard to have a material effect on its
financial position or results of operations.
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 27.0% for the three months ended March 31, 2005 to $88.5
million compared to $69.7 million for the same period in 2004. The New
Properties generated 54% 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 46%
growth in FFO.
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The calculation of FFO is as follows (in thousands):
Three Months Ended
March 31,
--------------------------
2005 2004
------------ -----------
Net income available to common shareholders $ 25,371 $ 30,189
Depreciation and amortization from:
Consolidated properties 41,286 32,556
Unconsolidated affiliates 1,710 1,196
Discontinued operations -- 189
Minority interest in earnings of operating partnership 20,826 25,034
Minority investors' share of depreciation and amortization in shopping center
properties (362) (293)
(Gain) loss on disposal of:
Operating real estate assets (223) (19,081)
Discontinued operations 32 5
Depreciation and amortization of non-real estate assets (179) (135)
------------ -----------
Funds from operations $ 88,461 $ 69,660
============ ===========
Diluted weighted average shares and potential dilutive common shares with
operating partnership units fully converted 58,028 56,713
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 March 31, 2005, a 0.5% increase or decrease
in interest rates on this variable-rate debt would decrease or increase annual
cash flows by approximately $3.9 million and, after the effect of capitalized
interest, annual earnings by approximately $3.9 million.
Based on the Company's proportionate share of consolidated and
unconsolidated debt at March 31, 2005, a 0.5% increase in interest rates would
decrease the fair value of debt by approximately $59.5 million, while a 0.5%
decrease in interest rates would increase the fair value of debt by
approximately $61.2 million.
The Company did not have any derivative financial instruments during the
three months ended March 31, 2005 or at March 31, 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.
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PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings
None
ITEM 2: Changes in Securities, Use of Proceeds and Issuer Purchases 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
10.1 Amended and Restated Loan Agreement between CBL & Associates
Limited Partnership, The Lakes Mall, LLC, Lakeshore/Sebring
Limited Partnership and First Tennessee Bank National
Association, dated March 9, 2005.
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.
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.
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.
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_.
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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: May 10, 2005
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