10-Q 1 form10q.txt FORM 10-Q QUARTER END 03/31/2005 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005 COMMISSION FILE NO. 1-12494 CBL & ASSOCIATES PROPERTIES, INC. (Exact Name of registrant as specified in its charter) DELAWARE 62-1545718 (State or other jurisdiction of incorporation (I.R.S. Employer Identification or organization) Number) 2030 Hamilton Place Blvd., Suite 500, Chattanooga, TN 37421-6000 (Address of principal executive office, including zip code) Registrant's telephone number, including area code (423) 855-0001 N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past ninety (90) days. YES |X| NO |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES |X| NO |_| As of May 2, 2005, there were 31,407,690 shares of common stock, par value $0.01 per share, outstanding. CBL & Associates Properties, Inc. 1 PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements..................................................................................3 Consolidated Balance Sheets...........................................................................4 Consolidated Statements of Operations.................................................................5 Consolidated Statements of Cash Flows.................................................................6 Notes to Unaudited Consolidated Financial Statements..................................................7 ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations................14 ITEM 3: Quantitative and Qualitative Disclosures About Market Risk...........................................25 ITEM 4: Controls and Procedures..............................................................................25 PART II - OTHER INFORMATION.................................................................................26 ITEM 1: Legal Proceedings....................................................................................26 ITEM 2: Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.....................26 ITEM 3: Defaults Upon Senior Securities......................................................................26 ITEM 4: Submission of Matters to a Vote of Security Holders..................................................26 ITEM 5: Other Information....................................................................................26 ITEM 6: Exhibits.............................................................................................26 SIGNATURE...................................................................................................27
2 CBL & Associates Properties, Inc. ITEM 1: Financial Statements The accompanying financial statements are unaudited; however, they have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair presentation of the financial statements for these interim periods have been included. The results for the interim period ended March 31, 2005, are not necessarily indicative of the results to be obtained for the full fiscal year. These financial statements should be read in conjunction with CBL & Associates Properties, Inc.'s audited financial statements and notes thereto included in the CBL & Associates Properties, Inc. Annual Report on Form 10-K for the year ended December 31, 2004. 3 CBL & Associates Properties, Inc. Consolidated Balance Sheets (In thousands, except share data) (Unaudited)
March 31, December 31, 2005 2004 --------------- --------------- ASSETS Real estate assets: Land.............................................................. $ 659,719 $ 659,782 Buildings and improvements........................................ 4,689,107 4,670,462 --------------- --------------- 5,348,826 5,330,244 Less accumulated depreciation................................... (612,957) (575,464) --------------- --------------- 4,735,869 4,754,780 Real estate assets held for sale, net............................. - 61,607 Developments in progress.......................................... 99,976 78,393 --------------- --------------- Net investment in real estate assets............................ 4,835,845 4,894,780 Cash and cash equivalents........................................... 58,935 25,766 Receivables: Tenant, net of allowance for doubtful accounts of $3,237 in 2005 and 2004.................................................. 34,183 38,409 Other............................................................. 12,214 13,706 Mortgage and other notes receivable................................. 29,889 27,804 Investments in unconsolidated affiliates............................ 94,704 84,782 Other assets........................................................ 113,010 119,253 --------------- --------------- $ 5,178,780 $ 5,204,500 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Mortgage and other notes payable.................................... $ 3,369,302 $ 3,359,466 Mortgage notes payable on real estate assets held for sale.......... -- 12,213 Accounts payable and accrued liabilities............................ 186,365 212,064 --------------- --------------- Total liabilities................................................. 3,555,667 3,583,743 --------------- --------------- Commitments and contingencies (Notes 2, 3, and 7) .................. Minority interests.................................................. 567,110 566,606 --------------- --------------- Shareholders' equity: Preferred stock, $.01 par value, 15,000,000 shares authorized: 8.75% Series B Cumulative Redeemable Preferred Stock, 2,000,000 shares outstanding in 2005 and 2004.............. 20 20 7.75% Series C Cumulative Redeemable Preferred Stock, 460,000 shares outstanding in 2005 and 2004................ 5 5 7.375% Series D Cumulative Redeemable Preferred Stock, 700,000 shares outstanding in 2005 and 2004................ 7 7 Common stock, $.01 par value, 95,000,000 shares authorized, 31,404,816 and 31,333,552 shares issued and outstanding in 2005 and 2004, respectively............................. 314 313 Additional paid - in capital...................................... 1,027,589 1,025,792 Deferred compensation............................................. (2,883) (3,081) Retained earnings................................................. 30,951 31,095 --------------- --------------- Total shareholders' equity...................................... 1,056,003 1,054,151 --------------- --------------- $ 5,178,780 $ 5,204,500 =============== =============== The accompanying notes are an integral part of these balance sheets.
4 CBL & Associates Properties, Inc. Consolidated Statements of Operations (In thousands, except per share data) (Unaudited)
Three Months Ended March 31, --------------------------------- 2005 2004 -------------- ------------- REVENUES: Minimum rents........................................................... $ 130,431 $ 108,450 Percentage rents........................................................ 8,099 6,685 Other rents............................................................. 3,125 2,786 Tenant reimbursements................................................... 60,786 47,996 Management, development and leasing fees................................ 3,045 1,795 Other................................................................... 5,419 4,447 -------------- ------------- Total revenues........................................................ 210,905 172,159 -------------- ------------- EXPENSES: Property operating...................................................... 31,665 27,645 Depreciation and amortization........................................... 41,286 32,556 Real estate taxes....................................................... 15,451 13,081 Maintenance and repairs................................................. 12,345 10,194 General and administrative.............................................. 9,186 8,233 Loss on impairment of real estate assets................................ 262 -- Other................................................................... 3,430 3,032 -------------- ------------- Total expenses........................................................ 113,625 94,741 -------------- ------------- Income from operations.................................................. 97,280 77,418 Interest income......................................................... 1,683 880 Interest expense........................................................ (48,921) (40,434) Loss on extinguishment of debt.......................................... (884) -- Gain on sales of real estate assets..................................... 2,714 19,825 Equity in earnings of unconsolidated affiliates......................... 3,091 2,864 Minority interest in earnings: Operating partnership................................................. (20,826) (25,034) Shopping center properties............................................ (1,397) (1,238) -------------- ------------- Income before discontinued operations................................... 32,740 34,281 Operating income of discontinued operations............................. 305 329 Loss on discontinued operations......................................... (32) (5) -------------- ------------- Net income.............................................................. 33,013 34,605 Preferred dividends..................................................... (7,642) (4,416) -------------- ------------- Net income available to common shareholders............................. $ 25,371 $ 30,189 ============== ============= Basic per share data: Income before discontinued operations, net of preferred dividends... $ 0.80 $ 0.98 Discontinued operations............................................. 0.01 0.02 -------------- ------------- Net income available to common shareholders......................... $ 0.81 $ 1.00 ============== ============= Weighted average common shares outstanding.......................... 31,224 30,324 Diluted per share data: Income before discontinued operations, net of preferred dividends... $ 0.77 $ 0.95 Discontinued operations............................................. 0.01 0.01 -------------- ------------- Net income available to common shareholders......................... $ 0.78 $ 0.96 ============== ============= Weighted average common and potential dilutive common shares outstanding........................................................ 32,397 31,567 The accompanying notes are an integral part of these statements.
5 CBL & Associates Properties, Inc. Consolidated Statements of Cash Flows (In thousands) (Unaudited)
Three Months Ended March 31, ------------------------------- 2005 2004 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................................... $ 33,013 $ 34,605 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation................................................................ 28,261 22,874 Amortization ............................................................... 15,046 11,625 Amortization of debt premiums............................................... (1,678) (932) Gain on sales of real estate assets......................................... (2,714) (19,825) Loss on discontinued operations............................................. 32 5 Write-off of development projects........................................... 121 441 Stock-based compensation expense............................................ 1,131 1,211 Loss on extinguishment of debt.............................................. 884 -- Minority interest in earnings............................................... 22,223 26,282 Amortization of above and below market leases............................... (1,531) (603) Loss on impairment of real estate assets.................................... 262 -- Changes in: Tenant and other receivables................................................ 4,997 (5,207) Other assets................................................................ (846) (1,830) Accounts payable and accrued liabilities.................................... (22,854) 10,107 ------------- ------------- Net cash provided by operating activities........................... 76,347 78,753 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to real estate assets........................................... (29,560) (18,965) Acquisitions of real estate assets and other assets....................... -- (113,800) Other capital expenditures................................................ (12,506) (11,892) Capitalized interest...................................................... (1,283) (1,001) Additions to other assets................................................. (1,989) (983) Reduction of cash in escrow .............................................. -- 78,476 Proceeds from sales of real estate assets................................. 52,675 93,664 Payments received on mortgage notes receivable............................ 542 8,663 Additional investments in and advances to unconsolidated affiliates....... (9,542) (7,356) Distributions in excess of equity in earnings of unconsolidated affiliates 3,189 8,039 Purchase of minority interest in the operating partnership................ -- (4,030) ------------- ------------- Net cash provided by investing activities........................... 1,526 30,815 ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from mortgage and other notes payable............................ 45,334 58,000 Principal payments on mortgage and other notes payable.................... (33,892) (113,003) Additions to deferred financing costs..................................... (693) (824) Proceeds from issuance of common stock.................................... 151 147 Costs related to issuance of preferred stock.............................. (193) -- Proceeds from exercise of stock options................................... 1,379 6,891 Prepayment penalties on extinguishment of debt............................ (852) -- Purchase of minority interest in the Operating Partnership................ (6) -- Distributions to minority interests....................................... (22,186) (18,922) Dividends paid to holders of preferred stock.............................. (8,287) (4,416) Dividends paid to common shareholders..................................... (25,459) (21,984) ------------- ------------- Net cash used in financing activities............................... (44,704) (94,111) ------------- ------------- NET CHANGE IN CASH AND CASH EQUIVALENTS....................................... 33,169 15,457 CASH AND CASH EQUIVALENTS, beginning of period 25,766 20,332 ------------- ------------- CASH AND CASH EQUIVALENTS, end of period...................................... $ 58,935 $ 35,789 ============= ============= SUPPLEMENTAL INFORMATION: Cash paid for interest, net of amounts capitalized.......................... $ 48,428 $ 39,168 The accompanying notes are an integral part of these statements.
6 CBL & Associates Properties, Inc. Notes to Unaudited Consolidated Financial Statements (In thousands, except per share data) Note 1 - Organization and Basis of Presentation CBL & Associates Properties, Inc. ("CBL"), a Delaware corporation, is a self-managed, self-administered, fully integrated real estate investment trust ("REIT") that is engaged in the ownership, development, acquisition, leasing, management and operation of regional shopping malls and community centers. CBL's shopping center properties are located in 29 states, but primarily in the southeastern and midwestern United States. CBL conducts substantially all of its business through CBL & Associates Limited Partnership (the "Operating Partnership"). At March 31, 2005, the Operating Partnership owned controlling interests in 64 regional malls, 25 associated centers (each adjacent to a regional shopping mall), five community centers and CBL's corporate office building. The Operating Partnership consolidates the financial statements of all entities in which it has a controlling financial interest. The Operating Partnership owned non-controlling interests in six regional malls, one associated center and 51 community centers. Because major decisions such as the acquisition, sale or refinancing of principal partnership assets must be approved by one or more of the other partners, the Operating Partnership does not control these partnerships and, accordingly, accounts for these investments using the equity method. The Operating Partnership had four mall expansions, one open-air shopping center, one associated center, two community centers and one community center expansion under construction at March 31, 2005. The Operating Partnership also holds options to acquire certain development properties owned by third parties. CBL is the 100% owner of two qualified REIT subsidiaries, CBL Holdings I, Inc. and CBL Holdings II, Inc. At March 31, 2005, CBL Holdings I, Inc., the sole general partner of the Operating Partnership, owned a 1.6% general partner interest in the Operating Partnership and CBL Holdings II, Inc. owned a 53.4% limited partner interest for a combined interest held by CBL of 55.0%. The minority interest in the Operating Partnership is held primarily by CBL & Associates, Inc. and its affiliates (collectively "CBL's Predecessor") and by affiliates of The Richard E. Jacobs Group, Inc. ("Jacobs"). CBL's Predecessor contributed their interests in certain real estate properties and joint ventures to the Operating Partnership in exchange for a limited partner interest when the Operating Partnership was formed in November 1993. Jacobs contributed their interests in certain real estate properties and joint ventures to the Operating Partnership in exchange for limited partner interests when the Operating Partnership acquired the majority of Jacobs' interests in 23 properties in January 2001 and the balance of such interests in February 2002. At March 31, 2005, CBL's Predecessor owned a 15.4% limited partner interest, Jacobs owned a 20.9% limited partner interest and third parties owned an 8.7% limited partner interest in the Operating Partnership. CBL's Predecessor also owned 2.7 million shares of CBL's common stock at March 31, 2005, for a total combined effective interest of 20.1% in the Operating Partnership. The Operating Partnership conducts CBL's property management and development activities through CBL & Associates Management, Inc. (the "Management Company") to comply with certain requirements of the Internal Revenue Code of 1986, as amended (the "Code"). The Operating Partnership owns 100% of both of the Management Company's preferred stock and common stock. CBL, the Operating Partnership and the Management Company are collectively referred to herein as "the Company". 7 Note 2 - Investments In Unconsolidated Affiliates At March 31, 2005, the Company had investments in the following nine partnerships and joint ventures, which are accounted for using the equity method of accounting:
Company's Joint Venture Property Name Interest ----------------------------------------------------------------------------------------- Governor's Square IB Governor's Plaza 50.0% Governor's Square Company Governor's Square 47.5% Imperial Valley Mall L.P. Imperial Valley Mall 60.0% Kentucky Oaks Mall Company Kentucky Oaks Mall 50.0% Mall of South Carolina L.P. Coastal Grand-Myrtle Beach 50.0% Mall of South Outparcel L.P. Coastal Grand-Myrtle Beach (vacant land) 50.0% Mall Shopping Center Company Plaza del Sol 50.6% Parkway Place L.P. Parkway Place 45.0% Galileo America, LLC Portfolio of 51 community centers 8.3%
Condensed combined financial statement information for the unconsolidated affiliates is as follows:
Company's Share for the Total for the Three Months Three Months Ended March 31, Ended March 31, --------------------------- -------------------------- 2005 2004 2005 2004 ------------ ------------ ------------ ------------ Revenues $35,826 $24,639 $ 8,767 $ 6,311 Depreciation and amortization (7,914) (5,120) (1,710) (1,196) Interest expense (8,898) (5,879) (2,522) (1,417) Other operating expenses (8,595) (5,736) (2,379) (1,443) Discontinued operations 454 170 38 17 Gain on sales of real estate assets 1,471 1,184 897 592 ------------ ------------ ------------ ------------ Net income $12,344 $ 9,258 $ 3,091 $ 2,864 ============ ============ ============ ============
The third phase of the Company's joint venture transaction with Galileo America, Inc. closed on January 5, 2005, when the Company sold its interests in two power centers, one community center and one community center expansion to the joint venture, Galileo America LLC ("Galileo America"), for $58,600, which consisted of $42,529 in cash, the joint venture's assumption of $12,141 of debt, $3,596 representing the Company's interest in Galileo America and closing costs of $334. The real estate assets and related mortgage notes payable of the properties in the third phase were reflected as held for sale as of January 1, 2004, the date that it was determined these assets met the criteria to be reflected as held for sale. The Company did not record any depreciation expense on these assets during the three months ended March 31, 2005 and 2004. The Company recognized a loss on impairment of real estate assets of $1,947 in December 2004 and an additional loss on impairment of real estate assets of $262 during the three months ended March 31, 2005 related to the properties included in the third phase. The Company has entered into master lease agreements with Galileo America on certain of the properties that have been sold to Galileo America since October 2003. The remaining aggregate obligation under these master lease agreements was $4,744 at March 31, 2005. The master lease arrangements are for various terms of up to fifteen years. The results of operations of the properties included in the Galileo America transaction are not reflected as discontinued operations since the Company has continuing involvement through its ownership interest and the agreement under which the Company is the exclusive manager of the properties. See Note 5 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2004, for a more complete description of the Galileo America transaction. 8 Note 3 - Mortgage and Other Notes Payable Mortgage and other notes payable consisted of the following at March 31, 2005 and December 31, 2004, respectively:
March 31, 2005 December 31, 2004 ---------------------------- ---------------------------- Weighted Weighted Average Average Interest Interest Amount Rate(1) Amount Rate(1) -------------- ---------- -------------- ---------- Fixed-rate debt: Non-recourse loans on operating properties $ 2,660,174 6.37% $ 2,688,186 6.38% -------------- -------------- Variable-rate debt: Recourse term loans on operating properties 197,700 3.83% 207,500 3.45% Construction loans 17,207 4.35% 14,593 3.94% Lines of credit 494,221 3.56% 461,400 3.37% -------------- -------------- Total variable-rate debt 709,128 3.65% 683,493 3.41% -------------- -------------- Total $ 3,369,302 5.80% $ 3,371,679 5.78% ============== ============== (1) Weighted-average interest rate including the effect of debt premiums, but excluding amortization of deferred financing costs.
Unsecured Line of Credit The Company has a $400,000 unsecured credit facility, which bears interest at the London Interbank Offered Rate ("LIBOR") plus a margin of 100 to 145 basis points based on the Company's leverage, as defined in the agreement. The credit facility matures in August 2006 and has three one-year extension options, which are at the Company's election. At March 31, 2005, the outstanding borrowings of $30,000 under the unsecured credit facility had a weighted average interest rate of 3.97%. Secured Lines of Credit The Company has four secured lines of credit that are used for construction, acquisition, and working capital purposes. Each of these lines is secured by mortgages on certain of the Company's operating properties. The following summarizes certain information about the secured lines of credit as of March 31, 2005:
Total Total Maturity Available Outstanding Date ---------------------------------------------------- $ 373,000 $ 368,150 February 2006 100,000 66,071 June 2007 20,000 20,000 March 2007 10,000 10,000 April 2006 ------------------------------------- $ 503,000 $ 464,221 =====================================
Borrowings under the secured lines of credit had a weighted average interest rate of 3.53% at March 31, 2005. Letters of Credit At March 31, 2005, the Company had additional secured lines of credit with a total commitment of $27,123 that can only be used for issuing letters of credit. The total outstanding amount under these lines of credit was $11,423 at March 31, 2005. 9 Covenants and Restrictions Nineteen malls, five associated centers, two community centers and the office building are owned by special purpose entities that are included in the Company's consolidated financial statements. The sole business purpose of the special purpose entities is to own and operate these properties, each of which is encumbered by a commercial-mortgage-backed-securities loan. The real estate and other assets owned by these special purpose entities are restricted under the loan agreements in that they are not available to settle other debts of the Company. However, so long as the loans are not under an event of default, as defined in the loan agreements, the cash flows from these properties, after payments of debt service, operating expenses and reserves, are available for distribution to the Company. The weighted average remaining term of the Company's consolidated debt was 4.4 years at March 31, 2005 and 4.7 years at December 31, 2004. Of the $428,363 of debt that will mature before March 31, 2006, the Company has extension options that will extend the maturity date of $398,150 of that debt beyond March 31, 2006. The Company plans to either retire or obtain new financing for the remaining $30,213 of debt maturing before March 31, 2006. Note 4 - Segment Information The Company measures performance and allocates resources according to property type, which is determined based on certain criteria such as type of tenants, capital requirements, economic risks, leasing terms, and short- and long-term returns on capital. Rental income and tenant reimbursements from tenant leases provide the majority of revenues from all segments. Information on the Company's reportable segments is presented as follows:
Associated Community Three Months Ended March 31, 2005 Malls Centers Centers All Other Total -------------------------------------- ----------- ------------- ------------- --------------- ------------ Revenues $ 192,404 $ 8,489 $ 1,674 $ 8,338 $ 210,905 Property operating expenses (1) (61,191) (1,950) (409) 4,089 (59,461) Interest expense (43,501) (1,292) (715) (3,413) (48,921) Other expense -- -- -- (3,430) (3,430) Gain on sales of real estate assets -- -- 1,063 1,651 2,714 ----------- ------------- ------------- --------------- ------------ Segment profit and loss $ 87,712 $ 5,247 $ 1,613 $ 7,235 101,807 =========== ============== ============= =============== Depreciation and amortization expense (41,286) General and administrative expense (9,186) Interest income 1,683 Loss on extinguishment of debt (884) Loss on impairment of real estate assets (262) Equity in earnings of unconsolidated affiliates 3,091 Minority interest in earnings (22,223) ------------ Income before discontinued operations $ 32,740 ============ Total assets $4,654,115 $ 277,335 $ 89,574 $ 157,756 $5,178,780 Capital expenditures (2) $ 33,828 $ 5,962 $ 737 $ 14,709 $ 55,236
10
Associated Community Three Months Ended March 31, 2004 Malls Centers Centers All Other Total -------------------------------------- ----------- ------------- ------------- --------------- ------------ Revenues $ 157,348 $ 8,191 $ 2,708 $ 3,912 $ 172,159 Property operating expenses (1) (53,263) (1,557) (864) 4,764 (50,920) Interest expense (37,517) (1,263) (741) (913) (40,434) Other expense -- -- -- (3,032) (3,032) Gain on sales of real estate assets 548 -- 19,076 201 19,825 ----------- ------------- ------------- --------------- ------------ Segment profit and loss $ 67,116 $ 5,371 $ 20,179 $ 4,932 97,598 =========== ============== ============= =============== Depreciation and amortization expense (32,556) General and administrative expense (8,233) Interest income 880 Equity in earnings of unconsolidated affiliates 2,864 Minority interest in earnings (26,272) ------------ Income before discontinued operations $ 34,281 ============ Total assets $3,885,267 $ 203,397 $ 146,970 $ 132,870 $4,368,504 Capital expenditures (2) $ 222,123 $ 386 $ 4,402 $ 13,744 $ 240,655 (1) Property operating expenses include property operating expenses, real estate taxes and maintenance and repairs. (2) Amounts include acquisitions of real estate assets and investments in unconsolidated affiliates. Developments in progress are included in the All Other category.
Note 5- Earnings Per Share Basic earnings per share ("EPS") is computed by dividing net income available to common shareholders by the weighted-average number of unrestricted common shares outstanding for the period. Diluted EPS assumes the issuance of common stock for all potential dilutive common shares outstanding. The limited partners' rights to convert their minority interest in the Operating Partnership into shares of common stock are not dilutive. The following summarizes the impact of potential dilutive common shares on the denominator used to compute earnings per share:
Three Months Ended March 31, ----------------------------- 2005 2004 ------------- ------------ Weighted average shares outstanding 31,384 30,475 Effect of nonvested stock awards (160) (151) ------------- ------------ Denominator - basic earnings per share 31,224 30,324 Effect of dilutive securities: Stock options, nonvested stock awards and deemed shares related to deferred compensation plans 1,173 1,243 ------------- ------------ Denominator - diluted earnings per share 32,397 31,567 ============= ============
Note 6- Comprehensive Income Comprehensive income includes all changes in shareholders' equity during the period, except those resulting from investments by shareholders and distributions to shareholders. Comprehensive income was equal to net income for the three months ended March 31, 2005 and 2004. Note 7- Contingencies The Company is currently involved in certain litigation that arises in the ordinary course of business. It is management's opinion that the pending litigation will not materially affect the financial position or results of operations of the Company. Based on environmental studies completed to date, management believes any potential exposure related to environmental cleanup will not materially affect the Company's financial position or results of operations. 11 The Company has guaranteed 50% of the debt of Parkway Place L.P., an unconsolidated affiliate in which the Company owns a 45% interest, which owns Parkway Place in Huntsville, AL. The total amount outstanding at March 31, 2005, was $53,324, of which the Company has guaranteed $26,662. The guaranty will expire when the related debt matures in December 2005. The Company did not receive a fee for issuing this guaranty. The Company has guaranteed 100% of the construction debt to be incurred by Imperial Valley Mall L.P., an unconsolidated affiliate in which the Company owns a 60% interest, to develop Imperial Valley Mall. The total amount outstanding at March 31, 2005, was $48,070. The total commitment under the construction loan is $67,082. The Company did not receive a fee for this guaranty. The Company has issued various bonds that it would have to satisfy in the event of non-performance. At March 31, 2005, the total amount outstanding on these bonds was $10,539. Note 8 - Stock-Based Compensation Historically, the Company accounted for its stock-based compensation plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB No. 25) and related Interpretations. Effective January 1, 2003, the Company elected to begin recording the expense associated with stock options granted after January 1, 2003, on a prospective basis in accordance with the fair value and transition provisions of SFAS No. 123, "Accounting for Stock Based Compensation", as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB Statement No. 123." The Company has not granted any stock options since January 1, 2003. The Company records compensation expense for awards of common stock based on the fair value of the common stock on the date of grant and the related vesting period, if any. No stock-based compensation expense related to stock options granted prior to January 1, 2003, has been reflected in net income since all options granted had an exercise price equal to the fair value of the Company's common stock on the date of grant. Therefore, stock-based compensation expense included in net income available to common shareholders in the three months ended March 31, 2005 and 2004 is less than that which would have been recognized if the fair value method had been applied to all stock-based awards since the effective date of SFAS No. 123. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to all outstanding and unvested awards in each period:
Three Months Ended March 31, ---------------------------- 2005 2004 ------------ ----------- Net income available to common shareholders, as reported $25,371 $30,189 Stock-based compensation expense included in reported net income available to common shareholders 1,142 992 Total stock-based compensation expense determined under fair value method (1,247) (1,120) ------------ ----------- Pro forma net income available to common shareholders $25,266 $30,061 ============ =========== Net income available to common shareholders per share: Basic, as reported $0.81 $1.00 ============ =========== Basic, pro forma $0.81 $0.99 ============ =========== Diluted, as reported $0.78 $0.96 ============ =========== Diluted, pro forma $0.78 $0.95 ============ ===========
12 Note 9 - Noncash Investing and Financing Activities The Company's noncash investing and financing activities were as follows for the three months ended March 31, 2005 and 2004: Three Months Ended March 31,
------------------------- 2005 2004 ------------------------- Debt assumed to acquire property interests, including premiums $- $95,568 ========================= Debt consolidated from application of FASB Interpretation No. 46 $- $38,147 =========================
Note 10 - Discontinued Operations In March 2005, the Company sold five community centers for an aggregate sales price of $12,100. The Company previously recognized an aggregate loss on impairment of real estate assets of $617 on these community centers in December 2004 and recognized an additional loss on impairment of $32 during the three months ended March 31, 2005. Total revenues for these community centers were $412 and $524 for the three months ended March 31, 2005 and 2004, respectively. All prior periods presented have been restated to reflect the operations of these community centers as discontinued operations. Note 11 - Recent Accounting Pronouncements In December 2004, the FASB released its final revised standard, SFAS No. 123 (Revised 2004), "Share-Based Payment." SFAS No. 123(R) requires that a public entity measure the cost of equity based service awards based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award or the vesting period. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. In April 2005, the Securities and Exchange Commission amended Regulation S-X to modify the effective date so that SFAS No. 123(R) can be adopted beginning with the first interim reporting period of the next fiscal year beginning after June 15, 2005 instead of the first interim period beginning after June 15, 2005. The Company previously adopted the fair value provisions of SFAS No. 123, "Accounting for Stock Based Compensation", as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB Statement No. 123" effective January 1, 2003. The Company does not expect the adoption of this standard to have a material effect on its financial position or results of operations. Note 12 - Subsequent Event In April 2005, the Company formed a joint venture with Jacobs to develop Gulf Coast Town Center in Lee County (Ft. Myers/Naples), Florida. Under the terms of the joint venture agreement, the Company has contributed approximately $40,335 to a joint venture with Jacobs for a 50% interest in the joint venture, the proceeds of which were used to refund the aggregate acquisition and development costs incurred with respect to the project that were previously paid by Jacobs. The Company will also provide any additional equity necessary to fund the development of the property, as well as to fund up to an aggregate of $30,000 of any operating deficits of the joint venture. The Company will receive a preferred return of 11% on its invested capital in the joint venture and will, after payment of such preferred return and repayment of the Company's invested capital, share equally with Jacobs in the joint venture's profits. The joint venture arrangement provides the Company with the right to put its 50% ownership interest to Jacobs if certain approvals of tenants and government entities that are required for the continued development of the project are not obtained by the second anniversary of the joint venture agreement. The put right provides that Jacobs will acquire the Company's 50% ownership interest for an amount equal to the total unreturned equity funded by the Company plus any accrued and unpaid preferred return on that equity. 13 ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of financial condition and results of operations should be read in conjunction with the consolidated financial statements and accompanying notes that are included in this Form 10-Q. In this discussion, the terms "we", "us", "our", and the "Company" refer to CBL & Associates Properties, Inc. and its subsidiaries. Certain statements made in this section or elsewhere in this report may be deemed "forward looking statements" within the meaning of the federal securities laws. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that these expectations will be attained, and it is possible that actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks and uncertainties. Such risks and uncertainties include, without limitation, general industry, economic and business conditions, interest rate fluctuations, costs of capital and capital requirements, availability of real estate properties, inability to consummate acquisition opportunities, competition from other companies and retail formats, changes in retail rental rates in the Company's markets, shifts in customer demands, tenant bankruptcies or store closings, changes in vacancy rates at our properties, changes in operating expenses, changes in applicable laws, rules and regulations, the ability to obtain suitable equity and/or debt financing and the continued availability of financing in the amounts and on the terms necessary to support our future business. We disclaim any obligation to update or revise any forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking information. EXECUTIVE OVERVIEW We are a self-managed, self-administered, fully integrated real estate investment trust ("REIT") that is engaged in the ownership, development, acquisition, leasing, management and operation of regional shopping malls and community centers. Our shopping center properties are located in 29 states, but primarily in the southeastern and midwestern United States. As of March 31, 2005, we owned controlling interests in 64 regional malls, 25 associated centers (each adjacent to a regional shopping mall), five community centers and our corporate office building. We consolidate the financial statements of all entities in which we have a controlling financial interest. As of March 31, 2005, we owned non-controlling interests in six regional malls, one associated center and 51 community centers. Because major decisions such as the acquisition, sale or refinancing of principal partnership or joint venture assets must be approved by one or more of the other partners, we do not control these partnerships and joint ventures and, accordingly, account for these investments using the equity method. We had four mall expansions, one open-air shopping center, one associated center, two community centers and one community center expansion under construction as of March 31, 2005. The majority of our revenues is derived from leases with retail tenants and generally includes base minimum rents, percentage rents based on tenants' sales volumes and reimbursements from tenants for expenditures, including property operating expenses, real estate taxes and maintenance and repairs, as well as certain capital expenditures. We also generate revenues from sales of outparcel land at the properties and from sales of operating real estate assets when it is determined that we can realize the maximum value of the assets. Proceeds from such sales are generally used to reduce borrowings on our credit facilities. 14 RESULTS OF OPERATIONS COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2005 TO THE THREE MONTHS ENDED MARCH 31, 2004 The following significant transactions impact the comparison of the results of operations for the three months ended March 31, 2005 to the results of operations for the three months ended March 31, 2004: |X| The acquisition of eight malls and two associated centers and the opening of two malls and one associated center since January 1, 2004 (collectively referred to as the "New Properties"). Therefore, the three months ended March 31, 2005, include revenues and expenses related to these properties for a greater period of time than the comparable period a year ago. The New Properties are as follows:
Project Name Location Date Acquired / Opened ------------------------------------ ------------------------------- ---------------------- Acquisitions: ------------- Honey Creek Mall Terre Haute, IN March 2004 Volusia Mall Daytona Beach, FL March 2004 Greenbrier Mall Chesapeake, VA April 2004 Chapel Hill Mall Akron, OH May 2004 Chapel Hill Suburban Akron, OH May 2004 Park Plaza Mall Little Rock, AK June 2004 Monroeville Mall Monroeville, PA July 2004 Monroeville Annex Monroeville, PA July 2004 Northpark Mall Joplin, MO November 2004 Mall del Norte Laredo, TX November 2004 Developments: ------------- Coastal Grand-Myrtle Beach (50/50 Myrtle Beach, SC March 2004 joint venture) The Shoppes at Panama City Panama City, FL March 2004 Imperial Valley Mall (60/40 joint El Centro, CA March 2005 venture)
|X| In January 2005, two power centers, one community center and one community center expansion were sold to Galileo America LLC ("Galileo America"). Since we have a continuing involvement with these properties through our ownership interest in Galileo America and the agreement under which we will be the exclusive manager of the properties, the results of operations of these properties have not been reflected in discontinued operations. Therefore, the three months ended March 31, 2005, do not include a significant amount of revenues and expenses related to these properties, whereas the three months ended March 31, 2004 include a full period of revenues and expenses related to these properties. |X| Properties that were in operation as of January 1, 2004 and March 31, 2005 are referred to as the "Comparable Properties." Revenues The $38.7 million increase in revenues resulted primarily from increases of $28.8 million attributable to the New Properties and $9.6 million from the Comparable Properties. The increase in revenues from the Comparable Properties was attributable to our achieving higher occupancy combined with an increase in average base rents from new and renewal leasing activity, percentage rents and specialty income. Our cost recovery ratio improved to 102% for the three months ended March 31, 2005, compared to 94% for the three months ended March 31, 2004. This increase was driven by (i) an increase in total portfolio occupancy to 91.3% at March 31, 2005 compared to 90.8% at March 31, 2004, (ii) increased profitability 15 related to utility reimbursements from tenants at the New Properties and certain existing malls due to the implementation of efficiency optimizing utility systems and (iii) a $6.1 million improvement in bad debt expenses and other charges against revenues, as we recognized $1.4 million in the three months ended March 31, 2005 for recoveries of accounts receivable that were previously reserved for, compared with total bad debt expense and other charges against revenues of $4.7 million in the three months ended March 31, 2004. The increase in revenues was offset slightly by a decrease in revenues of $1.6 million related to properties that have been sold to the Galileo America joint venture. Management, development and leasing fees increased $1.2 million, primarily as a result of an increase in management and leasing fees from Galileo America, which is directly related to the growth in Galileo America's portfolio. Other revenues increased $1.0 million as a result of growth in our taxable REIT subsidiary. Expenses The $8.5 million increase in property operating expenses, including real estate taxes and maintenance and repairs, resulted from an increase of $9.7 million attributable to the New Properties, which was offset by a decrease of $0.6 million from the Comparable Properties and $0.6 million from the properties that have been sold to the Galileo America joint venture. The $8.7 million increase in depreciation and amortization expense resulted from increases of $7.2 million from the New Properties and $1.5 million from the Comparable Properties. The increase attributable to the Comparable Properties is due to ongoing capital expenditures for renovations, expansions, tenant allowances and deferred maintenance. General and administrative expenses increased $1.0 million primarily as a result of annual increases in salaries and benefits of existing personnel and the addition of new personnel. Other expense increased $0.4 million due to an increase of $0.7 million in the operating expenses of our taxable REIT subsidiary, offset by a decrease of $0.3 million in write-offs of abandoned development projects. Other Income and Expenses The increase in interest income of $0.8 million results from an increase in the amount of mortgage and other notes receivable outstanding compared to the prior year period. Interest expense increased by $8.5 million primarily due to the additional debt associated with the New Properties as well as a slight increase in the weighted average interest rate of our variable-rate debt. Gain on Sales of Real Estate Assets Gain on sales of real estate assets of $2.7 million in the three months ended March 31, 2005 was primarily related to a gain of $1.7 million from sales of two outparcels and a gain of $1.0 million from the recognition of deferred gain related to properties that were previously sold to Galileo America. The gain on sales of $19.8 million in the three months ended March 31, 2004 resulted primarily from the sale of six community centers to Galileo America. 16 Equity in Earnings of Unconsolidated Affiliates The increase of $0.2 million in equity in earnings of unconsolidated affiliates is the result of an increase of $0.4 million in our share of the earnings of Galileo America as a result of the continued growth in its portfolio and an increase of $0.9 in our share of earnings from the sales of outparcels at Imperial Valley Mall. This was offset by a decrease of $0.7 million in our share of earnings of Coastal Grand-Myrtle Beach, which resulted primarily because of the significant gains from outparcel sales that were recognized during the three months ended March 31, 2004. Discontinued Operations Discontinued operations in the three months ended March 31, 2005 are related to five community centers located throughout Michigan that were sold in March 2005. Discontinued operations in the three months ended March 31, 2004 represent the true-up of estimated expenses to actual amounts for properties sold during previous periods. Operational Review The shopping center business is, to some extent, seasonal in nature with tenants achieving the highest levels of sales during the fourth quarter because of the holiday season. Additionally, the malls earn most of their "temporary" rents (rents from short-term tenants), during the holiday period. Thus, occupancy levels and revenue production are generally the highest in the fourth quarter of each year. Results of operations realized in any one quarter may not be indicative of the results likely to be experienced over the course of the fiscal year. We classify our regional malls into two categories - malls that have completed their initial lease-up are referred to as stabilized malls and malls that are in their initial lease-up phase are referred to as non-stabilized malls. The non-stabilized malls currently include Parkway Place in Huntsville, AL, which opened in October 2002; Coastal Grand-Myrtle Beach in Myrtle Beach, SC, which opened in March 2004; and Imperial Valley Mall in El Centro, CA, which opened in March 2005. We derive a significant amount of our revenues from the mall properties. The sources of our revenues by property type were as follows:
Three Months Ended March 31, --------------------------------- 2005 2004 ----------------- --------------- Malls 91.2% 91.4% Associated centers 4.0% 4.8% Community centers 0.8% 1.6% Mortgages, office building and other 4.0% 2.2%
Sales and Occupancy Costs Mall store sales (for those tenants who occupy 10,000 square feet or less and have reported sales) in the stabilized malls increased by 4.5% on a comparable per square foot basis for the three months ended March 31, 2005. Occupancy costs as a percentage of sales for the stabilized malls were 13.9% and 14.2% for the three months ended March 31, 2005 and 2004, respectively. 17 Occupancy The occupancy of the portfolio was as follows:
March 31, ------------------------------------- 2005 2004 ------------------ ------------------ Total portfolio occupancy 91.3% 90.8% Total mall portfolio 91.5% 91.0% Stabilized malls (67) 91.9% 91.5% Non-stabilized malls (3) 81.8% 81.5% Associated centers (26) 91.9% 88.7% Community centers (5)* 82.9% 91.6% * Excludes the community centers that were contributed to the Galileo America joint venture
Leasing Average annual base rents per square foot were as follows for each property type:
At March 31, ------------------------------------- 2005 2004 ------------------ ------------------ Stabilized malls $25.45 $25.03 Non-stabilized malls 26.92 27.37 Associated centers 10.05 10.05 Community centers * 14.55 10.45 * Excludes the community centers that were contributed to the Galileo America joint venture.
The following table shows the positive results we achieved in increasing the initial and average base rents through new and renewal leasing during the first quarter of 2005 for small shop spaces less than 20,000 square feet that were previously occupied, excluding junior anchors:
Base Rent Per Initial Base Average Base Square Foot Rent Per Rent Per Prior Lease Square Foot % Change Square Foot % Change Square Feet (1) New Lease (2) Initial New Lease (3) Average ------------- ------------- -------------- ----------- --------------- ---------- Stabilized Malls 688,306 $ 24.30 $ 24.60 1.2% $ 25.14 3.5% Associated centers 26,466 11.83 16.80 42.0% 17.19 45.3% Community centers (4) 11,200 8.18 8.34 2.0% 8.44 3.2% Other 3,087 20.83 24.35 16.9% 24.97 19.9% ------------- ------------- -------------- ----------- --------------- ---------- 729,059 $ 23.58 $ 24.07 2.1% $ 24.59 4.3% ============= ============= ============== =========== =============== ========== (1) Represents the rent that was in place at the end of the lease term. (2) Represents the rent in place at beginning of the lease terms. (3) Average base rent over the term of the new lease. (4) Excludes the community centers that were sold to the Galileo America joint venture.
LIQUIDITY AND CAPITAL RESOURCES There was $58.9 million of cash and cash equivalents as of March 31, 2005, an increase of $33.2 million from December 31, 2004. Cash flows from operations are used to fund short-term liquidity and capital needs such as tenant construction allowances, capital expenditures and payments of dividends and distributions. For longer-term liquidity needs such as acquisitions, new developments, renovations and expansions, we typically rely on property specific mortgages (which are generally non-recourse), construction and term loans, revolving lines of credit, common stock, preferred stock, joint venture investments and a minority interest in the Operating Partnership. 18 Cash Flows Cash provided by operating activities decreased by $2.4 million to $76.3 million, which was primarily the result of the timing of accounts payable and accrued liabilities. Debt During the three months ended March 31, 2005, we borrowed $45.3 million under mortgage and other notes payable and paid $33.9 million to reduce outstanding borrowings under mortgage and other notes payable. The following tables summarize debt based on our pro rata ownership share (including our pro rata share of unconsolidated affiliates and excluding minority investors' share of shopping center properties) because we believe this provides investors a clearer understanding of our total debt obligations and liquidity (in thousands):
Weighted Average Minority Unconsolidated Interest Consolidated Interests Affiliates Total Rate(1) ------------- ---------------- --------------- ------------- --------------- March 31, 2005: Fixed-rate debt: Non-recourse loans on operating properties $ 2,660,174 $(52,667) $ 107,219 $2,714,726 6.34% ------------- ---------------- --------------- ------------- Variable-rate debt: Recourse term loans on operating properties 197,700 - 80,057 277,757 3.92% Construction loans 17,207 - - 17,207 4.35% Lines of credit 494,221 - - 494,221 3.56% ------------- ---------------- --------------- ------------- Total variable-rate debt 709,128 - 80,057 789,185 3.70% ------------- ---------------- --------------- ------------- Total $ 3,369,302 $(52,667) $ 187,276 $3,503,911 5.75% ============= ================ =============== =============
December 31, 2004: Fixed-rate debt: Non-recourseloans on operating properties $ 2,688,186 $(52,914) $ 104,114 $2,739,386 6.35% ------------- ---------------- --------------- ------------- Variable-rate debt: Recourse term loans on operating 207,500 -- 29,415 236,915 3.40% properties Construction loans 14,593 -- 39,493 54,086 4.05% Lines of credit 461,400 -- -- 461,400 3.37% ------------- ---------------- --------------- ------------- Total variable-rate debt 683,493 -- 68,908 752,401 3.44% ------------- ---------------- --------------- ------------- Total $ 3,371,679 $ (52,914) $ 173,022 $3,491,787 5.72% ============= ================ =============== ============= (1) Weighted average interest rate including the effect of debt premiums, but excluding amortization of deferred financing costs.
In February 2005, we amended one of our secured credit facilities to increase the total availability from $80.0 million to $100.0 million and to extend the maturity by one year to June 2007. The interest rate remained at LIBOR plus 1.00%. We have four secured credit facilities with total availability of $503.0 million, of which $464.2 million was outstanding as of March 31, 2005. The secured credit facilities bear interest at LIBOR plus 100 basis points. We have one unsecured credit facility with total availability of $400.0 million, of which $30.0 million was outstanding as of March 31, 2005. The unsecured credit facility bears interest at LIBOR plus a margin of 100 to 145 basis points based on our leverage. We also have secured lines of credit with total availability of $27.1 million that can only be used to issue letters of credit. There was $11.4 million outstanding under these lines at March 31, 2005. 19 The secured and unsecured credit facilities contain, among other restrictions, certain financial covenants including the maintenance of certain coverage ratios, minimum net worth requirements, and limitations on cash flow distributions. We were in compliance with all financial covenants and restrictions under our credit facilities at March 31, 2005. Additionally, certain property-specific mortgage notes payable require the maintenance of debt service coverage ratios. At March 31, 2005, the properties subject to these mortgage notes payable were in compliance with the applicable ratios. We expect to refinance the majority of mortgage and other notes payable maturing over the next five years with replacement loans. Based on our pro rata share of total debt, there is $455.1 million of debt that is scheduled to mature before March 31, 2006. There are extension options in place that will extend the maturity of $398.2 million of this debt beyond March 31, 2006. We expect to either retire or refinance the remaining $56.9 million of maturing loans. Equity During the three months ended March 31, 2005, we received $1.5 million in proceeds from issuances of common stock related to exercises of employee stock options and our dividend reinvestment plan. During the three months ended March 31, 2005, we paid dividends of $33.7 million to holders of our common stock and our preferred stock, as well as $22.2 million in distributions to the minority interest investors in our Operating Partnership and certain shopping center properties. As a publicly traded company, we have access to capital through both the public equity and debt markets. We have an effective shelf registration statement authorizing us to publicly issue shares of preferred stock, common stock and warrants to purchase shares of common stock with an aggregate public offering price up to $562.0 million, of which approximately $272.0 million was available at March 31, 2005. We anticipate that the combination of equity and debt sources will, for the foreseeable future, provide adequate liquidity to continue our capital programs substantially as in the past and make distributions to our shareholders in accordance with the requirements applicable to real estate investment trusts. Our policy is to maintain a conservative debt-to-total-market capitalization ratio in order to enhance our access to the broadest range of capital markets, both public and private. Based on our share of total consolidated and unconsolidated debt and the market value of equity, our debt-to-total-market capitalization (debt plus market-value equity) ratio was as follows at March 31, 2005 (in thousands, except stock prices):
Shares Outstanding Stock Price (1) Value ------------------ ----------------- ----------------- Common stock and operating partnership units 57,035 $ 71.51 $4,078,573 8.75% Series B Cumulative Redeemable Preferred Stock 2,000 $ 50.00 100,000 7.75% Series C Cumulative Redeemable Preferred Stock 460 $ 250.00 115,000 7.375% Series D Cumulative Redeemable Preferred Stock 700 $ 250.00 175,000 ----------------- Total market equity 4,468,573 Company's share of total debt 3,503,911 ----------------- Total market capitalization $7,972,484 ================= Debt-to-total-market capitalization ratio 44.0% ================= (1) Stock price for common stock and operating partnership units equals the closing price of the common stock on March 31, 2005. The stock price for the preferred stock represents the face value of each respective series of preferred stock.
20 Capital Expenditures We expect to continue to have access to the capital resources necessary to expand and develop our business. Future development and acquisition activities will be undertaken as suitable opportunities arise. We do not expect to pursue these opportunities unless adequate sources of funding are available and a satisfactory budget with targeted returns on investment has been internally approved. An annual capital expenditures budget is prepared for each property that is intended to provide for all necessary recurring and non-recurring capital expenditures. We believe that property operating cash flows, which include reimbursements from tenants for certain expenses, will provide the necessary funding for these expenditures. Developments and Expansions The following development projects are under construction (dollars in thousands):
Our Share of Project Our Share Cost as of Square Of Total March 31, Projected Initial Property Location Feet Costs 2005 Opening Date Yield -------------------------------- ----------------- --------- ----------- ----------- -------------- ------- Mall Expansions: ---------------- The District at Monroeville Mall Monroeville, PA 75,000 $ 20,588 $ 13,674 Nov-04/May-05 8% Citadel Mall Charleston, SC 46,000 6,549 1,539 August-05 9% Fayette Mall Lexington, KY 144,000 25,532 8,715 October-05 11% Burnsville Center Burnsville, MN 146,000 24,612 5,786 Nov-05/Mar-06 9% Open-Air Center: ---------------- Southaven Towne Center Southaven, MS 437,600 26,303 24,089 October-05 10% Associated Center: ------------------ Coastal Grand Crossing Myrtle Beach, SC 15,000 1,946 773 May-05 10% Community Centers: ------------------ Cobblestone Village at Royal Palm Royal Palm, FL 225,000 10,003 6,880 July-05 9% Chicopee Marketplace Chicopee, MA 156,000 19,743 9,019 September-05 9% Community Center Expansion: --------------------------- Fashion Square Orange Park, FL 18,000 6,066 671 July-05 10% --------- ----------- ----------- 1,262,600 $ 141,342 $ 71,146 ========= =========== ===========
There is a construction loan in place for the costs of the open-air center. The costs of the remaining projects will be funded with operating cash flows and the credit facilities. We have entered into a number of option agreements for the development of future regional malls, open-air centers and community centers. Except for the projects discussed under Developments and Expansions above, we do not have any other material capital commitments. Dispositions We received a total of $52.7 million in cash proceeds from the sales of real estate assets during the three months ended March 31, 2005. The third phase of the joint venture transaction with Galileo America, which is discussed in Note 2 to the unaudited consolidated financial statements, closed on January 5, 2004 and generated net cash proceeds of $42.5 million. We received $8.2 million in cash proceeds and issued a note receivable for $2.6 million from the sale of five community centers that are located in Michigan. We also received $2.0 million in cash proceeds from the sales of two outparcels. 21 Other Capital Expenditures Including our share of unconsolidated affiliates' capital expenditures and excluding minority investor's share of capital expenditures, we spent $8.7 million during the three months ended March 31, 2005 for tenant allowances, which generate increased rents from tenants over the terms of their leases. Deferred maintenance expenditures were $2.5 million for the three months ended March 31, 2005 and included $1.2 million for roof repairs and replacements, $0.2 million for resurfacing and improved lighting of parking lots and $1.1 million for other capital expenditures. Renovation expenditures were $1.3 million for the three months ended March 31, 2005. Deferred maintenance expenditures are generally billed to tenants as common area maintenance expense, and most are recovered over a 5- to 15-year period. Renovation expenditures are primarily for remodeling and upgrades of malls, of which approximately 30% is recovered from tenants over a 5- to 15-year period. CRITICAL ACCOUNTING POLICIES Our significant accounting policies are disclosed in Note 2 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2004. The following discussion describes our most critical accounting policies, which are those that are both important to the presentation of our financial condition and results of operations and that require significant judgment or use of complex estimates. Revenue Recognition Minimum rental revenue from operating leases is recognized on a straight-line basis over the initial terms, including rent holidays, of the related leases. Certain tenants are required to pay percentage rent if their sales volumes exceed thresholds specified in their lease agreements. Percentage rent is recognized as revenue when the thresholds are achieved and the amounts become determinable. We receive reimbursements from tenants for real estate taxes, insurance, common area maintenance, utilities and other recoverable operating expenses as provided in the lease agreements. Tenant reimbursements are recognized as revenue in the period the related operating expenses are incurred. Tenant reimbursements related to certain capital expenditures are billed to tenants over periods of 5 to 15 years and are recognized as revenue when billed. We receive management, leasing and development fees from third parties and unconsolidated affiliates. Management fees are charged as a percentage of revenues (as defined in the management agreement) and are recognized as revenue when earned. Development fees are recognized as revenue on a pro rata basis over the development period. Leasing fees are charged for newly executed leases and lease renewals and are recognized as revenue when earned. Development and leasing fees received from unconsolidated affiliates during the development period are recognized as revenue to the extent of the third-party partners' ownership interest. Fees to the extent of our ownership interest are recorded as a reduction to our investment in the unconsolidated affiliate. Gains on sales of real estate assets are recognized when it is determined that the sale has been consummated, the buyer's initial and continuing investment is adequate, our receivable, if any, is not subject to future subordination, and the buyer has assumed the usual risks and rewards of ownership of the asset. When we have an ownership interest in the buyer, gain is recognized to the extent of the third party partner's ownership interest and the portion of the gain attributable to our ownership interest is deferred. 22 Real Estate Assets We capitalize predevelopment project costs paid to third parties. All previously capitalized predevelopment costs are expensed when it is no longer probable that the project will be completed. Once development of a project commences, all direct costs incurred to construct the project, including interest and real estate taxes, are capitalized. Additionally, certain general and administrative expenses are allocated to the projects and capitalized based on the amount of time applicable personnel work on the development project. Ordinary repairs and maintenance are expensed as incurred. Major replacements and improvements are capitalized and depreciated over their estimated useful lives. All acquired real estate assets are accounted for using the purchase method of accounting and accordingly, the results of operations are included in the consolidated statements of operations from the respective dates of acquisition. The purchase price is allocated to (i) tangible assets, consisting of land, buildings and improvements, and tenant improvements, (ii) and identifiable intangible assets generally consisting of above- and below-market leases and in-place leases. We use estimates of fair value based on estimated cash flows, using appropriate discount rates, and other valuation methods to allocate the purchase price to the acquired tangible and intangible assets. Liabilities assumed generally consist of mortgage debt on the real estate assets acquired. Assumed debt with a stated interest rate that is significantly different from market interest rates is recorded at its fair value based on estimated market interest rates at the date of acquisition. Depreciation is computed on a straight-line basis over estimated lives of 40 years for buildings, 10 to 20 years for certain improvements and 7 to 10 years for equipment and fixtures. Tenant improvements are capitalized and depreciated on a straight-line basis over the term of the related lease. Lease-related intangibles from acquisitions of real estate assets are amortized over the remaining terms of the related leases. Any difference between the face value of the debt assumed and its fair value is amortized to interest expense over the remaining term of the debt using the effective interest method. Carrying Value of Long-Lived Assets We periodically evaluate long-lived assets to determine if there has been any impairment in their carrying values and record impairment losses if the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts or if there are other indicators of impairment. If it is determined that an impairment has occurred, the excess of the asset's carrying value over its estimated fair value will be charged to operations. See Note 2 to the unaudited consolidated financial statements for a description of the loss on impairment of real estate assets of $0.3 million that was recorded in the three months ended March 31, 2005. There were no impairment charges in the three months ended March 31, 2004. RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the FASB released its final revised standard, SFAS No. 123 (Revised 2004), "Share-Based Payment." SFAS No. 123(R) requires that a public entity measure the cost of equity based service awards based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award or the vesting period. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. In April 2005, the Securities and Exchange Commission amended Regulation S-X to modify the effective date so that SFAS No. 123(R) can be adopted beginning with the first interim reporting period of the next fiscal year beginning after June 15, 2005 instead of the first interim period beginning after June 15, 2005. The Company previously adopted the fair value provisions of SFAS No. 123, "Accounting for Stock Based Compensation", as amended by SFAS No. 148, 23 "Accounting for Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB Statement No. 123" effective January 1, 2003. The Company does not expect the adoption of this standard to have a material effect on its financial position or results of operations. IMPACT OF INFLATION In the last three years, inflation has not had a significant impact on the Company because of the relatively low inflation rate. Substantially all tenant leases do, however, contain provisions designed to protect the Company from the impact of inflation. These provisions include clauses enabling the Company to receive percentage rent based on tenant's gross sales, which generally increase as prices rise, and/or escalation clauses, which generally increase rental rates during the terms of the leases. In addition, many of the leases are for terms of less than ten years, which may enable the Company to replace existing leases with new leases at higher base and/or percentage rents if rents of the existing leases are below the then existing market rate. Most of the leases require tenants to pay their share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing the Company's exposure to increases in costs and operating expenses resulting from inflation. FUNDS FROM OPERATIONS Funds From Operations ("FFO") is a widely used measure of the operating performance of real estate companies that supplements net income determined in accordance with generally accepted accounting principles ("GAAP"). The National Association of Real Estate Investment Trusts ("NAREIT") defines FFO as net income (computed in accordance with GAAP) excluding gains or losses on sales of operating properties, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated on the same basis. We define FFO available for distribution as defined above by NAREIT less dividends on preferred stock. Our method of calculating FFO may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs. We believe that FFO provides an additional indicator of the operating performance of our properties without giving effect to real estate depreciation and amortization, which assumes the value of real estate assets declines predictably over time. Since values of well-maintained real estate assets have historically risen with market conditions, we believe that FFO enhances investors' understanding of our operating performance. The use of FFO as an indicator of financial performance is influenced not only by the operations of our properties and interest rates, but also by our capital structure. FFO does not represent cash flows from operations as defined by accounting principles generally accepted in the United States, is not necessarily indicative of cash available to fund all cash flow needs and should not be considered as an alternative to net income for purposes of evaluating our operating performance or to cash flow as a measure of liquidity. FFO increased 27.0% for the three months ended March 31, 2005 to $88.5 million compared to $69.7 million for the same period in 2004. The New Properties generated 54% of the growth in FFO. Consistently high portfolio occupancy and recoveries of operating expenses as well as increases in rental rates from renewal and replacement leasing accounted for the remaining 46% growth in FFO. 24 The calculation of FFO is as follows (in thousands):
Three Months Ended March 31, -------------------------- 2005 2004 ------------ ----------- Net income available to common shareholders $ 25,371 $ 30,189 Depreciation and amortization from: Consolidated properties 41,286 32,556 Unconsolidated affiliates 1,710 1,196 Discontinued operations -- 189 Minority interest in earnings of operating partnership 20,826 25,034 Minority investors' share of depreciation and amortization in shopping center properties (362) (293) (Gain) loss on disposal of: Operating real estate assets (223) (19,081) Discontinued operations 32 5 Depreciation and amortization of non-real estate assets (179) (135) ------------ ----------- Funds from operations $ 88,461 $ 69,660 ============ =========== Diluted weighted average shares and potential dilutive common shares with operating partnership units fully converted 58,028 56,713
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk The Company has exposure to interest rate risk on its debt obligations and derivative financial instruments. The Company may elect to use derivative financial instruments to manage its exposure to changes in interest rates, but will not use them for speculative purposes. The Company's interest rate risk management policy requires that derivative instruments be used for hedging purposes only and that they be entered into only with major financial institutions based on their credit ratings and other factors. Based on the Company's proportionate share of consolidated and unconsolidated variable rate debt at March 31, 2005, a 0.5% increase or decrease in interest rates on this variable-rate debt would decrease or increase annual cash flows by approximately $3.9 million and, after the effect of capitalized interest, annual earnings by approximately $3.9 million. Based on the Company's proportionate share of consolidated and unconsolidated debt at March 31, 2005, a 0.5% increase in interest rates would decrease the fair value of debt by approximately $59.5 million, while a 0.5% decrease in interest rates would increase the fair value of debt by approximately $61.2 million. The Company did not have any derivative financial instruments during the three months ended March 31, 2005 or at March 31, 2004. ITEM 4: Controls and Procedures As of the end of the period covered by this quarterly report, an evaluation, under Rule 13a-15 of the Securities Exchange Act of 1934 was performed under the supervision of the Company's Chief Executive Officer and Chief Financial Officer and with the participation of the Company's management, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective. No change in the Company's internal control over financial reporting occurred during the period covered by this quarterly report that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 25 PART II - OTHER INFORMATION ITEM 1: Legal Proceedings None ITEM 2: Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities None ITEM 3: Defaults Upon Senior Securities None ITEM 4: Submission of Matters to a Vote of Security Holders None ITEM 5: Other Information None ITEM 6: Exhibits 10.1 Amended and Restated Loan Agreement between CBL & Associates Limited Partnership, The Lakes Mall, LLC, Lakeshore/Sebring Limited Partnership and First Tennessee Bank National Association, dated March 9, 2005. 31.1 Certification pursuant to Securities Exchange Act Rule 13a-14(a) by the Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification pursuant to Securities Exchange Act Rule 13a-14(a) by the Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification pursuant to Securities Exchange Act Rule 13a-14(b) by the Chief Executive Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification pursuant to Securities Exchange Act Rule 13a-14(b) by the Chief Financial Officer as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002_. 26 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CBL & ASSOCIATES PROPERTIES, INC. /s/ John N. Foy -------------------------------------------------------- John N. Foy Vice Chairman of the Board, Chief Financial Officer and Treasurer (Authorized Officer of the Registrant, Principal Financial Officer) Date: May 10, 2005 27 31