-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BBuGzkGM3BSbm8djBSXGVOLltv7U6EUMegiET47R3X9jVgsQIVGCZj/hSKZ+4trw +b2lgeKpzKc63xGGI853yw== 0000910612-04-000141.txt : 20041110 0000910612-04-000141.hdr.sgml : 20041110 20041109171813 ACCESSION NUMBER: 0000910612-04-000141 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041109 DATE AS OF CHANGE: 20041109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CBL & ASSOCIATES PROPERTIES INC CENTRAL INDEX KEY: 0000910612 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 621545718 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12494 FILM NUMBER: 041130633 BUSINESS ADDRESS: STREET 1: 2030 HAMILTON PLACE BVLD, SUITE 500 STREET 2: CBL CENTER CITY: CHATTANOOGA STATE: TN ZIP: 37421 BUSINESS PHONE: 4238550001 MAIL ADDRESS: STREET 1: 2030 HAMILTON PLACE BVLD, SUITE 500 STREET 2: CBL CENTER CITY: CHATTANOOGA STATE: TN ZIP: 37421 10-Q 1 form10q.txt FORM 10Q SEP 2004 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 EX-31 3 exhibit311.txt EXHIBIT 31.1 CEO CERTIFICATION 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 EX-31 4 exhibit312.txt EXHIBIT 31.2 CFO CERTIFICATION 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 37 EX-32 5 exhibit321.txt EXHIBIT 32.1 CEO CERTIFICATION 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 EX-32 6 exhibit322.txt EXHIBIT 32.2 CFO CERTIFICATION 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 -----END PRIVACY-ENHANCED MESSAGE-----