EX-99 4 exhibit991.txt EXHIBIT 99.1 RESTATED FORM 10-K Exhibit 99.1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004 Or |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 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 No.) incorporate or organization) 2030 Hamilton Place Blvd, Suite 500 37421 Chattanooga, TN (Zip Code) (Address of principal executive office) Registrant's telephone number, including area code:(423) 855-0001 Securities registered pursuant to Section 12(b) of the Act: Title of each Class Name of each exchange on which registered ------------------------------------ ----------------------------------------- Common Stock, $0.01 par value New York Stock Exchange 8.75% Series B Cumulative Redeemable Preferred Stock, $0.01 par value New York Stock Exchange 7.75% Series C Cumulative Redeemable Preferred Stock, $0.01 par value New York Stock Exchange 7.375% Series D Cumulative Redeemable Preferred Stock, $0.01 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 12 months (or for such shorter periods that the registrant was required to file such report(s)) and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes |X| No |_| The aggregate market value of the 56,746,062 shares of common stock held by non-affiliates of the registrant as of June 30, 2004 was $1,560,576,705, based on the closing price of $27.50 per share on the New York Stock Exchange on June 30, 2004. (For this computation, the registrant has excluded the market value of all shares of its common stock reported as beneficially owned by executive officers and directors of the registrant; such exclusion shall not be deemed to constitute an admission that any such person is an "affiliate" of the registrant.) As of March 7, 2005, there were 62,798,056 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's proxy statement for the annual shareholders meeting to be held on May 9, 2005, are incorporated by reference into Part III. 6 Part I. ITEM 1. BUSINESS Background CBL & Associates Properties, Inc. (the "CBL") was organized on July 13, 1993, as a Delaware corporation, to acquire substantially all of the real estate properties owned by CBL & Associates, Inc., and its affiliates ("CBL's Predecessor"), which was formed by Charles B. Lebovitz in 1978. On November 3, 1993, CBL completed an initial public offering (the "Offering") of 30,800,000 shares of its common stock. Simultaneous with the completion of the Offering, CBL's Predecessor transferred substantially all of its interests in its real estate properties to CBL & Associates Limited Partnership (the "Operating Partnership") in exchange for common units of limited partnership interest in the Operating Partnership. CBL's Predecessor also acquired an additional interest in the Operating Partnership for a cash payment. The interests in the Operating Partnership contain certain conversion rights that are more fully described in Note 9 to the consolidated financial statements. The terms "we", "us", "our" and the "Company" refer to CBL & Associates Properties, Inc. and its subsidiaries. Recent Developments On January 5, 2004, we closed the second phase of our joint venture transaction with Galileo America, Inc. ("Galileo America REIT") when we sold our 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. We sold a community center expansion to the joint venture during September 2004 for $3.4 million in cash. In October 2004, we sold our interests in a community center to the joint venture for $17.9 million, which consisted of $2.9 million in cash, the joint venture's assumption of $10.5 million of debt and a limited partnership interest in Galileo America REIT. The community center was originally scheduled to be included in the third phase of the transaction that closed in January 2005. We closed the third and final phase of the Galileo joint venture transaction on January 5, 2005, when we sold our interest in two power centers, one community center and one community center expansion for $58.6 million, which consisted of $42.6 million in cash, the joint venture's assumption of $12.1 million of debt and $3.6 million representing our interest in the joint venture. 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. 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. On April 8, 2004, we acquired Greenbrier Mall in Chesapeake, VA for a cash purchase price, including transaction costs, of $107.5 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 our 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 7 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 our 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. On July 28, 2004, we 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 $39.5 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 pay for the fee interest in the land underlying the mall and associated center on or before July 28, 2007, and the issuance of 1,560,940 special common units in the Operating Partnership with a fair value of $46.2 million ($29.605 per special common unit). 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 drew on the credit facility to repay all $102.4 million of 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. On November 22, 2004, we acquired Mall del Norte in Laredo, TX for a cash purchase price, including transaction costs, of $170.4 million. The purchase price was partially financed with a new nonrecourse, interest-only term loan of $113.4 million that bears interest at a stated rate of 5.04% and matures in December 2011. On November 22, 2004, we acquired Northpark Mall in Joplin, MO for a purchase price, including transaction costs, of $79.1 million. The purchase price consisted of $37.6 million in cash and the assumption of $41.5 million of non-recourse debt that bears interest at a stated rate of 5.75% and matures in March 2014. On December 13, 2004, we issued 7,000,000 depositary shares in a public offering, each representing one-tenth of a share of 7.375% Series D Cumulative Redeemable Preferred Stock (the "Series D Preferred Stock") with a liquidation preference of $250.00 per share ($25.00 per depositary share). The net proceeds of $169.3 million were used to reduce outstanding borrowings on the Company's credit facilities. At our Annual Meeting of Shareholders on May 9, 2005, our shareholders approved an increase in the authorized shares of the common stock under our amended and restated certificate of incorporation to 180,000,000 shares from 95,000,000 shares. On May 10, 2005, our Board of Directors approved a two-for-one stock split of our common stock, which was effected in the form of a stock dividend. The record date for the stock split was June 1, 2005, and the distribution date was June 15, 2005. We retained the current par value of $0.01 per share for all shares of common stock. All references to numbers of common shares and per share data in this annual report on Form 10-K have been adjusted to reflect the stock split on a retroactive basis. The Operating Partnership currently has common units and special common units of limited partner interest outstanding that may be exchanged by their holders, under certain circumstances, for shares of common stock on a one-for-one basis. These common units and special common units were also split on a two-for-one basis so that they continue to be exchangeable on a one-for-one basis into shares of our common stock. All references to numbers of common units and special common units and related per unit data in this annual report on Form 10-K have also been adjusted to reflect the stock split on a retroactive basis. The Company's Business We are a self-managed, self-administered, fully integrated real estate investment trust ("REIT"). We own operate, market, manage, lease, expand, develop, redevelop, acquire and finance regional malls and community shopping 8 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. We have elected to be taxed as a REIT for federal income tax purposes. We are the fourth largest mall REIT in the United States and the largest owner of malls and shopping centers in the Southeast based on gross leasable area owned. We conduct substantially all of our business through the Operating Partnership. We are the 100% owner of two qualified REIT subsidiaries, CBL Holdings I, Inc. and CBL Holdings II, Inc. CBL Holdings I, Inc. is the sole general partner of the Operating Partnership. At December 31, 2004, CBL Holdings I, Inc. owned a 1.6% general partnership interest and CBL Holdings II, Inc. owned a 53.4% limited partnership interest in the Operating Partnership, for a combined interest held by us of 55.0%. As of December 31, 2004, we owned: |X| interests in a portfolio of operating properties including 69 enclosed regional malls (the "Malls"), 26 associated centers (the "Associated Centers"), 60 community centers (the "Community Centers") and our corporate office building (the "Office Building"); |X| interests in one regional mall, one open-air center, two associated centers, one associated center expansion, one associated center redevelopment and three community centers that are currently under construction (the "Construction Properties"), as well as options to acquire certain shopping center development sites; and |X| mortgages on ten properties that are secured by first mortgages or wrap-around mortgages on the underlying real estate and related improvements (the "Mortgages"). The Malls, Associated Centers, Community Centers, Construction Properties, Mortgages and Office Building are collectively referred to as the "Properties" and individually as a "Property." We conduct our property management and development activities through CBL & Associates Management, Inc. (the "Management Company") to comply with certain technical requirements of the Internal Revenue Code of 1986, as amended. The Management Company manages all of the Properties except for Governor's Square and Governor's Plaza in Clarksville, TN and Kentucky Oaks Mall, in Paducah, KY. A property manager affiliated with the third party managing general partner performs the property management services for these Properties and receives a fee for its services. The managing partner of each of these Properties controls the cash flow distributions, although our approval is required for certain major decisions. The majority of our revenues is derived from leases with retail tenants and generally include minimum rents, percentage rents based on tenants' sales volumes and reimbursements from tenants for expenditures related to property operating expenses, real estate taxes, insurance and maintenance and repairs, as well as certain capital expenditures. We also generate revenues from sales of peripheral land at the properties and from sales of 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. The following terms used in this annual report on Form 10-K will have the meanings described below: |X| GLA - refers to gross leasable area of retail space in square feet, including anchors and mall tenants |X| Anchor - refers to a department store or other large retail store |X| Freestanding - property locations that are not attached to the primary complex of buildings that comprise the mall shopping center |X| Outparcel - land used for freestanding developments, such as retail stores, banks and restaurants, on the periphery of the Properties 9 Geographic Concentration Our properties are located principally in the southeastern and midwestern Unites States. Our properties located in the southeastern United States accounted for approximately 57.0% of our total revenues from all properties for the year ended December 31, 2004 and currently include 37 Malls, 18 Associated Centers, 35 Community Centers and one Office Building and. Our properties located in the midwestern United States accounted for approximately 24.9% of our total revenues from all properties for the year ended December 31, 2004 and currently include 18 Malls, three Associated Centers and five Community Centers. Our results of operations and funds available for distribution to shareholders therefore will be subject generally to economic conditions in the southeastern and midwestern United States. We will continue to look for opportunities to geographically diversify our portfolio in order to minimize dependency on any particular region; however, the expansion of the portfolio through both acquisitions and developments is contingent on many factors including consumer demand, competition and economic conditions. Significant Markets The top five markets, in terms of revenues, where the Properties are located were as follows for the year ended December 31, 2004: Market Percentage Total of Revenues -------------------- ---------------------------- Nashville, TN 7.1% Chattanooga, TN 5.5% Madison, WI 3.5% Winston-Salem, NC 3.3% Charleston, SC 3.1% Top 25 Tenants The top 25 tenants based on percentage of our total revenues were as follows for the year ended December 31, 2004:
Annual Percentage Number Of Square Gross Of Total Tenant Stores Feet Rentals(1) Revenues ----------------------------------------- --------- ------------ ------------------ ---------- 1 Limited Brands, Inc. 213 1,319,862 $42,031,928 5.6% 2 Foot Locker, Inc. 178 691,050 25,969,731 3.4% 3 The Gap, Inc. 92 937,517 21,787,095 2.9% 4 Luxottica Group, S.P.A. (2) 186 332,200 14,906,585 2.0% 5 Abercrombie & Fitch Co. 57 389,717 13,692,044 1.8% 6 Signet Group plc (3) 96 143,848 12,963,332 1.7% 7 American Eagle Outfitters, Inc. 64 334,415 12,873,601 1.7% 8 J.C. Penney Co., Inc. (4) 64 7,039,243 11,805,362 1.6% 9 Zale Corporation 135 131,483 11,775,773 1.6% 10 The Finish Line, Inc. 56 294,736 10,473,046 1.4% 11 The Regis Corporation 176 201,876 9,626,228 1.3% 12 Charming Shoppes, Inc. (5) 54 332,924 9,595,551 1.3% 13 Lerner New York, Inc. 38 310,877 9,405,871 1.2% 14 Trans World Entertainment (6) 52 268,688 8,846,329 1.2% 15 Hallmark Cards, Inc. 75 259,241 8,468,088 1.1% 16 Genesco Inc. (7) 123 156,505 8,447,715 1.1% 17 Pacific Sunwear of California 68 228,070 7,630,131 1.0% 10 Annual Percentage Number Of Square Gross Of Total Tenant Stores Feet Rentals(1) Revenues ----------------------------------------- --------- ------------ ------------------ ---------- 18 Borders Group, Inc. 47 276,554 7,471,343 1.0% 19 The Shoe Show of Rocky Mount, Inc 49 265,199 7,239,772 1.0% 20 Sun Capital Partners, Inc. (8) 57 329,005 6,946,881 0.9% 21 Christopher & Banks, Inc. 56 194,824 6,615,540 0.9% 22 Barnes & Noble, Inc. 50 297,562 6,584,027 0.9% 23 The Buckle, Inc. 39 190,977 6,570,412 0.9% 24 Claire's Stores, Inc. 105 117,898 6,448,645 0.9% 25 Aeropostale, Inc. 49 164,360 6,421,776 0.9% 2,179 15,208,631 $294,596,806 39.3% (1) Includes annual minimum rent and tenant reimbursements based on amounts in effect at December 31, 2004 (2) Luxottica was previously Lenscrafters & Sunglass Hut. Luxottica purchased Cole National Corporation, which operates Pearl Vision and Things Remembered in October 2004. (3) Signet Group was previously Sterling, Inc. They operate Kay Jewelers, Marks & Morgan, JB Robinson, Shaw's Jewelers, Osterman's Jewelers, LeRoy's Jewelers, Jared Jewelers, Belden Jewelers and Rogers Jewelers. (4) J.C. Penney owns 27 of these stores. (5) Charming Shoppes, Inc. operates Lane Bryant, Fashion Bug, & Catherine's. (6) Trans World Entertainment operates FYE (formerly Camelot Music and Record Town) & Saturday Matinee. (7) Genesco Inc. operates Journey's, Jarman, & Underground Station. Genesco purchased Hat World, which operates Hat World, Lids, Hat Zone, and Cap Factory, as of April 2, 2004. (8) Sun Capital Partners, Inc. operates Sam Goody, Suncoast Motion Pictures, Musicland, Life Uniform, Anchor Blue, Mervyn's, Bruegger's Bagels, Wick's Furniture, and the Mattress Firm.
Our Growth Strategy Our objective is to achieve growth in funds from operations by maximizing cash flows through a variety of methods that are discussed below. Leasing, Management and Marketing Our objective is to maximize cash flows from our existing Properties through: |X| aggressive leasing that seeks to increase occupancy, |X| originating and renewing leases at higher base rents per square foot compared to the previous lease, |X| merchandising, marketing and promotional activities and |X| aggressively controlling operating costs and tenant occupancy costs. 11 Expansions and Renovations We can create additional revenue by expanding a Property through the addition of department stores, mall stores and large format retailers. An expansion also protects the Property's competitive position within its market. As shown below, we completed six expansions during 2004 and will expand seven Properties in 2005:
Property Location GLA Opening Date ----------------------------------------- ---------------------------- ---------------- ----------------------- Completed in 2004: Arbor Place Mall (Rich's-Macy's) Douglasville, GA 140,000 September 2004 East Towne Mall Madison, WI 139,000 November 2004 West Towne Mall Madison, WI 94,000 November 2004 The Lakes Mall (Dick's Sporting Goods) Muskegon, MI 45,000 November 2004 Garden City Plaza Expansion Garden City, KS 26,500 March 2004 Coastal Way Spring Hill, FL 20,500 September 2004 465,000 Scheduled for 2005: Citadel Mall Charleston, SC 45,000 August 2005 Stroud Mall Stroudsburg, PA 4,500 August 2005 Fayette Mall Lexington, KY 144,000 October 2005 Burnsville Center Burnsville, MN 3,000 November 2005 CoolSprings Crossing Nashville, TN 10,000 March 2005 The District at Monroeville Mall Monroeville, PA 75,000 April 2005 Fashion Square Orange Park, FL 18,000 July 2005 299,500
Renovations usually include renovating existing facades, uniform signage, new entrances and floor coverings, updating interior decor, resurfacing parking lots and improving the lighting of interiors and parking lots. Renovations can result in attracting new retailers, increased rental rates and occupancy levels and in maintaining the Property's market dominance. As shown below, we renovated three Properties during 2004 and will renovate two Properties during 2005. Property Location --------------------------- --------------------------- Completed in 2004: Northwoods Mall North Charleston, SC Cherryvale Mall Rockford, IL Panama City Mall Panama City, FL Scheduled for 2005: CoolSprings Galleria Nashville, TN Fayette Mall Lexington, KY 12 Development of New Retail Properties In general, we seek development opportunities in middle-market trade areas that we believe are under-served by existing retail operations. These middle-markets must also have sufficient demographic trends to provide the opportunity to effectively maintain a competitive position. The following shows the new developments we opened during 2004 and those currently under construction:
Property Location GLA Opening Date -------------------------------------- ------------------------ ------------------ ----------------------- Opened in 2004: The Shoppes at Panama City Panama City, FL 56,000 February 2004 Coastal Grand-Myrtle Beach (50/50 joint venture) Myrtle Beach, SC 908,000 March 2004 Wilkes-Barre Township Marketplace Wilkes-Barre Township, PA 281,000 March 2004 Charter Oak Marketplace Hartford, CT 312,000 November 2004 ----------------- 1,557,000 ================= Currently under construction: Imperial Valley Mall (60/40 joint venture) El Centro, CA 754,000 March 2005 Hamilton Corner Chattanooga, TN 68,000 March 2005 Coastal Grand Crossing Myrtle Beach, SC 15,000 April 2005 Cobblestone Village at Royal Palm BeachRoyal Palm Beach, FL 225,000 June 2005 Chicopee Marketplace Chicopee, MA 156,000 September 2005 Southaven Towne Center Southaven, MS 420,000 October 2005 ------------------ 1,638,000 ==================
Our total investment in the Properties opened in 2004 was $89.5 and the total investment in the Properties we currently have under construction will be $106.2 million. Acquisitions We believe there is opportunity for growth through acquisitions of regional malls and other associated properties. We selectively acquire regional mall properties where we believe we can increase the value of the property through our development, leasing and management expertise. We acquired the following Properties during 2004:
Property Location GLA Date Acquired --------------------------------------- ------------------------ ------------------ ----------------------- Honey Creek Mall Terre Haute, IN 680,890 March 2004 Volusia Mall Daytona Beach, FL 1,064,768 March 2004 Greenbrier Mall Chesapeake, VA 889,683 April 2004 Fashion Square Orange Park, FL 27,286 April 2004 Chapel Hill Mall Akron, OH 861,653 May 2004 Chapel Hill Suburban Akron, OH 117,088 May 2004 Park Plaza Mall Little Rock, AR 546,500 June 2004 Monroeville Mall Monroeville, PA 1,128,747 July 2004 Monroeville Annex Monroeville, PA 229,588 July 2004 Northpark Mall Joplin, MO 991,076 November 2004 Mall del Norte Laredo, TX 1,198,199 November 2004 ------------------ 7,735,478 ==================
Risks Associated with Our Growth Strategy As with any strategy there are risks involved with our plan for growth. Such risks include, but are not limited to: development opportunities pursued may be abandoned; construction costs may exceed estimates; construction loans with full recourse to us may not be refinanced; proforma objectives, such as 13 occupancy and rental rates, may not be achieved; and the required approval by an anchor tenant, mortgage lender or joint venture partner for certain expansion/development activities may not be obtained. An unsuccessful development project could result in a loss greater than our investment. Insurance We carry a comprehensive blanket policy for liability, fire and rental loss insurance covering all of the Properties, with specifications and insured limits customarily carried for similar properties. The property and liability insurance policies on our Properties currently do not exclude loss resulting from acts of terrorism, whether foreign or domestic. We believe the Properties are adequately insured in accordance with industry standards. Environmental Matters Under various federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real estate may be liable for the costs of removal or remediation of petroleum, certain hazardous or toxic substances on, under or in such real estate. Such laws typically impose such liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such substances. The costs of remediation or removal of such substances may be substantial. The presence of such substances, or the failure to promptly remediate such substances, may adversely affect the owner's or operator's ability to lease or sell such real estate or to borrow using such real estate as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, regardless of whether such facility is owned or operated by such person. Certain laws also impose requirements on conditions and activities that may affect the environment or the impact of the environment on human health. Failure to comply with such requirements could result in the imposition of monetary penalties (in addition to the costs to achieve compliance) and potential liabilities to third parties. Among other things, certain laws require abatement or removal of friable and certain non-friable asbestos-containing materials in the event of demolition or certain renovations or remodeling. Certain laws regarding asbestos-containing materials require building owners and lessees, among other things, to notify and train certain employees working in areas known or presumed to contain asbestos-containing materials. Certain laws also impose liability for release of asbestos-containing materials into the air and third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with asbestos-containing materials. In connection with the ownership and operation of properties, we may be potentially liable for all or a portion of such costs or claims. All of our properties (but not properties for which we hold an option to purchase but do not yet own) have been subject to Phase I environmental assessments or updates of existing Phase I environmental assessments within approximately the last ten years. Such assessments generally consisted of a visual inspection of the properties, review of federal and state environmental databases and certain information regarding historic uses of the property and adjacent areas and the preparation and issuance of written reports. Some of the properties contain, or contained, underground storage tanks used for storing petroleum products or wastes typically associated with automobile service or other operations conducted at the properties. Certain properties contain, or contained, dry-cleaning establishments utilizing solvents. Where believed to be warranted, samplings of building materials or subsurface investigations were undertaken. At certain properties, where warranted by the conditions, we have developed and implemented an operations and maintenance program that establishes operating procedures with respect to asbestos-containing materials. The costs associated with the development and implementation of such programs were not material. We believe that our properties are in compliance in all material respects with all federal, state and local ordinances and regulations regarding the handling, discharge and emission of hazardous or toxic substances. We have not been notified by any governmental authority, and are not otherwise aware, of any material noncompliance, liability or claim relating to hazardous or toxic substances in connection with any of our present or former properties. We have not recorded in our financial statements any material liability in connection with environmental matters. Nevertheless, it is possible that the environmental assessments available to us do not reveal all potential environmental liabilities. It is also possible that subsequent investigations will identify 14 material contamination, that adverse environmental conditions have arisen subsequent to the performance of the environmental assessments, or that there are material environmental liabilities of which management is unaware. Moreover, no assurances can be given that (i) future laws, ordinances or regulations will not impose any material environmental liability or (ii) the current environmental condition of the properties has not been or will not be affected by tenants and occupants of the properties, by the condition of properties in the vicinity of the properties or by third parties unrelated to us, the Operating Partnership or the relevant property's partnership. The existence of any such environmental liability could have an adverse effect on our results of operations, cash flow and the funds available to us to pay dividends. Competition The Properties compete with various shopping facilities in attracting retailers to lease space. In addition, retailers at our properties face continued competition from discount shopping centers, outlet malls, wholesale clubs, direct mail, television shopping networks, the internet and other retail shopping developments. The extent of the retail competition varies from market to market. We work aggressively to attract customers through marketing promotions and campaigns. Seasonality Our business is somewhat seasonal in nature with tenant sales achieving the highest levels during the fourth quarter because of the holiday season. 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 entire year. Qualification as a Real Estate Investment Trust ("REIT") We intend to continue to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code, as amended (the "Code"). We generally will not be subject to federal income tax to the extent we distribute at least 90% of our REIT ordinary taxable income to our shareholders. If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax on our taxable income at regular corporate rates. Financial Information About Segments See Note 12 to the consolidated financial statements for information about our reportable segments. Employees CBL & Associates Properties, Inc. does not have any employees other than its statutory officers. Our Management Company currently employees 738 full-time and 621 part-time employees. None of our employees are represented by a union. Corporate Offices Our principal executive offices are located at CBL Center, 2030 Hamilton Place Boulevard, Suite 500, Chattanooga, Tennessee, 37421 and our telephone number is (423) 855-0001. Available Information There is additional information about us on our web site at www.cblproperties.com. Electronic copies of our Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any amendments to those reports, are available free of charge by visiting the "investor relations" section of our web site. These reports are posted as soon as reasonably practical after they are electronically filed with, or furnished to, the Securities and Exchange Commission. The information on the web site is not, and should not, be considered to be a part of this Form 10-K. 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. (a) Market Information ------------------ The New York Stock Exchange is the principal United States market in which our common stock is traded. The high and low sales prices for our common stock for each quarter of our two most recent fiscal years were as follows, as adjusted for the two-for-one stock split that occurred June 15, 2005: Quarter Ended High Low ------------------------------------------- ----------- ------------- 2004: March 31 $31.050 $27.725 June 30 $31.085 $22.895 September 30 $31.830 $26.405 December 31 $38.565 $30.395 2003: March 31 $20.635 $18.750 June 30 $22.570 $20.245 September 30 $25.380 $21.495 December 31 $28.755 $24.825 Holders ------- There were approximately 555 shareholders of record for our common stock as of March 7, 2005. Dividends Declared ------------------ The frequency and amounts of dividends declared and paid on the common stock for each quarter of our two most recent fiscal years were as follows, as adjusted for the two-for-one stock split that occurred June 15, 2005: Quarter Ended 2004 2003 ------------------------------------------ ------------ ---------- March 31 $ 0.3625 $0.3275 June 30 $ 0.3625 $0.3275 September 30 $ 0.3625 $0.3275 December 31 $0.40625 $0.3625 Future dividend distributions are subject to our actual results of operations, economic conditions and such other factors as our Board of Directors deems relevant. Our actual results of operations will be affected by a number of factors, including the revenues received from the Properties, our operating expenses, interest expense, the ability of the anchors and tenants at the Properties to meet their obligations and unanticipated capital expenditures. Securities Authorized For Issuance Under Equity Compensation Plans ------------------------------------------------------------------ See Part III, Item 12. Recent Sales Of Unregistered Securities' Use Of Proceeds From ------------------------------------------------------------- Registered Securities --------------------- None (b) None (c) None 16 Item 6. Selected Financial Data: The following table sets forth selected financial and operating information for CBL & Associates Properties, Inc. (the "Company") for each of the five years in the period ended December 31, 2004, which has been updated to reflect (i) the application of the requirements of Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," to the sale of five community centers in March 2005 that requires the results of operations of these community centers be retroactively reclassified as discontinued operations in all periods presented and (ii) the Company's two-for-one stock split effected in the form of a stock dividend that occurred on June 15, 2005.. The reclassification to discontinued operations of the results of operations of the five community centers has no effect on the reported net income available to common shareholders in any prior period. Refer to Note 1 of the Company's consolidated financial statements for a description of the two-for-one stock split and to Note 4 for discussion of the sale of the five community centers. The following information should be read in conjunction with the Company's consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this report. 17 (In thousands, except per share data)
Year Ended December 31, (2) ------------------------------------------------------------------- 2004 2003 2002 2001 2000 ----------- ----------- ----------- ----------- ------------ Total revenues $ 757,253 $ 664,312 $ 584,131 $ 534,424 $ 343,074 Total expenses 413,619 348,586 302,245 276,745 178,348 ----------- ----------- ----------- ----------- ------------ Income from operations 344,634 315,726 282,886 257,679 164,726 Interest income 3,355 2,485 1,853 1,891 2,644 Interest expense (177,219) (153,321) (142,908) (156,404) (95,677) Loss on extinguishment of debt - (167) (3,872) (13,558) (367) Gain on sales of real estate assets 29,272 77,765 2,804 10,649 15,978 Equity in earnings of unconsolidated affiliates 10,308 4,941 8,215 7,155 3,684 Minority interest in earnings: Operating partnership (85,186) (106,532) (64,251) (49,643) (28,507) Shopping center properties (5,365) (2,758) (3,280) (1,654) (1,504) ----------- ----------- ----------- ----------- ------------ Income before discontinued operations 118,799 138,139 81,447 56,115 60,977 Discontinued operations 2,312 6,000 3,459 4,793 4,745 ----------- ----------- ----------- ----------- ------------ Net income 121,111 144,139 84,906 60,908 65,722 Preferred dividends (18,309) (19,633) (10,919) (6,468) (6,468) ----------- ----------- ----------- ----------- ------------ Net income available to common shareholders $ 102,802 $ 124,506 $ 73,987 $ 54,440 $ 59,254 =========== =========== =========== =========== ============ Basic earnings per common share: Income before discontinued operations, net of preferred dividends $ 1.63 $ 1.98 $ 1.23 $ 0.98 $ 1.10 =========== =========== =========== =========== ============ Net income available to common shareholders $ 1.67 $ 2.08 $ 1.29 $ 1.07 $ 1.19 =========== =========== =========== =========== ============ Weighted average shares outstanding 61,602 59,872 57,380 50,716 49,762 Diluted earnings per common share: Income before discontinued operations, net of preferred dividends $ 1.57 $ 1.90 $ 1.19 $ 0.96 $ 1.09 =========== =========== =========== =========== ============ Net income available to common shareholders $ 1.61 $ 2.00 $ 1.25 $ 1.05 $ 1.18 =========== =========== =========== =========== ============ Weighted average shares and potential dilutive common shares outstanding 64,004 62,386 59,336 51,666 50,042 Dividends declared per common share $ 1.49375 $ 1.345 $ 1.16 $ 1.065 $ 1.02
December 31, (2) ------------------------------------------------------------------- 2004 2003 2002 2001 2000 ----------- ----------- ----------- ----------- ------------ BALANCE SHEET DATA: Net investment in real estate assets $4,894,780 $3,912,220 $3,611,485 $3,201,622 $ 2,040,614 Total assets 5,204,500 4,264,310 3,795,114 3,372,851 2,115,565 Total mortgage and other notes payable 3,371,679 2,738,102 2,402,079 2,315,955 1,424,337 Minority interests 566,606 527,431 500,513 431,101 174,665 Shareholders' equity 1,054,151 837,300 741,190 522,008 434,825 OTHER DATA: Cash flows provided by (used in): Operating activities $ 339,197 $ 274,349 $ 273,923 $ 213,075 $ 139,118 Investing activities (608,651) (312,366) (274,607) (201,245) (122,215) Financing activities 274,888 44,994 3,902 (6,877) (17,958) Funds From Operations (FFO) (1) of the Operating Partnership $ 310,405 $ 271,588 $ 235,474 $ 182,687 $ 137,132 FFO applicable to the Company 169,725 146,552 126,127 94,945 92,594 (1) Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations for the definition of FFO. FFO does not represent cash flow from operations as defined by accounting principles generally accepted in the United States and is not necessarily indicative of the cash available to fund all cash requirements. (2) Please refer to Notes 3 and 5 to the consolidated financial statements for a description of acquisitions and joint venture transactions that have impacted the comparability of the financial information presented.
18 Item 7: 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 annual report. Capitalized terms used, but not defined, in this Management's Discussion and Analysis of Financial Condition and Results of Operations have the same meanings as defined in the notes to the consolidated financial statements. 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 our 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 December 31, 2004, we owned controlling interests in 64 regional malls, 25 associated centers (each adjacent to a regional mall), 12 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 December 31, 2004, we owned non-controlling interests in five regional malls, one associated center and 48 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, two mall expansions, one open-air shopping center, two associated centers, one of which is owned in a joint venture, one associated center expansion, one associated center redevelopment and three community centers under construction as of December 31, 2004. The majority of our revenues is derived from leases with retail tenants and generally include minimum rents, percentage rents based on tenants' sales volumes and reimbursements from tenants for expenditures related to property operating expenses, real estate taxes and maintenance and repairs, as well as certain capital expenditures. We also generate revenues from sales of peripheral land at the properties and from sales of 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. We expanded our portfolio in 2004 with the acquisition of eight malls, two associated centers and a community center, representing a total investment of $950.0 million. We opened nine new developments totaling 1.9 million square feet, including the nearly 1.0 million square foot regional mall Coastal Grand-Myrtle Beach in Myrtle Beach, SC, which we own in a joint venture. We have approximately 2.0 million square feet of new developments, which represent over $185.0 million of net investment, that is scheduled to open during 2005. We also 19 added a total of 12 big box stores and eight anchor retailers to our malls, which have made positive contributions by strengthening the tenant mix of these properties. Results of Operations COMPARISON OF THE YEAR ENDED DECEMBER 31, 2004 TO THE YEAR ENDED DECEMBER 31, 2003 The following significant transactions impacted the consolidated results of operations for the year ended December 31, 2004, compared to the year ended December 31, 2003: |X| The acquisition of eight malls, two associated centers and one community center, and the opening of one new mall (which is accounted for using the equity method), one associated center and one community center during 2004. Additionally, 2004 was the first full year of operations for the six malls and two associated centers that were acquired during 2003 and the one associated center and two community centers that were opened in 2003. The properties opened or acquired during 2004 and 2003 are collectively referred to as the "New 2004 Properties" in this section and are as follows:
Property Location Date Acquired / Opened -------------------------------------------------------------------------------------------------- Acquisitions: Sunrise Mall Brownsville, TX April 2003 Sunrise Commons Brownsville, TX April 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 Daytona Beach, March 2004 Volusia Mall FL Greenbrier Mall Chesapeake, VA April 2004 Fashion Square Orange Park, FL April 2004 Chapel Hill Mall Akron, OH May 2004 Chapel Hill kron, OH May 2004 Suburban A Park Plaza Mall Little Rock, AR 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 New Developments: The Shoppes at Hamilton Place Chattanooga, TN May 2003 Cobblestone Village St. Augustine, FL May 2003 Waterford Commons Waterford, CT September 2003 Wilkes-Barre Township Marketplace Wilkes-Barre Township, PA March 2004 Coastal Grand-Myrtle Beach Myrtle Beach, SC March 2004 The Shoppes at Panama City Panama City, FL March 2004
|X| In October 2003, we sold 41 community centers to Galileo America. We sold six additional community centers to Galileo America in January 2004. Since we have continuing involvement with these properties through our ownership interest in Galileo America and our role as manager of the properties, the results of operations of these properties have not been reflected in discontinued operations. Therefore, the year ended December 31, 2003 includes results of operations for these properties through the dates they were sold. 20 |X| Effective January 1, 2004, we began to consolidate the results of operations of PPG Venture I Limited Partnership, which owns two community centers and one associated center (the "PPG Properties"), as a result of the adoption of a new accounting pronouncement. The PPG Properties were accounted for as unconsolidated affiliates using the equity method of accounting prior to January 1, 2004. |X| Properties that were in operation for the entire period during 2004 and 2003 are referred to as the "2004 Comparable Properties" in this section, except for the five community centers located in Michigan that were sold in March 2005, which are reflected as discontinued operations as discussed in Note 4 to our consolidated financial statements. Revenues The $92.9 million increase in revenues was primarily attributable to increases of $113.6 million from the New 2004 Properties, $7.5 million related to the PPG Properties and $4.1 million from the 2004 Comparable Properties. These increases were offset by a reduction in revenues of $42.5 million related to the community centers that were sold to Galileo America in October 2003 and January 2004. The increase in revenues of the 2004 Comparable Properties was driven by our ability to maintain high occupancy levels, while achieving an increase of 3.3% in rents from both new leases and lease renewals for comparable small shop spaces. An increase in management and leasing fees of $2.8 million received from Galileo America was the primary contributor to the $4.3 million increase in management, development and leasing fees. Other revenues increased $5.9 million due to growth of our taxable REIT subsidiary. Operating Expenses Property operating expenses including real estate taxes and maintenance and repairs, increased as a result of increases of $35.7 million from the New 2004 Properties and $2.2 million from the PPG Properties, offset by decreases of $9.4 million related to the community centers that were sold to Galileo America and $5.6 million in operating expenses of the 2004 Comparable Properties. The increase in depreciation and amortization expense resulted from increases of $29.0 million from the New 2004 Properties, $1.0 million related to the PPG Properties and $6.6 million from the 2004 Comparable Properties. These increases were offset by a decrease of $7.4 million related to the community centers that we sold to Galileo America in October 2003 and January 2004. The increase attributable to the 2004 Comparable Properties is due to ongoing capital expenditures for renovations, expansions, tenant allowances and deferred maintenance. General and administrative expenses increased $4.9 million during 2004. As a percentage of revenues, this was only a 0.1% increase over the comparable 2003 amount. General and administrative expenses were significantly impacted by an additional $1.1 million of expenses in 2004 related to compliance with Section 404 of the Sarbanes-Oxley Act of 2002. State tax expenses also increased $1.8 million as a result of our continued growth. The remainder of the increase is attributable to additional salaries and benefits for the personnel added to manage the properties acquired during 2004 and 2003 combined with annual compensation increases for existing personnel. We identified ten community centers and recorded a loss on impairment of real estate assets of $3.1 million to reduce the carrying value of these properties to their respective estimated fair values. The ten community centers include four community centers that we sold to Galileo America in January 2005, five community centers that we sold during the first quarter of 2005 and one community center that was sold for a loss during the fourth quarter of 2004. 21 Other Income and Expenses Interest expense increased $23.9 million primarily due to the debt on the New 2004 Properties and the PPG Properties, as well as the additional financings that were obtained on the 2004 Comparable Properties. The increase was offset by a reduction in interest expense related to the Galileo Transaction as well as normal principal amortization. The gain on sales of real estate assets of $29.3 million in 2004 included $26.8 million of gain related to the Galileo Transaction and $2.5 million of gain on sales of seven outparcels at various properties. Equity in earnings of unconsolidated affiliates increased by $5.4 million in 2004 as a result of our interest in Galileo America and the opening of Coastal Grand-Myrtle Beach in March 2004. We sold two community centers during 2004 for a gain on discontinued operations of $0.9 million. We sold one community center for a loss of $0.1 million, which was included in loss on impairment of real estate assets. We sold five community centers in March 2005 for which we recorded an impairment loss of $0.6 million in 2004. Operating income from discontinued operations decreased in 2004 because the properties were owned for a shorter period of time in 2004 than in 2003, and because 2003 includes the operations of properties that were sold during 2003. COMPARISON OF THE YEAR ENDED DECEMBER 31, 2003 TO THE YEAR ENDED DECEMBER 31, 2002 The following significant transactions impacted the consolidated results of operations for the year ended December 31, 2003, compared to the year ended December 31, 2002: |X| The acquisition of six malls and two associated centers and the opening of one new associated center and two new community centers during 2003. Additionally, there was a full year of operations in 2003 for three malls and one associated center that were acquired during 2002 and one associated center that was opened in 2002. The properties opened or acquired during 2003 and 2002 are collectively referred to as the "New 2003 Properties" and are as follows:
Property Location Date Acquired / Opened ---------------------------------------------------------------------------------------- Acquisitions: Richland Mall Waco, TX May 2002 Panama City Mall Panama City, FL May 2002 Westmoreland Mall Greensburg, PA December 2002 Westmoreland Crossing Greensburg, PA December 2002 Sunrise Mall Brownsville, TX April 2003 Sunrise Commons Brownsville, TX April 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 New Developments: Parkdale Crossing Beaumont, TX November 2002 The Shoppes at Hamilton Place Chattanooga, TN May 2003 Cobblestone Village St. Augustine, FL May 2003 Waterford Commons Waterford, CT September 2003
22 |X| The consolidation of a full year of operations for East Towne Mall, West Towne Mall and West Towne Crossing (the "Newly Consolidated Properties") in which we acquired the remaining ownership interest during December 2002. We had previously owned a non-controlling interest in these properties and had accounted for them using the equity method of accounting. |X| The sale of interests in 41 community centers to Galileo America in October 2003 ("the Galileo Transaction"). |X| Properties that were in operation for the entire period during 2003 and 2002 are referred to as the "2003 Comparable Properties" in this section, except for the five community centers located in Michigan that were sold in March 2005, which are reflected as discontinued operations as discussed in Note 4 to our consolidated financial statements. Revenues The $80.2 million increase in revenues was primarily attributable to increases of $44.7 million from the New 2003 Properties, $23.6 million from the Newly Consolidated Properties and $20.2 million from properties that were in operation for all of 2003 and 2002, offset by a reduction of $6.7 million from the Galileo Transaction. The increase in revenues at properties that were in operation for all of 2003 and 2002 was primarily driven by our ability to maintain high occupancy levels while achieving increases in rents from both new leases and lease renewals on comparable spaces. Additionally, our cost recovery ratio improved to 99.2% in 2003 compared to 91.4% in 2002 due primarily to the partial recovery of certain capital expenditures incurred in connection with the significant number of mall renovations completed during the past three years. Management, leasing and development fees decreased $1.6 million because of a reduction in fees related to the Newly Consolidated Properties. Operating Expenses Property operating expenses (including real estate taxes and maintenance and repairs) increased $19.7 million due to increases of $15.6 million from the New 2003 Properties and $7.0 million from the Newly Consolidated Properties, offset by a reduction of $2.9 million from the Galileo Transaction. The $19.4 million increase in depreciation and amortization expense resulted from increases of $9.2 million from the New 2003 Properties, $4.2 million from the Newly Consolidated Properties and $7.0 million from the comparable centers, which is primarily attributable to the 16 property renovations and expansions that were completed during 2003 and 2002. These increases were offset by a reduction of $1.0 million from the Galileo Transaction. General and administrative expenses increased $7.1 million because we had a lower level of development activity in 2003 than in 2002. As a result, we capitalized less in salaries of leasing and development personnel, which resulted in higher compensation expense. There were also additional salaries and benefits for the personnel added to manage the properties acquired during 2003 and 2002 combined with annual compensation increases for existing personnel. Other Income and Expenses Interest expense increased $10.4 million due to the debt on the New 2003 Properties and the Newly Consolidated Properties. We also refinanced $196.0 million of short-term, variable-rate debt with fixed-rate, non-recourse long-term debt with a higher interest rate. The increase was offset somewhat by a reduction in debt related to the Galileo Transaction and normal principal amortization. While converting to fixed-rate debt is dilutive in the short-term, it is consistent with our strategy of minimizing exposure to variable-rate debt when we can obtain fixed-rate debt on terms that are deemed favorable for the long-term. 23 The net gain on sales of real estate assets of $77.8 million in 2003 was primarily attributable to the $71.9 million gain recognized on the Galileo Transaction. The remaining $5.9 million of gain was related to gains on sales of 20 outparcels at various properties and sales of two options on potential development sites. Equity in earnings of unconsolidated affiliates decreased by $3.3 million in 2003 as a result of the Newly Consolidated Properties no longer being accounted for using the equity method. We sold six community centers during 2003 for a gain on discontinued operations of $4.0 million. Operating income from discontinued operations decreased in 2003 because the properties were owned for a shorter period of time in 2003 than in 2002, and because 2002 includes the operations of properties that were sold during 2002. 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 short-term rents 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 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:
Year Ended December 31, --------------------------------- 2004 2003 ----------------- --------------- Malls 90.4% 87.3% Associated centers 4.1% 3.8% Community centers 2.0% 7.4% Mortgages, office building and other 3.5% 1.5%
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 2.8% on a comparable per square foot basis to $314 per square foot for 2004 compared with $305 per square foot for 2003. Occupancy costs as a percentage of sales for the stabilized malls were 12.0% and 12.2% for 2004 and 2003, respectively. Occupancy Total portfolio occupancy increased 90 basis points to 94.0%. Since June 2003, we experienced 118 store closings, totaling approximately 457,000 square feet and representing approximately $8.1 million in annual minimum base rent. As of December 31, 2004, we had re-leased approximately 217,000 square feet of this space at rents per square foot that are 3.5% higher than the previous rent and at comparable rents based on total annual base rent. Our portfolio occupancy is summarized in the following table: 24
December 31, --------------------------------- 2004 2003 ----------------- --------------- Total portfolio 94.0% 93.1% Total mall portfolio 94.3% 94.2% Stabilized malls 94.4% 94.4% Non-stabilized malls 92.8% 87.7% Associated centers 91.8% 88.4% Community centers (1) 94.0% 89.6% (1) Excludes the community centers that were sold in Phases I and II of the Galileo Transaction
Leasing Average annual base rents per square foot were as follows for each property type:
December 31, ------------------------------------ 2004 2003 ----------------- ------------------ Stabilized malls $25.60 $25.03 Non-stabilized malls 26.33 25.82 Associated centers 9.77 9.90 Community centers (1) 8.12 8.29 (1) Excludes the community centers that were sold in Phases I and II of the Galileo Transaction.
During 2004, we achieved positive results from new and renewal leasing of comparable small shop space during 2004 for spaces that were previously occupied as summarized in the following table:
New Prior New PSF Base Square PSF PSF Base % Change Rent - % Change Feet Base Rent Rent - Initial Initial Average Average ----------- ------------- ------------------------- ------------ --------- Stabilized malls 1,982,406 $25.13 $25.40 1.1% $25.95 3.3% Associated centers 46,805 13.03 12.98 (0.4)% 13.03 0.00% Community centers (1) 53,330 10.16 10.77 6.0% 10.82 6.5% ----------- ------------- ------------------------- ------------ --------- TOTAL 2,082,541 $24.47 $24.78 1.1% $25.27 3.3% (1) Excludes the community centers that were sold in Phases I and II of the Galileo Transaction.
Liquidity and Capital Resources There was $25.8 million of unrestricted cash and cash equivalents as of December 31, 2004, an increase of $5.4 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 provided by operating activities increased $64.8 million to $339.2 million for the year ended December 31, 2004. The increase was primarily attributable to the operations of the New 2004 Properties and improved results at the 2004 Comparable Properties. 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): 25
Weighted Average Minority Unconsolidated Interest Consolidated Interests Affiliates Total Rate(1) -------------- ---------------- ----------------- --------------- --------------- December 31, 2004: Fixed-rate debt: Non-recourse loans on operating properties $ 2,688,186 $(52,914) $ 104,114 $2,739,386 6.35% -------------- ---------------- ----------------- --------------- --------------- Variable-rate debt: Recourse term loans on operating properties 207,500 -- 29,415 236,915 3.40% 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% ============== ================ ================= =============== =============== 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 including the effect of debt premiums, but excluding amortization of deferred financing costs.
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 we have three one-year extension options. 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 December 31, 2004, total outstanding borrowings of $39.9 million under the new credit facility had a weighted average interest rate of 3.54%. We currently have four secured lines of credit with total availability of $483.0 million that are used for construction, acquisition and working capital purposes. Each of these lines is secured by mortgages on certain of our operating properties. There were total borrowings of $421.5 million outstanding at a weighted average interest rate of 3.36% as of December 31, 2004. 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 $12.3 million outstanding under these lines at December 31, 2004. We obtained a $57.3 million, nonrecourse loan secured by Eastgate Mall in Cincinnati, OH that bears interest at 4.55% and matures in December 2009. We assumed $304.6 million of debt and obtained an additional $272.6 million of debt to fund the acquisitions completed during 2004. The assumed loans bear interest at stated fixed rates ranging from 5.73% to 8.69% and mature at various dates from March 2009 to December 2014. Since the stated interest rates on the fixed-rate loans were above market rates for similar debt instruments as of the respective dates of acquisition, debt premiums of $19.5 million were recorded to reflect the assumed debt at estimated fair values. Including the effect of the related debt premiums, the effective interest rates on the assumed loans range from 4.75% to 5.50%. The additional loans include $159.2 million of loans that bear interest at LIBOR plus 100 basis points and mature in April 2006 and May 2006, and a fixed-rate, interest-only, nonrecourse loan of $113.4 million that bears interest at 5.04% and matures in December 2014. 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 December 31, 2004. Additionally, certain property-specific mortgage notes payable require the maintenance of debt 26 service coverage ratios on their respective properties. At December 31, 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 $67.7 million of debt that is scheduled to mature in 2005. There are extension options in place to extend the maturity of $30.0 million of this debt to 2006. We repaid $10.6 million of these loans subsequent to December 31, 2004, and expect to repay the remaining $27.1 million of maturing loans. Equity On December 13, 2004, we issued 7,000,000 depositary shares in a public offering, each representing one-tenth of a share of 7.375% Series D Cumulative Redeemable Preferred Stock (the "Series D Preferred Stock") with a liquidation preference of $250.00 per share ($25.00 per depositary share). The dividends on the Series D Preferred Stock are cumulative, accrue from the date of issuance and are payable quarterly in arrears at a rate of $18.4375 per share ($1.84375 per depositary share) per annum. The Series D Preferred Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption, and is not redeemable before December 13, 2009. The net proceeds of $169.3 million were used to reduce outstanding borrowings on our credit facilities. We received $15.8 million in proceeds from issuances of common stock during 2004 from exercises of employee stock options, our dividend reinvestment plan and our employee stock purchase plan. During 2004, we paid dividends of $106.9 million to holders of our common stock and our preferred stock, as well as $78.5 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 $272.0 million remains after the Series D Preferred Stock offering. 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 our equity, our debt-to-total-market capitalization (debt plus market-value equity) ratio was as follows at December 31, 2004 (in thousands, except stock prices):
Shares Outstanding Stock Price (1) Value ------------------ ----------------- ----------------- Common stock and operating partnership units 113,928 $38.175 $4,349,201 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 4,739,201 Our share of total debt 3,491,787 ----------------- Total market capitalization $8,230,988 ================= Debt-to-total-market capitalization ratio 42.4% ================= (1) The number of shares of common stock and operating partnership units outstanding reflects the effect of the two-for-one stock split that occurred on June 15, 2005, which is discussed in Note 1 to our consolidated financial statements. The stock price for common stock and operating partnership units equals the closing price of our common stock on December 31, 2004 as adjusted for the two-for-one stock split that occurred on June 15, 2005. The stock price for the preferred stock represents the liquidation preference of each respective series of preferred stock.
27 Contractual Obligations The following table summarizes our significant contractual obligations as of December 31, 2004 (dollars in thousands):
Payments Due By Period ----------------------------------------------------------------- Less Than 1 - 3 3 - 5 More Than Total 1 Year Years Years 5 Years ------------- ------------ ------------ ----------- ------------- Long-term debt: Total consolidated debt service (1) $4,230,608 $323,641 $1,347,226 $1,039,637 $1,520,104 Minority investors' share in shopping center properties (74,803) (4,886) (15,194) (16,198) (38,525) Our share of unconsolidated affiliates debt service (2) 188,465 13,466 64,838 31,960 78,201 ------------- ------------ ------------ ----------- ------------- Our share of total debt service obligations 4,344,270 332,221 1,396,870 1,055,399 1,559,780 ------------- ------------ ------------ ----------- ------------- Operating leases: (3) Ground leases on consolidated properties 40,002 1,320 2,674 2,695 33,313 Minority investors' share in shopping center properties (423) (31) (65) (71) (256) Our share of ground leases on unconsolidated affiliates 5,295 64 128 129 4,974 ------------- ------------ ------------ ----------- ------------- Our share of total ground lease obligations 44,874 1,353 2,737 2,753 38,031 ------------- ------------ ------------ ----------- ------------- Purchase obligations: (4) Construction contracts on consolidated properties 34,145 34,145 - - - Minority investors' share in shopping center properties (60) (60) - - - Our share of construction contracts of unconsolidated affiliates 7,631 7,631 - - - ------------- ------------ ------------ ----------- ------------- Our share of total construction contracts 41,716 41,716 - - - ------------- ------------ ------------ ----------- ------------- Other long-term liabilities: Master lease obligation to Galileo America (5) 3,789 883 1,159 778 969 ------------- ------------ ------------ ----------- ------------- Total contractual obligations $4,434,649 $376,173 $1,400,766 $1,058,930 $1,598,780 ============= ============ ============ =========== ============= (1) Represents principal and interest payments due under terms of mortgage and other notes payable and includes $683,493 of variable-rate debt on six operating properties, four secured credit facilities and one unsecured credit facility. The variable-rate loans on the six operating properties call for payments of interest only with the total principal due at maturity. The credit facilities do not require scheduled principal payments. The future contractual obligations for all variable-rate indebtedness reflect payments of interest only throughout the term of the debt with the total outstanding principal at December 31, 2004 due at maturity. The future interest payments are projected based on the interest rates that were in effect at December 31, 2004. See Note 6 to the consolidated financial statements for additional information regarding the terms of long-term debt. (2) Includes $68,908 of variable-rate indebtedness. Future contractual obligations have been projected using the same assumptions as used in (1) above. (3) Obligations where we own the buildings and improvements, but lease the underlying land under long-term ground leases. The maturities of these leases range from 2006 to 2091 and generally provide for renewal options. Renewal options have not been included in the future contractual obligations. (4) Represents the remaining balance to be incurred under construction contracts that had been entered into as of December 31, 2004, but were not complete. The contracts are primarily for development, renovation and expansion of properties. (5) See Note 5 to the consolidated financial statements for a description of the master lease obligation to Galileo America. The future contractual obligations shown above only include the remaining obligation that was recorded in the consolidated balance sheet at December 31, 2004.
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 activities unless adequate sources of financing are available and we can achieve satisfactory returns on our investments. 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. 28 Developments and Expansions The following is a summary of the projects currently under construction (dollars in thousands):
Our Share of Gross Our Cost As of Scheduled Leasable Share of December 31, Opening Property Location Area Total Cost 2004 Date ----------------------------------------------------------------------------------------------------------------------- New Mall Developments: Imperial Valley Mall (60/40 joint venture) El Centro, CA 754,000 $ 45,538 $38,536 March 2005 Mall Expansions: Citadel Mall Charleston, SC 45,000 6,389 156 August 2005 Fayette Mall Lexington, KY 144,000 25,532 4,793 October 2005 Open Air Center: Southaven Towne Center Southaven, MS 420,000 24,655 19,427 October 2005 Associated Centers: CoolSprings Crossing - Tweeters Nashville, TN 10,000 1,415 31 March 2005 Hamilton Corner Chattanooga, TN 68,000 5,500 2,472 March 2005 The District at Monroeville Mall Monroeville, PA 75,000 20,588 9,724 April 2005 Coastal Grand Crossing Myrtle Beach, SC 15,000 1,946 -- April 2005 Community Centers: Cobblestone Village at Royal Palm Royal Palm, FL 225,000 8,784 4,194 June 2005 Chicopee Marketplace Chicopee, MA 156,000 19,743 5,094 August 2005 Fashion Square Orange Park, FL 18,000 2,031 218 July 2005 ----------------------------------------- 1,930,000 $ 162,121 $84,645 =========================================
There are construction loans in place for the costs of the new mall and open-air center developments. 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 and community centers. Except for the projects listed in the above table, we do not have any other material capital commitments. Acquisitions We acquired eight malls, two associated centers and a community center during 2004 for an aggregate purchase price of $950.0 million, including transaction costs. We paid $587.2 million in cash, assumed $304.6 million of debt, agreed to pay $12.0 million for land at a future date and issued limited partnership interests in our Operating Partnership valued at $46.2 million to fund these acquisitions. The cash portions of the purchase prices were funded with borrowings under our credit facilities and the three new loans totaling $272.6 million. These acquisitions are expected to generate an initial weighted-average, unleveraged return of 7.68%. Dispositions During 2004, we generated aggregate net proceeds of $113.6 million from the Galileo Transaction, the sales of four community centers and one community center expansion and the sales of nine outparcels. The net proceeds were used to reduce borrowings under our credit facilities. In January 2005, we sold two power centers, one community center and a community center expansion to Galileo America. The net proceeds of $42.5 million were used to reduce outstanding balances under our lines of credit. In March 2005, we sold five community centers for an aggregate sales price of $12.1 million. We recognized an aggregate loss on impairment of real estate assets of $0.6 million on these community centers in December 2004 and recognized an additional loss on impairment of less than $0.1 million during the three months ended March 31, 2005 29 Other Capital Expenditures Including our share of unconsolidated affiliates' capital expenditures, we spent $37.4 million in 2004 for tenant allowances, which generate increased rents from tenants over the terms of their leases. Deferred maintenance expenditures were $17.5 million for 2004 and included $6.0 million for resurfacing and improved lighting of parking lots, $5.1 million for roof repairs and replacements and $6.4 million for various other expenditures. Renovation expenditures were $21.1 million in 2004. Deferred maintenance expenditures are 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. We expect to renovate two malls during 2005 at a total estimated cost of $28.0 million, which will be funded from operating cash flows and availability under our credit facilities. One of the renovation projects will be completed in 2005 and the other will be completed in 2006. Off-Balance Sheet Arrangements Unconsolidated Affiliates We have ownership interests in nine unconsolidated affiliates that are described in Note 5 to the consolidated financial statements. The unconsolidated affiliates are accounted for using the equity method of accounting and are reflected in the consolidated balance sheets as "Investments in Unconsolidated Affiliates." The following are circumstances when we may consider entering into a joint venture with a third party: |X| Third parties may approach us with opportunities where they have obtained land and performed some pre-development activities, but they may not have sufficient access to the capital resources or the development and leasing expertise to bring the project to fruition. We enter into such arrangements when we determine such a project is viable and we can achieve a satisfactory return on our investment. We typically earn development fees from the joint venture and provide management and leasing services to the property once it is placed in operation. |X| We determine that we may have the opportunity to capitalize on the value we have created in a property by selling an interest in the property to a third party. This provides us with an additional source of capital that can be used to develop or acquire additional real estate assets that we believe will provide greater potential for growth. When we retain an interest in an asset rather than selling a 100% interest, it is typically because this allows us to continue to manage the property, which provides us the ability to earn fees for management, leasing, development, financing and acquisition services provided to the joint venture. Guarantees We have guaranteed 100% of the debt to be incurred to develop the property owned by Imperial Valley Mall L.P. and 50% of the debt of Parkway Place L.P. We have issued these guarantees primarily because it allows the joint ventures to obtain funding at a lower cost than could be obtained otherwise. This results in a higher return for the joint venture on its investment, and in a higher return on our investment in the joint venture. We may receive a fee from the joint venture for providing the guaranty. Additionally, when we are required to perform under a guaranty, the terms of the guaranty typically provide that the joint venture partners' interests in the joint venture is assigned to us, to the extent of our guaranty. 30 We had guaranteed the debt incurred to develop the property owned by Mall of South Carolina L.P. and had received a fee for the guaranty. This debt was refinanced during 2004 by Mall of South Carolina L.P. and, as a result, the guaranty was terminated. We recognized revenues of $0.5 million and $0.2 million related to this guaranty during 2004 and 2003, respectively. The Company's guarantees and the related accounting are more fully described in Note 17 to the consolidated financial statements. Critical Accounting Policies Our significant accounting policies are disclosed in Note 2 to the consolidated financial statements. The following discussion describes our most critical accounting policies, which are those that are both important to the presentation of our financial condition and results of operations and that require significant judgment or use of complex estimates. Revenue Recognition Minimum rental revenue from operating leases is recognized on a straight-line basis over the initial terms of the related leases. Certain tenants are required to pay percentage rent if their sales volumes exceed thresholds specified in their lease agreements. Percentage rent is recognized as revenue when the thresholds are achieved and the amounts become determinable. We receive reimbursements from tenants for real estate taxes, insurance, common area maintenance, and other recoverable operating expenses as provided in the lease agreements. Tenant reimbursements are recognized as revenue in the period the related operating expenses are incurred. Tenant reimbursements related to certain capital expenditures are billed to tenants over periods of 5 to 15 years and are recognized as revenue when billed. We receive management, leasing and development fees from third parties and unconsolidated affiliates. Management fees are charged as a percentage of revenues (as defined in the management agreement) and are recognized as revenue when earned. Development fees are recognized as revenue on a pro rata basis over the development period. Leasing fees are charged for newly executed leases and lease renewals and are recognized as revenue when earned. Development and leasing fees received from unconsolidated affiliates during the development period are recognized as revenue to the extent of the third-party partners' ownership interest. Fees to the extent of our ownership interest are recorded as a reduction to our investment in the unconsolidated affiliate. Gains on sales of real estate assets are recognized when it is determined that the sale has been consummated, the buyer's initial and continuing investment is adequate, our receivable, if any, is not subject to future subordination, and the buyer has assumed the usual risks and rewards of ownership of the asset. When we have an ownership interest in the buyer, gain is recognized to the extent of the third party partner's ownership interest and the portion of the gain attributable to our ownership interest is deferred. Real Estate Assets We capitalize predevelopment project costs paid to third parties. All previously capitalized predevelopment costs are expensed when it is no longer probable that the project will be completed. Once development of a project commences, all direct costs incurred to construct the project, including interest and real estate taxes, are capitalized. Additionally, certain general and administrative expenses are allocated to the projects and capitalized based on the amount of time applicable personnel work on the development project. Ordinary repairs and maintenance are expensed as incurred. Major replacements and improvements are capitalized and depreciated over their estimated useful lives. 31 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 and (ii) 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. The amortization of above- and below-market leases is recorded as an adjustment to minimum rental revenue, while the amortization of all other lease-related intangibles is recorded as amortization expense. 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 is charged to operations. We recorded losses on the impairment of real estate assets of $3,080 in 2004, which are discussed in Note 2 to the consolidated financial statements. There were no impairment charges in 2003 and 2002. Recent Accounting Pronouncements Effective January 1, 2004, we adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation ("FIN") No. 46(R), "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. We determined that one unconsolidated affiliate, PPG Venture I Limited Partnership ("PPG"), is a variable interest entity and that we are the primary beneficiary. We began consolidating the assets, liabilities and results of operations of PPG effective January 1, 2004. We 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 FIN 46(R) had been effective when we first met the conditions to be the primary beneficiary, which was the inception of PPG. We own a 10% interest in PPG, which owns one associated center and two community centers. In May 2003, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity," which specifies that instruments within its scope are obligations of the issuer and, therefore, the issuer must classify them as liabilities. Financial instruments within the scope of the pronouncement include mandatorily redeemable financial instruments, obligations to repurchase the issuer's equity shares by transferring assets, and certain obligations to issue a variable number of shares. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003. However, on October 29, 2003, the FASB indefinitely deferred the provisions of paragraphs 9 and 10 of SFAS No. 150 related to noncontrolling interests in limited-life subsidiaries. During 2004, the joint venture agreements with minority interest partners were amended so that they no longer have a limited life. 32 In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB No. 29, Accounting for Nonmonetary Transactions." SFAS No. 153 requires exchanges of productive assets to be accounted for at fair value, rather than at carryover basis, unless (1) neither the asset received nor the asset surrendered has a fair value that is determinable within reasonable limits or (2) the transactions lack commercial substance. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not expect the adoption of this standard to have a material effect on our financial position or results of operations. 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. Adoption of SFAS No. 123(R) is required for fiscal periods beginning after June 15, 2005. We 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. We do not expect the adoption of this standard to have a material effect on our financial position or results of operations. Impact of Inflation In the last three years, inflation has not had a significant impact on our operations because of the relatively low inflation rate. Substantially all tenant leases do, however, contain provisions designed to protect us from the impact of inflation. These provisions include clauses enabling us to receive percentage rent based on tenants' 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 10 years which may provide us the opportunity to replace existing leases with new leases at higher base and/or percentage rent if rents of the existing leases are below the then existing market rate. Most of the leases require the tenants to pay their share of operating expenses, including common area maintenance, real estate taxes and insurance, which reduces our 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 compute FFO 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. 33 FFO increased 14.3% in 2004 to $310.4 million compared to $271.6 million in 2003. The New 2004 Properties generated 69% of the growth in FFO. Consistently high portfolio occupancy, increases in rental rates from new and renewal leasing and increased recoveries of operating expenses primarily accounted for the remaining 31% growth in FFO. The calculation of FFO is as follows (in thousands):
Year Ended December 31, ------------------------------------------------------------------ 2004 2003 2002 ------------------------------------------------------------------ Net income available to common shareholders $ 102,802 $ 124,506 $ 73,987 Add: Depreciation and amortization from consolidated properties 142,043 112,857 93,589 Depreciation and amortization from unconsolidated affiliates 6,144 4,307 4,490 Depreciation and amortization from discontinued operations 587 934 1,370 Minority interest in earnings of operating partnership 85,186 106,532 64,251 Less: Gains on sales of operating real estate assets (23,696) (71,886) - Minority investors' share of depreciation and amortization (1,230) (1,111) (1,348) Gain on discontinued operations (845) (4,042) (372) Depreciation and amortization of non-real estate assets (586) (508) (493) ------------- ------------- ------------ Funds from operations $ 310,405 $ 271,589 $ 235,474 ============= ============= =========== FFO applicable to our shareholders $ 169,725 $ 146,552 $ 126,127 ============= ============= =========== SUPPLEMENTAL FFO INFORMATION: Lease termination fees $ 3,864 $ 4,552 $ 5,888 Straight-line rental income $ 2,688 $ 3,908 $ 4,348 Gains on outparcel sales $ 3,449 $ 6,195 $ 2,483 Amortization of acquired above- and below-market leases $ 3,656 $ 332 $ - Amortization of debt premiums $ 5,418 $ 646 $ - Gain on sales of nonoperating properties $ 4,285 $ - $ - Loss on impairment of real estate assets $ (3,080) $ - $ -
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Reference is made to the Index to Financial statements contained in Item 15 on page 36. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (1) Financial Statements Page Number Report of Management on Internal Control Over Financial Reporting 37 Report Of Independent Registered Public Accounting Firm 39 CBL & Associates Properties, Inc. Consolidated Balance Sheets as of December 31, 2004 and 2003 40 34 CBL & Associates Properties, Inc. Consolidated Statements of Operations for the Years Ended December 31, 2004, 2003 and 2002 41 CBL & Associates Properties, Inc. Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2004, 2003 and 2002 42 CBL & Associates Properties, Inc. Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002 43 Notes to Consolidated Financial Statements 44 35 INDEX TO FINANCIAL STATEMENTS Report of Management on Internal Control Over Financial Reporting 37 Report Of Independent Registered Public Accounting Firm 39 CBL & Associates Properties, Inc. Consolidated Balance Sheets as of December 31, 2004 and 2003 40 CBL & Associates Properties, Inc. Consolidated Statements of Operations for the Years Ended December 31, 2004, 2003 and 2002 41 CBL & Associates Properties, Inc. Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2004, 2003 and 2002 42 CBL & Associates Properties, Inc. Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002 43 Notes to Consolidated Financial Statements 44 36 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of CBL & Associates Properties, Inc.: We have audited management's assessment, included in the Report of Management on Internal Control over Financial Reporting (that was included in CBL & Associates Properties, Inc. Form 10-K for the year ended December 31, 2004), that CBL & Associates Properties, Inc. and subsidiaries (the "Company") maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment (not presented herein) that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. 37 We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedules as of and for the year ended December 31, 2004 of the Company and our report dated March 16, 2005, except for the effect of Note 23 as to which the date is January 9, 2006, expressed an unqualified opinion on those financial statements and financial statement schedules. /s/ DELOITTE & TOUCHE LLP Atlanta, Georgia March 16, 2005 38 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of CBL & Associates Properties, Inc.: We have audited the accompanying consolidated balance sheets of CBL & Associates Properties, Inc. and subsidiaries (the "Company") as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedules (that were included in CBL & Associates Properties, Inc. Form 10-K for the year ended December 31, 2004). These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of CBL and Associates Properties, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 16, 2005 expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. /s/ DELOITTE & TOUCHE LLP Atlanta, Georgia March 16, 2005, except for the effect of Note 23 as to which the date is January 9, 2006 39 CBL & Associates Properties, Inc. Consolidated Balance Sheets (In thousands, except share data)
December 31, --------------------------------------- ASSETS 2004 2003 --------------------------------------- Real estate assets: Land $ 659,782 $ 578,310 Buildings and improvements 4,670,462 3,678,074 --------------------------------------- 5,330,244 4,256,384 Accumulated depreciation (575,464) (467,614) --------------------------------------- 4,754,780 3,788,770 Real estate assets held for sale 61,607 64,354 Developments in progress 78,393 59,096 --------------------------------------- Net investment in real estate assets 4,894,780 3,912,220 Cash and cash equivalents 25,766 20,332 Cash in escrow - 78,476 Receivables: Tenant, net of allowance for doubtful accounts of $3,237 in 2004 and 2003 38,409 42,165 Other 13,706 3,033 Mortgage notes receivable 27,804 36,169 Investments in unconsolidated affiliates 84,782 96,450 Other assets 119,253 75,465 --------------------------------------- $5,204,500 $4,264,310 ======================================= LIABILITIES AND SHAREHOLDERS' EQUITY Mortgage and other notes payable $3,359,466 $2,709,348 Mortgage notes payable on real estate assets held for sale 12,213 28,754 Accounts payable and accrued liabilities 212,064 161,477 --------------------------------------- Total liabilities 3,583,743 2,899,579 --------------------------------------- Commitments and contingencies (Notes 3, 5 and 17) Minority interests 566,606 527,431 --------------------------------------- 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 7.375% Series D Cumulative Redeemable Preferred Stock, 700,000 shares outstanding in 2004 7 - Common stock, $.01 par value, 180,000,000 shares authorized, 62,667,104 and 60,646,952 shares issued and outstanding in 2004 and 2003, respectively 627 606 Additional paid-in capital 1,025,478 817,310 Deferred compensation (3,081) (1,607) Retained earnings 31,095 20,966 --------------------------------------- Total shareholders' equity 1,054,151 837,300 --------------------------------------- $5,204,500 $4,264,310 ======================================= The accompanying notes are an integral part of these balance sheets.
40 CBL & Associates Properties, Inc. Consolidated Statements of Operations (In thousands, except per share amounts)
Year Ended December 31, ---------------------------------------------- 2004 2003 2002 ---------------------------------------------- REVENUES: Minimum rents $ 476,578 $ 426,318 $ 379,243 Percentage rents 15,948 12,900 13,320 Other rents 16,102 12,633 11,013 Tenant reimbursements 218,736 192,760 159,407 Management, development and leasing fees 9,791 5,525 7,146 Other 20,098 14,176 14,002 ---------------------------------------------- Total revenues 757,253 664,312 584,131 ---------------------------------------------- EXPENSES: Property operating 115,173 102,909 92,454 Depreciation and amortization 142,043 112,857 93,418 Real estate taxes 58,081 51,340 46,831 Maintenance and repairs 43,531 39,596 34,903 General and administrative 35,338 30,395 23,332 Loss on impairment of real estate assets 3,080 - - Other 16,373 11,489 10,307 ---------------------------------------------- Total expenses 413,619 348,586 301,245 ---------------------------------------------- Income from operations 343,634 315,726 282,886 Interest income 3,355 2,485 1,853 Interest expense (177,219) (153,321) (142,908) Loss on extinguishment of debt - (167) (3,872) Gain on sales of real estate assets 29,272 77,765 2,804 Equity in earnings of unconsolidated affiliates 10,308 4,941 8,215 Minority interest in earnings: Operating Partnership (85,186) (106,532) (64,251) Shopping center properties (5,365) (2,758) (3,280) ---------------------------------------------- Income before discontinued operations 118,799 138,139 81,447 Operating income of discontinued operations 1,467 1,958 3,087 Gain on discontinued operations 845 4,042 372 ---------------------------------------------- Net income 121,111 144,139 84,906 Preferred dividends (18,309) (19,633) (10,919) ---------------------------------------------- Net income available to common shareholders $ 102,802 $ 124,506 $ 73,987 ============================================== Basic per share data: Income before discontinued operations, net of preferred dividends $ 1.63 $ 1.98 $ 1.23 Discontinued operations 0.04 0.10 0.06 ---------------------------------------------- Net income available to common shareholders $ 1.67 $ 2.08 $ 1.29 ---------------------------------------------- Weighted average common shares outstanding 61,602 59,872 57,380 ============================================== Diluted per share data: Income before discontinued operations, net of preferred dividends $ 1.57 $ 1.90 $ 1.19 Discontinued operations 0.04 0.10 0.06 Net income available to common shareholders $ 1.61 $ 2.00 $ 1.25 ---------------------------------------------- Weighted average common and potential dilutive common shares outstanding 64,004 62,386 59,336 ============================================== The accompanying notes are an integral part of these statements.
41 CBL & Associates Properties, Inc. Consolidated Statement Of Shareholders' Equity (In thousands, except share data)
Accumulated Retained Additional Other Earnings Preferred Common Paid-in Comprehensive Deferred (Accumulated Stock Stock Capital Loss Compensation Deficit) Total --------- ------ ---------- ------------- ----------- ------------ --------- Balance, December 31, 2001 $ 29 $ 513 $ 556,126 $ (6,784) $ - $(27,796) $ 522,088 Net income - - - - - 84,906 84,906 Gain on current period cash flow hedges - - - 4,387 - - 4,387 --------- Total comprehensive income 89,293 Dividends declared - common stock - - - - - (68,635) (68,635) Dividends declared - preferred stock - - - - - (10,919) (10,919) Issuance of 2,000,000 shares of Series B preferred stock 20 - 96,350 - - - 96,370 Purchase of 200,000 shares of Series A preferred stock (2) - (5,091) - - - (5,093) Issuance of 7,048,598 shares of common stock - 70 120,555 - - - 120,625 Exercise of stock options - 4 5,003 - - - 5,007 Accrual under deferred compensation arrangements - - 2,194 - - - 2,194 Conversion of Operating Partnership units into 893,304 shares of common stock - 9 7,154 - - - 7,163 Adjustment for minority interest in Operating Partnership - - (16,903) - - - (16,903) --------- ------ ---------- ------------- ----------- ------------ --------- Balance, December 31, 2002 47 596 765,388 (2,397) - (22,444) 741,190 Net income - - - - - 144,139 144,139 Gain on current period cash flow hedges - - - 2,397 - - 2,397 --------- Total comprehensive income 146,536 Dividends declared - common stock - - - - - (81,096) (81,096) Dividends declared - preferred stock - - - - - (17,453) (17,453) Issuance of 460,000 shares of Series C preferred stock 5 - 111,222 - - - 111,227 Redemption of 2,675,000 shares of Series A - preferred stock (27) - (64,668) - - (2,180) (66,875) Issuance of 405,676 shares of common stock - 4 8,753 - (1,855) - 6,902 Exercise of stock options - 6 7,756 - - - 7,762 Accrual under deferred compensation arrangements - - 618 - - - 618 Amortization of deferred compensation - - - - 248 - 248 Adjustment for minority interest in Operating Partnership - - (11,759) - - - (11,759) --------- ------ ---------- ------------- ----------- ------------ --------- Balance, December 31, 2003 25 606 817,310 - (1,607) 20,966 837,300 Net income and total comprehensive income - - - - - 121,111 121,111 Dividends declared - common stock - - - - - (92,678) (92,678) Dividends declared - preferred stock - - - - - (18,304) (18,304) Issuance of 700,000 shares of Series D preferred - stock 7 - 169,326 - - 169,333 Issuance of 169,962 shares of common stock - 2 4,526 - (2,129) - 2,399 Exercise of stock options - 14 15,254 - - - 15,268 Accrual under deferred compensation arrangements - - 776 - - - 776 Amortization of deferred compensation - - - - 655 - 655 Conversion of Operating Partnership units into 525,636 shares of common stock - 5 5,625 - - - 5,630 Adjustment for minority interest in Operating Partnership - - 12,661 - - - 12,661 --------- ------ ---------- ------------- ----------- ------------ --------- Balance, December 31, 2004 $32 $627 $1,025,478 $ - $ (3,081) $31,095 $1,054,151 ================================================================================ The accompanying notes are an integral part of theses statements.
42 CBL & Associates Properties, Inc. Consolidated Statements of Cash Flows (In thousands)
Year Ended December 31, -------------------------------------------- 2004 2003 2002 -------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $121,111 $144,139 $84,906 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest in earnings 90,551 109,331 67,554 Depreciation 100,667 85,584 74,501 Amortization 49,162 34,301 25,242 Amortization of debt premiums (5,262) (646) - Loss on extinguishment of debt - 167 3,930 Gain on sales of real estate assets (29,583) (77,775) (2,804) Gain on discontinued operations (845) (4,042) (372) Issuance of stock under incentive plan 1,870 1,876 2,578 Accrual of deferred compensation 776 618 2,194 Amortization of deferred compensation 655 248 - Write-off of development projects 3,714 2,056 236 Loss on impairment of real estate assets 3,080 - - Net amortization of above and below market leases (3,515) (311) - Changes in assets and liabilities: Tenant and other receivables (1,678) (9,773) (1,110) Other assets (3,413) (12,770) (6,089) Accounts payable and accrued liabilities 11,907 1,346 23,157 -------------------------------------------- Net cash provided by operating activities 339,197 274,349 273,923 -------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to real estate assets (219,383) (227,362) (176,799) Acquisitions of real estate assets and other assets (587,163) (273,265) (166,489) Proceeds from sales of real estate assets 113,565 284,322 84,885 Cash in escrow 78,476 (78,476) - Additions to mortgage notes receivable (9,225) (10,000) (5,965) Payments received on mortgage notes receivable 17,590 1,840 2,135 Distributions in excess of equity in earnings of unconsolidated affiliates 28,908 9,740 5,751 Additional investments in and advances to unconsolidated affiliates (27,112) (15,855) (15,394) Additions to other assets (4,307) (3,310) (2,731) -------------------------------------------- Net cash used in investing activities (608,651) (312,366) (274,607) -------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from mortgage and other notes payable 642,743 572,080 751,881 Principal payments on mortgage and other notes payable (355,651) (390,115) (815,444) Additions to deferred financing costs (6,029) (4,830) (5,589) Proceeds from issuance of common stock 529 5,026 118,047 Proceeds from exercise of stock options 15,268 7,762 5,007 Proceeds from issuance of preferred stock 169,333 111,227 96,370 Redemption of preferred stock - (64,695) - Purchase of preferred stock - - (5,093) Purchase of minority interest in the Operating Partnership (5,949) (21,013) - Prepayment penalties on extinguishment of debt - - (2,290) Distributions to minority interests (78,493) (72,186) (65,310) Dividends paid (106,863) (98,262) (73,677) -------------------------------------------- Net cash provided by financing activities 274,888 44,994 3,902 -------------------------------------------- Net change in cash and cash equivalents 5,434 6,977 3,218 Cash and cash equivalents, beginning of period 20,332 13,355 10,137 -------------------------------------------- Cash and cash equivalents, end of period $25,766 $20,332 $13,335 ============================================ The accompanying notes are an integral part of these statements.
43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share data) NOTE 1. ORGANIZATION 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 shopping 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 PartnershAs of December 31, 2004, the Operating Partnership owned controlling interests in 64 regional malls, 25 associated centers (each located adjacent to a regional mall), 12 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 48 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, the Operating Partnership does not control these partnerships and joint ventures and, accordingly, accounts for these investments using the equity method. The Operating Partnership had one mall, which is owned in a joint venture, two mall expansions, one open-air shopping center, two associated centers, one of which is owned in a joint venture, one associated center expansion, one associated center redevelopment and three community centers under construction at December 31, 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 December 31, 2004, CBL Holdings I, Inc., the sole general partner of the Operating Partnership, owned a 1.6% general partnership interest in the Operating Partnership and CBL Holdings II, Inc. owned a 53.4% limited partnership 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 partnership 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 a limited partnership interest 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 December 31, 2004, CBL's Predecessor owned a 15.4% limited partnership interest, Jacobs owned a 20.9% limited partnership interest and third parties owned an 8.7% limited partnership interest in the Operating Partnership. CBL's Predecessor also owned 2.7 million shares of CBL's common stock at December 31, 2004, for a combined total 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 Operating Partnership continues to consolidate the Management Company. 44 CBL, the Operating Partnership and the Management Company are collectively referred to herein as "the Company." All significant intercompany balances and transactions have been eliminated in the consolidated presentation. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Real Estate Assets The Company capitalizes 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 have been 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 Company allocates the purchase price to (i) tangible assets, consisting of land, buildings and improvements, and tenant improvements, and (ii) identifiable intangible assets, generally consisting of above- and below-market leases and in-place leases, which are included in other assets in the consolidated balance sheet. The Company uses estimates of fair value based on estimated cash flows, using appropriate discount rates, and other valuation techniques 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 for similar debt instruments 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. The amortization of above- and below-market leases is recorded as an adjustment to minimum rental revenue, while the amortization of all other lease-related intangibles is recorded as amortization expense. 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 Company's acquired intangibles and their balance sheet classifications as of December 31, 2004 and 2003, are summarized as follows:
December 31, 2004 December 31, 2003 ------------------------------- ------------------------------ Accumulated Accumulated Cost Amortization Cost Amortization --------------- ------------- -------------- ------------- Other assets: Above-market leases $ 12,250 $(1,335) $5,635 $ (270) In-place leases 53,850 (5,810) 19,945 (686) Accounts payable and accrued liabilities: Below-market leases 38,967 (4,870) 12,975 (539)
The total net amortization expense of the above acquired intangibles for the next five succeeding years will be $1,691 in 2005, $2,645 in 2006, $2,999 in 2007, $3,030 in 2008 and $2,371 in 2009. Total interest expense capitalized was $4,517, $5,974 and $5,109 in 2004, 2003 and 2002, respectively. 45 Carrying Value of Long-Lived Assets The Company evaluates the carrying value of long-lived assets to be held and used when events or changes in circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when its estimated future undiscounted cash flows are less than its carrying value. If it is determined that an impairment has occurred, the excess of the asset's carrying value over its estimated fair value is charged to operations. During 2004, the Company recognized a loss of $114 on the sale of one community center as a loss on impairment of real estate assets. During 2004, the Company determined that the carrying value of a vacant community center exceeded the community center's estimated fair value by $402. The Company recorded the reduction in the carrying value of the related real estate assets to their estimated fair value as a loss on impairment of real estate assets. Subsequent to December 31, 2004, the Company completed the third phase of the Galileo America joint venture transaction discussed in Note 5. The Company recognized a loss of $1,947 on this transaction as an impairment of real estate assets in 2004 and reduced the carrying value of the related assets, which are classified as real estate assets held for sale as of December 31, 2004 in the accompanying consolidated balance sheet. Subsequent to December 31, 2004, the Company reached a tentative agreement to sell five of its community centers. As a result, the Company recorded a loss on impairment of real estate assets of $617 in 2004 to reduce the carrying values of the five community centers to their respective estimated fair values based on the expected selling price. Since the Company determined that the properties were held for sale subsequent to December 31, 2004, the real estate assets related to these five community centers are reflected as held and used in the accompanying consolidated balance sheet. There were no impairment charges in 2003 and 2002. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less as cash equivalents. Deferred Financing Costs Net deferred financing costs of $13,509 and $10,808 were included in other assets at December 31, 2004 and 2003, respectively. Deferred financing costs include fees and costs incurred to obtain financing and are amortized to interest expense over the terms of the related notes payable. Amortization expense was $4,390, $3,268, and $4,114 in 2004, 2003 and 2002, respectively. Accumulated amortization was $7,815 and $5,030 as of December 31, 2004 and 2003, respectively. 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. The Company receives reimbursements from tenants for real estate taxes, insurance, common area maintenance, and other recoverable operating expenses as provided in the lease agreements. Tenant reimbursements are recognized as 46 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. The Company receives 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 only to the extent of the third-party partners' ownership interest. Development and leasing fees during the development period to the extent of the Company's ownership interest are recorded as a reduction to the Company's investment in the unconsolidated affiliate. Gain on Sales of Real Estate Assets 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, the Company's 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 the Company has 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 the Company's ownership interest is deferred. Income Taxes The Company is qualified as a REIT under the provisions of the Code. To maintain qualification as a REIT, the Company is required to distribute at least 90% of its taxable income to shareholders and meet certain other requirements. As a REIT, the Company is generally not liable for federal corporate income taxes. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal and state income taxes on its taxable income at regular corporate tax rates. Even if the Company maintains its qualification as a REIT, the Company may be subject to certain state and local taxes on its income and property, and to federal income and excise taxes on its undistributed income. State income taxes were not material in 2004, 2003 and 2002. The Company has also elected taxable REIT subsidiary status for some of its subsidiaries. This enables the Company to receive income and provide services that would otherwise be impermissible for REITs. For these entities, deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the temporary differences reverse. A valuation allowance for deferred tax assets is provided if the Company believes all or some portion of the deferred tax asset may not be realized. An increase or decrease in the valuation allowance that results from the change in circumstances that causes a change in our judgment about the realizability of the related deferred tax asset is included in income. The Company had a net deferred tax asset of $16,636 and $8,018 at December 31, 2004 and 2003, respectively, which consisted primarily of net operating loss carryforwards, that was reduced to zero by a valuation allowance because of uncertainty about the realization of the net deferred tax asset considering all available evidence. Derivative Financial Instruments The Company records derivative financial instruments as either an asset or liability measured at the instrument's fair value. Any fair value adjustments affect either shareholders' equity or net income depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity. See Note 15 for more information. Concentration of Credit Risk 47 The Company's tenants include national, regional and local retailers. Financial instruments that subject the Company to concentrations of credit risk consist primarily of tenant receivables. The Company generally does not obtain collateral or other security to support financial instruments subject to credit risk, but monitors the credit standing of tenants. The Company derives a substantial portion of its rental income from various national and regional retail companies; however, no single tenant collectively accounted for more than 10.0% of the Company's total revenues in 2004, 2003 and 2002. 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 (Note 9). The following summarizes the impact of potential dilutive common shares on the denominator used to compute earnings per share:
Year Ended December 31, -------------------------------------------------- 2004 2003 2002 ---------------- ----------------- --------------- Weighted average shares 61,878 60,108 57,586 Effect of nonvested stock awards (276) (236) (206) ---------------- ----------------- --------------- Denominator - basic earnings per share 61,602 59,872 57,380 Dilutive effect of stock options, nonvested stock awards and deemed shares related to deferred compensation arrangements 2,402 2,514 1,956 ---------------- ----------------- --------------- Denominator - diluted earnings per share 64,004 62,386 59,336 ================ ================= ===============
Stock-Based Compensation Historically, the Company accounted for its stock-based compensation plans, which are described in Note 19, under the recognition and measurement principles of Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB No. 25") and related interpretations. Effective January 1, 2003, the Company elected to begin recording the expense associated with stock options granted after January 1, 2003, on a prospective basis in accordance with the fair value and transition provisions of SFAS No. 123, "Accounting for Stock Based Compensation", as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB Statement No. 123." There were no stock options granted during the years ended December 31, 2004 and 2003. No stock-based compensation expense related to stock options granted prior to January 1, 2003, has been reflected in net income since all options granted had an exercise price equal to the fair value of the Company's common stock on the date of grant. Therefore, stock-based compensation expense included in net income available to common shareholders in 2004, 2003 and 2002 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:
Year Ended December 31, ------------------------------------------------- 2004 2003 2002 ---------------- ---------------- --------------- Net income available to common shareholders, as reported $102,802 $124,506 $73,987 Add: Stock-based employee compensation expense included in reported net income available to common shareholders 2,890 2,742 4,772 Less: Total stock-based compensation expense determined under fair value method (3,398) (3,344) (5,423) ---------------- ---------------- --------------- Pro forma net income available to common shareholders $102,294 $123,904 $73,336 ================ ================ =============== Earnings per share: Basic, as reported $ 1.67 $ 2.08 $ 1.29 ================ ================ =============== Basic, pro forma $ 1.66 $ 2.07 $ 1.28 ================ ================ =============== Diluted, as reported $ 1.61 $ 2.00 $ 1.25 ================ ================ =============== Diluted, pro forma $ 1.60 $ 1.99 $ 1.17 ================ ================ ===============
48 The fair value of each employee stock option grant during 2002 was estimated as of the date of grant using the Black-Scholes option pricing model and the following weighted average assumptions:
Year Ended December 31, ---------------------------- 2002 ------------ Risk-free interest rate 4.84% Dividend yield 6.83% Expected volatility 19.7% Expected life 7.0 years
The per share weighted average fair value of stock options granted during 2002 was $1.75. Comprehensive Income Comprehensive income includes all changes in shareholders' equity during the period, except those resulting from investments by shareholders and distributions to shareholders. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Recent Accounting Pronouncements Effective January 1, 2004, the Company adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. ("FIN") 46(R), "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 FIN 46(R) 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 December 31, 2004, PPG had non-recourse, fixed-rate debt of $37,795 that was secured by the real estate assets it owns, which had a net carrying value of $50,265. In May 2003, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity," which specifies that instruments within its scope are obligations of the issuer and, therefore, the issuer must classify them as liabilities. Financial instruments within the scope of the pronouncement include mandatorily redeemable financial instruments, obligations to repurchase the issuer's equity shares by transferring assets, and certain obligations to issue a variable number of shares. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003. However, on October 29, 2003, the FASB indefinitely deferred the provisions of paragraphs 9 and 10 of SFAS No. 150 related to noncontrolling interests in limited-life subsidiaries. During 2004, the joint venture agreements with minority interest partners were amended so that they no longer have a limited life. 49 In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB No. 29, Accounting for Nonmonetary Transactions." SFAS No. 153 requires exchanges of productive assets to be accounted for at fair value, rather than at carryover basis, unless (1) neither the asset received nor the asset surrendered has a fair value that is determinable within reasonable limits or (2) the transactions lack commercial substance. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect the adoption of this standard to have a material effect on its financial position or results of operations. 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. Adoption of SFAS No. 123(R) is required for fiscal periods 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 3. ACQUISITIONS The Company includes the results of operations of real estate assets acquired in the consolidated statement of operations from the date of the related acquisition. 2004 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, including transaction costs, of $78,252. 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. 50 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 1,560,940 special common units in the Operating Partnership with a fair value of $46,212 ($29.605 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. On November 22, 2004, the Company acquired Mall del Norte in Laredo, TX for a cash purchase price, including transaction costs, of $170,413. The purchase price was partially financed with a new non-recourse, interest-only loan of $113,400 that bears interest at 5.04% and matures in December 2014. On November 22, 2004, the Company acquired Northpark Mall in Joplin, MO for a purchase price, including transaction costs, of $79,141. The purchase price consisted of $37,619 in cash and the assumption of $41,522 of non-recourse debt that bears interest at a stated rate of 5.75% and matures in March 2014. The Company recorded a debt premium of $687, computed using an estimated market interest rate of 5.50%, since the debt assumed was at an above-market interest rate compared to similar debt instruments at the date of acquisition. The results of operations of the acquired properties have been included in the consolidated financial statements since their respective dates of acquisition. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the respective acquisition dates during the year ended December 31, 2004:
Land $ 81,673 Buildings and improvements 872,855 Above-market leases 8,329 In-place leases 33,921 -------------- Total assets 996,778 Mortgage note payables assumed (304,646) Premiums on mortgage note payables assumed (19,455) Below-market leases (27,352) Land purchase obligation (11,950) -------------- Net assets acquired $ 633,375 ==============
The following unaudited pro forma financial information is for the years ended December 31, 2004 and 2003. It presents the results of the Company as if each of the 2004 acquisitions had occurred on January 1, 2003. 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, 2003. The pro forma financial information also does not project the consolidated results of operations for any future period. The pro forma results for 2004 and 2003 are as follows: 51
2004 2003 -------------- ---------------- Total revenues $ 812,782 $780,324 Total expenses (446,784) (415,189) -------------- ---------------- Income from operations $ 365,998 $ 365,135 ============== ================ Income before discontinued operations $ 121,040 $ 145,196 ============== ================ Net income available to common shareholders $ 105,043 $ 131,563 ============== ================ Basic per share data: Income before discontinued operations, net of preferred dividends $ 1.67 $ 2.10 Net income available to common shareholders $ 1.71 $ 2.20 Diluted per share data: Income before discontinued operations, net of preferred dividends $ 1.61 $ 2.01 Net income available to common shareholders $ 1.64 $ 2.11
2003 Acquisitions On April 30, 2003, the Company acquired Sunrise Mall and its associated center, Sunrise Commons, which are located in Brownsville, TX. The total purchase price, including transaction costs, of $80,686 consisted of $40,686 in cash and the assumption of $40,000 of variable-rate debt that matures in May 2004. On September 10, 2003, the Company acquired Cross Creek Mall in Fayetteville, NC for a purchase price, including transaction costs, of $116,729, which consisted of $52,484 in cash and the assumption of $64,245 of non-recourse debt that bears interest at a stated rate of 7.4% and matures in April 2012. The Company recorded a debt premium of $10,209, computed using an estimated market interest rate of 5.00%, since the debt assumed was at an above-market interest rate compared to similar debt instruments at the date of acquisition. On October 1, 2003, the Company acquired River Ridge Mall in Lynchburg, VA for a purchase price, including transaction costs, of $61,933, which consisted of $38,622 in cash, a short-term note payable of $793 and the assumption of $22,518 of non-recourse debt that bears interest at a stated rate of 8.05% and matures in January 2007. The Company also recorded a debt premium of $2,724, computed using an estimated market interest rate of 4.00%, since the debt assumed was at an above-market interest rate compared to similar debt instruments at the date of acquisition. On October 1, 2003, the Company acquired Valley View Mall in Roanoke, VA for a purchase price, including transaction costs, of $86,094, which consisted of $35,351 in cash, a short-term note payable of $5,708 and the assumption of $45,035 of non-recourse debt that bears interest at a weighted-average stated rate of 8.61% and matures in September 2010. The Company also recorded a debt premium of $8,813, computed using an estimated market interest rate of 5.10%, since the debt assumed was at an above-market interest rate compared to similar debt instruments at the date of acquisition. On December 15, 2003, the Company acquired Southpark Mall in Colonial Heights, VA for a purchase price, including transaction costs, of $78,031, which consisted of $34,879 in cash, a short-term note payable of $5,116 and the assumption of $38,036 of non-recourse debt that bears interest at a stated rate of 7.00% and matures in May 2012. The Company also recorded a debt premium of $4,544, computed using an estimated market interest rate of 5.10%, since the debt assumed was at an above-market interest rate compared to similar debt instruments at the date of acquisition. On December 30, 2003, the Company acquired Harford Mall Business Trust, a Maryland business trust that owns Harford Mall and its associated center, Harford Annex, in Bel Air, MD for a cash purchase price, including transaction costs, of $71,110. 52 The following summarizes the allocation of the purchase prices to the assets acquired and liabilities assumed for the 2003 acquisitions:
Land $ 72,620 Buildings and improvements 434,318 Above-market leases 5,709 In-place leases 19,542 -------------- Total assets 532,189 Mortgage note payables assumed (209,834) Short-term notes payable (11,617) Premiums on mortgage note payables assumed (26,290) Below-market leases (11,384) -------------- Net assets acquired $ 273,064 ==============
The following unaudited pro forma financial information is for the years ended December 31, 2003 and 2002. It presents the results of the Company as if each of the 2003 acquisitions had occurred on January 1, 2002. 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, 2002. The pro forma financial information also does not project the consolidated results of operations for any future period. The pro forma results for 2003 and 2002 are as follows:
2003 2002 -------------- ------------------ Total revenues $ 713,740 $ 651,623 Total expenses (383,450) (346,862) -------------- ------------------ Income from operations $ 330,290 $ 304,761 ============== ================== Income before discontinued operations $ 139,776 $ 83,580 ============== ================== Net income available to common shareholders $ 125,568 $ 75,752 ============== ================== Basic per share data: Income before discontinued operations, net of preferred dividends $ 2.01 $ 1.27 Net income available to common shareholders $ 2.10 $ 1.32 Diluted per share data: Income before discontinued operations, net of preferred dividends $ 1.93 $ 1.22 Net income available to common shareholders $ 2.01 $ 1.28
2002 Acquisitions In March 2002, the Company closed on the second and final stage of its acquisition of interests in 21 malls and two associated centers from Jacobs by acquiring additional interests in the joint ventures that own the following properties: o West Towne Mall, East Towne Mall and West Towne Crossing in Madison, WI (17% interest) o Columbia Place in Columbia, SC (31% interest) o Kentucky Oaks Mall in Paducah, KY (2% interest) The purchase price of $42,519 for the additional interests consisted of $422 in cash, the assumption of $24,487 of debt and the issuance of 999,460 special common units with a fair value of $17,610 (weighted average of $17.62 per unit). The Company acquired Richland Mall, located in Waco, TX, in May 2002, for a cash purchase price of $43,250. The Company acquired Panama City Mall, located in Panama City, FL, for a purchase price of $45,645 in May 2002. The purchase price of Panama City Mall consisted of the assumption of $40,700 of non-recourse 53 mortgage debt with an interest rate of 7.30%, the issuance of 237,390 common units of the Operating Partnership with a fair value of $4,487 ($18.90 per unit) and $458 in cash closing costs. The Company also entered into a ground lease in May 2002, for land adjacent to Panama City Mall. The terms of the ground lease provided that the lessor could require the Company to purchase the land for $4,148 between August 1, 2003, and February 1, 2004. The Company purchased the land in August 2003. The Company acquired the remaining 21% ownership interest in Columbia Place in Columbia, SC in August 2002. The total consideration of $9,875 consisted of the issuance of 123,324 common units with a fair value of $2,280 ($18.485 per unit) and the assumption of $7,595 of debt. In December 2002, the Company acquired the remaining 35% interest in East Towne Mall, West Towne Mall and West Towne Crossing, which are all located in Madison, WI. The purchase price $62,029 consisted of the issuance of 1,865,338 common units with a fair value of $36,411 ($19.52 per unit) and the assumption of $25,618 of debt. In December 2002, the Company acquired Westmoreland Mall and its associated center, Westmoreland Crossing, located in Greensburg, PA, for a cash purchase price of $112,416. NOTE 4. DISCONTINUED OPERATIONS During 2004, the Company sold three community centers for a total sales price $7,250 and recognized a total gain of $845 on two of the community centers that is recorded as gain on discontinued operations. The Company recognized a loss of $114 in December 2004 on one of the community centers, which is included in loss on impairment of real estate assets in the consolidated statement of operations. Total revenues from these community centers were $782, $1,168 and $1,134 in 2004, 2003 and 2002, respectively. During 2003, the Company sold six community centers for a total sales price $17,280 and recognized a net gain on discontinued operations of $4,042. Total revenues from these community centers were $1,528 and $2,093 in 2003 and 2002, respectively. During 2002, the Company sold five community centers and an office building for a total sales price of $36,800 and recognized a net gain on discontinued operations of $372. Total revenues for these properties were $2,331 in 2002. Certain amounts in the consolidated financial statements have been reclassified to reflect the results of operations of the above properties as discontinued operations in all periods presented. NOTE 5. UNCONSOLIDATED AFFILIATES At December 31, 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 Square 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 Carolina Outparcel L.P. Coastal Grand-Myrtle Beach 50.0% Mall Shopping Center Company Plaza del Sol 50.6% Parkway Place L.P. Parkway Place 45.0% Galileo America LLC Portfolio of community centers 7.2%
54 Condensed combined financial statement information of the unconsolidated affiliates is presented as follows:
December 31, ------------------------------ 2004 2003 ------------------------------ ASSETS: Net investment in real estate assets $1,013,475 $759,073 Other assets 63,903 65,253 ------------------------------ Total assets $1,077,378 $824,326 ============================== LIABILITIES : Mortgage notes payable $ 603,664 $465,602 Other liabilities 41,995 36,167 ------------------------------ Total liabilities 645,659 501,769 OWNERS' EQUITY: The Company 103,512 96,961 Other investors 328,207 225,596 ------------------------------ Total owners' equity 431,719 322,557 ------------------------------ Total liabilities and owners' equity $1,077,378 $824,326 ==============================
Year Ended December 31, ------------------------------------------------ 2004 2003 2002 ------------------------------------------------ Revenues $ 109,696 $ 49,855 $57,084 Depreciation and amortization (24,994) (9,338) (7,603) Other operating expenses (27,479) (14,067) (17,634) ------------------------------------------------ Income from operations 57,223 26,450 31,847 Interest income 138 -- -- Interest expense (27,353) (13,981) (14,827) Gain on sales of real estate assets 4,555 892 -- Discontinued operations 1,945 207 -- ------------------------------------------------ Net income $ 36,508 $ 13,568 $17,020 ================================================ Company's share of net income $ 10,308 $ 4,941 $ 8,215 ================================================
Initial investments in joint ventures that are in economic substance a capital contribution to the joint venture are recorded in an amount equal to the Company's historical carryover basis in the real estate contributed. Initial investments in joint ventures that are in economic substance the sale of a portion of the Company's interest in the real estate are accounted for as a contribution of real estate recorded in an amount equal to the Company's historical carryover basis in the ownership percentage retained and as a sale of real estate with profit recognized to the extent of the other joint venturers' interests in the joint venture. Profit recognition assumes the Company has no commitment to reinvest with respect to the percentage of the real estate sold and the accounting requirements of the full accrual method under SFAS No. 66 are met. In general, contributions and distributions of capital or cash flows and allocations of income and expense are made on a pro rata basis in proportion to the equity interest held by each general or limited partner. All debt on these properties is non-recourse. See Note 17 for a description of guarantees the Company has issued related to certain unconsolidated affiliates. Galileo America Joint Venture On September 24, 2003, the Company formed Galileo America LLC ("Galileo America"), a joint venture with Galileo America, Inc., the U.S. affiliate of Australia-based Galileo America Shopping Trust, to invest in community centers throughout the United States. The arrangement provides for the Company to sell, in three phases, its interests in 51 community centers for a total price of $516,000 plus a 10% interest in Galileo America. 55 The first phase of the transaction closed on October 23, 2003, when the Company sold its interests in 41 community centers to Galileo America for $393,925, which consisted of $250,705 in cash, the retirement of $24,922 of debt on one of the community centers, a note receivable of $4,813, Galileo America's assumption of $93,037 in debt and $20,448 representing the Company's 10% interest in Galileo America. The Company used the net proceeds to fund escrow amounts to be used in like-kind exchanges and to reduce outstanding borrowings under the Company's credit facilities. The Company recognized a gain of $71,886 from the first phase and recorded its investment in Galileo America at the carryover basis of the real estate assets contributed for its 10% interest. The note receivable was paid subsequent to December 31, 2003. The second phase of the Galileo America transaction 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 from October 23, 2003, the date that it was determined these assets met the criteria to be reflected as held for sale. There was no depreciation expense recorded on these assets subsequent to October 23, 2003. The Company sold a community center expansion to Galileo America during September 2004 for $3,447 in cash. The Company recognized gain of $1,316 to the extent of the third party partner's ownership interest and recorded an investment of $147 in Galileo America at the carryover basis of the real estate assets contributed for its 10% interest. In October 2004, the Company sold its interests in one community center to Galileo America for a purchase price of $17,900, which consisted of $2,900 in cash, Galileo America's assumption of $10,500 of debt and a limited partnership interest in Galileo America, Inc. The community center was originally scheduled to be included in the third phase of the transaction that closed in January 2005. The Company recognized a gain of $2,840 on the sale of this property and recorded an investment of $3,820 in Galileo America at the carryover basis of the real estate assets contributed for its 10% interest in this property. The third phase of the Galileo America transaction closed on January 5, 2005, when the Company sold its interest in two power centers, one community center and one community center expansion 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 from January 2004, the date that it was determined these assets met the criteria to be reflected as held for sale. There was no depreciation expense recorded on these assets during 2004. The Company, as tenant, has entered, or will enter into, separate master lease agreements with Galileo America, as landlord, covering certain spaces in certain of the properties sold or, to be sold, to the joint venture. Under each master lease agreement, the Company is obligated to pay Galileo America an agreed-upon minimum annual rent, plus a pro rata share of common area maintenance expenses and real estate taxes, for each designated space for a term of five years from the applicable property's closing date. If the Company is able to lease a designated space to a third party, then the amounts owed by the Company under the master lease will be reduced by the amounts received under the third party lease. If the amounts under the third party lease are equal to or greater than the Company's obligation for the full term of the master lease agreement, then the Company's obligation is zero. When a third party lease is executed that releases the Company from its obligation, Galileo America assumes the credit risk related to the third party lease. This arrangement is in effect until the end of the five-year term of the master lease. Therefore, if a third party lease expires before the expiration of the master lease term, then the Company is obligated under the remaining term of the master lease. Two properties in the first phase and one in the second phase are subject to master lease agreements. The Company had a liability of $3,789 and $2,184 at December 31, 2004 and 2003, respectively, for the amounts to be paid over the remaining terms of the master lease obligations. The Company reduces the liability as payments are made under the obligations or as it is relieved of its obligations under the terms of the master lease arrangements. The reduction in the liability is recognized as gain to the extent that the Company is relieved of its obligation under the master lease arrangements by obtaining third party leases that are sufficient to satisfy the related master lease obligation. During 2004 and 2003, the Company recognized gain of $7,206 and $0, respectively, as a result of being relieved of its obligation under the master lease arrangements. 56 The Company may also receive up to $8,000 of additional contingent consideration if, as the exclusive manager of the properties, it achieves certain leasing objectives related to spaces that were vacant, or projected to soon be vacant, at the time the first phase closed. The Company earned $4,167 in 2004 for leasing objectives that were met during 2004, of which $3,750 was recognized as gain on sales of real estate assets and $417, representing the portion attributable to the Company's ownership interest, was recorded as a reduction of the Company's investment in Galileo America. In 2003, the Company earned $3,833 for leasing objectives that were met as of December 31, 2003, of which $3,450 was recognized as gain on sales of real estate assets and $383, representing the portion attributable to the Company's 10% ownership interest, was recorded as a reduction of the Company's investment in Galileo America. Pursuant to a long-term agreement, the Company is the exclusive manager for all of the joint venture's properties in the United States, and will be entitled to management, leasing, acquisition, disposition, asset management and financing fees. In December 2004, Galileo America acquired interests in six properties from a third party. The Company elected not to contribute its pro rata share of the equity contribution necessary to maintain a 10% interest in Galileo America after the completion of this acquisition. As a result, the Company's ownership interest in Galileo America was reduced to 7.2% as of December 31, 2004. Other Unconsolidated Affiliates In February 2002, the Company contributed its interests in two community centers and one associated center to PPG Venture I Limited Partnership, a joint venture with a third party, and retained a 10% interest. The total consideration of $63,030 consisted of cash of $46,000 and the Company's retained interest. As discussed in Note 2, the Company began to consolidate PPG Venture I Limited Partnership effective January 1, 2004, as a result of the adoption of FIN 46(R). In March 2002, the Company acquired an additional 2% interest in Kentucky Oaks Mall Company, an additional 17% interest in Madison Joint Venture and an additional 31% interest in Columbia Mall Company as discussed in Note 3. Since the additional interest in Columbia Mall Company resulted in the Company having a 79% controlling interest in that joint venture, the Company discontinued accounting for it using the equity method and began consolidating it as of the date the additional 31% interest was acquired. During 2002, the Company entered into three joint ventures with third parties to develop two malls, Imperial Valley Mall and Coastal Grand. 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. 57 NOTE 6. MORTGAGE AND OTHER NOTES PAYABLE Mortgage and other notes payable consisted of the following:
December 31, 2004 December 31, 2003 -------------------------------- -------------------------------- Weighted Average Weighted Average Amount Interest Rate(1) Amount Interest Rate(1) ------------- ----------------- ------------- ----------------- Fixed-rate debt: Non-recourse loans on operating properties $2,688,186 6.38% $2,256,544 6.63% ------------- ------------- Variable-rate debt: Recourse term loans on operating properties 207,500 3.45% 105,558 2.67% Lines of credit 461,400 3.37% 376,000 2.23% Construction loans 14,593 3.94% -- -- ------------- ------------- Total variable-rate debt 683,493 3.41% 481,558 2.33% ------------- ------------- Total $3,371,679 5.78% $2,738,102 5.87% ============= ============= (1) Weighted average interest rate including the effect of debt premiums, but excluding the amortization of deferred financing costs.
Non-recourse and recourse loans include loans that are secured by properties owned by the Company that have a net carrying value of $4,130,922 at December 31, 2004. At December 31, 2004, the Company had $950 available and unfunded under a recourse term loan commitment on one property. Fixed-Rate Debt At December 31, 2004, fixed-rate loans bear interest at stated rates ranging from 4.52% to 10.4%. Outstanding borrowings under fixed-rate loans include unamortized debt premiums of $39,837 that were recorded when the Company assumed debt to acquire real estate assets that was at an above-market interest rate compared to similar debt instruments at the date of acquisition. Fixed-rate loans generally provide for monthly payments of principal and/or interest and mature at various dates from March 2006 through April 2016, with a weighted average maturity of 5.6 years. Variable-Rate Debt Recourse term loans bear interest at variable interest rates indexed to the prime lending rate or London Interbank Offered Rate ("LIBOR"). At December 31, 2004, interest rates on recourse loans varied from 3.35% to 3.94%. These loans mature at various dates from January 2005 to December 2006, with a weighted average maturity of 1.3 years. 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 December 31, 2004, the outstanding borrowings of $39,900 under the $400,000 credit facility had a weighted average interest rate of 3.54%. 58 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 December 31, 2004:
Total Total Maturity Available Outstanding Date ---------------------------------------------------- $ 373,000 $ 368,150 February 2006 80,000 23,350 June 2006 20,000 20,000 March 2007 10,000 10,000 April 2006 ----------------------------------- $ 483,000 $ 421,500 ===================================
The secured lines of credit are secured by 21 of the Company's properties, which had an aggregate net carrying value of $475,831 at December 31, 2004. Borrowings under the secured lines of credit had a weighted average interest rate of 3.36% at December 31, 2004. Letters of Credit At December 31, 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 under these lines of credit was $12,267 at December 31, 2004. Covenants and Restrictions The secured and unsecured line of credit agreements contain, among other restrictions, certain financial covenants including the maintenance of certain financial coverage ratios, minimum net worth requirements, and limitations on cash flow distributions. Additionally, certain property-specific mortgage notes payable require the maintenance of debt service coverage ratios on their respective properties. The Company was in compliance with all covenants and restrictions at December 31, 2004. 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. Debt Maturities As of December 31, 2004, the scheduled principal payments on all mortgage and other notes payable, including construction loans and lines of credit, are as follows:
2005 $ 92,444 2006 827,594 2007 242,979 2008 422,209 2009 351,335 Thereafter 1,395,281 ------------- 3,331,842 Net unamortized premiums 39,837 ------------- $3,371,679 =============
59 Of the $92,444 of scheduled principal payments in 2005, $40,187 is related to three loans that are scheduled to mature in 2005. The Company has extension options in place for $30,000 on one loan that will extend its scheduled maturity to 2006. Galileo America assumed one loan in the amount of $9,800 in the third phase that closed in January 2005 (see Note 5). The Company intends to repay the remaining loan of $387. NOTE 7. LOSS ON EXTINGUISHMENT OF DEBT The losses on extinguishment of debt resulted from prepayment penalties and the write-off of unamortized deferred financing costs when notes payable were retired before their scheduled maturity dates as follows:
Year Ended December 31, ------------------------------------ 2004 2003 2002 ------------------------------------ Prepayment penalties $ -- $ -- $ 2,232 Prepayment penalties on discontinued operations -- -- 58 Unamortized deferred financing costs -- 167 1,640 ------------------------------------ $ -- $ 167 $ 3,930 ====================================
NOTE 8. SHAREHOLDERS' EQUITY Common Stock In March 2002, the Company completed an offering of 6,705,540 shares of its $0.01 par value common stock at $17.275 per share. The net proceeds of $114,705 were used to repay outstanding borrowings under the Company's credit facilities and to retire debt on certain operating properties. Preferred Stock In June 1998, the Company issued 2,875,000 shares of 9.0% Series A Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock") with a liquidation preference of $25.00 per share in a public offering. In June 2002, the Company purchased 200,000 shares of the Series A Preferred Stock for $5,093. On November 28, 2003, the Company redeemed the remaining 2,675,000 outstanding shares of the Series A Preferred Stock at its liquidation preference of $25.00 per share plus accrued and unpaid dividends. In connection with the redemption of the Series A Preferred Stock, the Company recorded a charge of $2,181 to write-off direct issuance costs that were recorded as a reduction of additional paid-in capital when the Series A Preferred Stock was issued. The charge is included in preferred dividends in the accompanying consolidated statement of operations. In June 2002, the Company completed an offering of 2,000,000 shares of 8.75% Series B Cumulative Redeemable Preferred Stock (the "Series B Preferred Stock"), having a par value of $.01 per share, at its liquidation preference of $50.00 per share. The net proceeds of $96,370 were used to reduce outstanding balances under the Company's credit facilities and to retire term loans on several properties. The dividends on the Series B Preferred Stock are cumulative and accrue from the date of issue and are payable quarterly in arrears at a rate of $4.375 per share per annum. The Series B Preferred Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption, and is not convertible into any other securities of the Company. The Series B Preferred Stock cannot be redeemed by the Company prior to June 14, 2007. After that date, the Company may redeem shares, in whole or in part, at any time for a cash redemption price of $50.00 per share plus accrued and unpaid dividends. On August 22, 2003, the Company issued 4,600,000 depositary shares in a public offering, each representing one-tenth of a share of 7.75% Series C Cumulative Redeemable Preferred Stock (the "Series C Preferred Stock") with a 60 par value of $0.01 per share. The Series C Preferred Stock has a liquidation preference of $250.00 per share ($25.00 per depositary share). The dividends on the Series C Preferred Stock are cumulative, accrue from the date of issuance and are payable quarterly in arrears at a rate of $19.375 per share ($1.9375 per depositary share) per annum. The Series C Preferred Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption, and is not convertible into any other securities of the Company. The Series C Preferred Stock cannot be redeemed by the Company prior to August 22, 2008. After that date, the Company may redeem shares, in whole or in part, at any time for a cash redemption price of $250.00 per share ($25.00 per depositary share) plus accrued and unpaid dividends. The net proceeds of $111,227 were used to partially fund certain acquisitions discussed in Note 3 and to reduce outstanding borrowings on the Company's credit facilities. On December 13, 2004, the Company issued 7,000,000 depositary shares in a public offering, each representing one-tenth of a share of 7.375% Series D Cumulative Redeemable Preferred Stock (the "Series D Preferred Stock") with a par value of $0.01 per share. The Series D Preferred Stock has a liquidation preference of $250.00 per share ($25.00 per depositary share). The dividends on the Series D Preferred Stock are cumulative, accrue from the date of issuance and are payable quarterly in arrears at a rate of $18.4375 per share ($1.84375 per depositary share) per annum. The Series D Preferred Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption, and is not convertible into any other securities of the Company. The Series D Preferred Stock cannot be redeemed by the Company prior to December 13, 2009. After that date, the Company may redeem shares, in whole or in part, at any time for a cash redemption price of $250.00 per share ($25.00 per depositary share) plus accrued and unpaid dividends. The net proceeds of $169,333 were used to reduce outstanding borrowings on the Company's credit facilities. Holders of each series of preferred stock will have limited voting rights if dividends are not paid for six or more quarterly periods and in certain other events. NOTE 9. MINORITY INTERESTS Minority interests represent (i) the aggregate partnership interest in the Operating Partnership that is not owned by the Company and (ii) the aggregate ownership interest in 13 of the Company's shopping center properties that is held by third parties. Minority Interest in Operating Partnership The minority interest in the Operating Partnership is represented by common units and special common units of limited partnership interest in the Operating Partnership (the "Operating Partnership Units") that the Company does not own. The assets and liabilities allocated to the Operating Partnership's minority interests are based on their ownership percentage of the Operating Partnership at December 31, 2004 and 2003. The ownership percentage is determined by dividing the number of Operating Partnership Units held by the minority interests at December 31, 2004 and 2003 by the total Operating Partnership Units outstanding at December 31, 2004 and 2003, respectively. The minority interest ownership percentage in assets and liabilities of the Operating Partnership was 45.0% and 45.4% at December 31, 2004 and 2003, respectively. Income is allocated to the Operating Partnership's minority interests based on their weighted average ownership during the year. The ownership percentage is determined by dividing the weighted average number of Operating Partnership Units held by the minority interests by the total weighted average number of Operating Partnership Units outstanding during the year. A change in the number of shares of common stock or Operating Partnership Units changes the percentage ownership of all partners of the Operating Partnership. An Operating Partnership Unit is considered to be equivalent to a share of common stock since it generally is redeemable for cash or shares of the Company's common stock. As a result, an allocation is made between shareholders' equity and minority interest in the Operating Partnership in the accompanying 61 balance sheet to reflect the change in ownership of the Operating Partnership's underlying equity when there is a change in the number of shares and/or Operating Partnership Units outstanding. The total minority interest in the Operating Partnership was $554,629 and $523,779 at December 31, 2004 and 2003, respectively. Minority Interest in Operating Partnership-Conversion Rights Under the terms of the Operating Partnership's limited partnership agreement, each of the limited partners has the right to exchange all or a portion of its partnership interests for shares of CBL's common stock or, at CBL's election, their cash equivalent. When an exchange occurs, CBL assumes the limited partner's ownership interests in the Operating Partnership. The number of shares of common stock received by a limited partner of the Operating Partnership upon exercise of its exchange rights will be equal on a one-for-one basis to the number of partnership units exchanged by the limited partner. The amount of cash received by the limited partner, if CBL elects to pay cash, will be based on the five-day trailing average of the trading price at the time of exercise of the shares of common stock that would otherwise have been received by the limited partner in the exchange. Neither the limited partnership interests in the Operating Partnership nor the shares of common stock of CBL are subject to any right of mandatory redemption. As of January 31, 2004, holders of 26,318,804 special common units may exchange them for shares of common stock or cash. The special common units receive a minimum distribution of $1.45125 per unit per year. When the distribution on the common units exceeds $1.45125 per unit per year, the special common units will receive a distribution equal to that paid on the common units. The distribution on the common units exceeded $1.45125 per unit during 2004. In July 2004, the Company issued 1,560,940 special common units in connection with the acquisition of Monroeville Mall, which is discussed in Note 3. These special common units receive a minimum distribution of $2.53825 per unit per year for the first three years, and a minimum distribution of $2.92875 per unit per year thereafter. The Operating Partnership issued 2,226,052 common units in 2002 in connection with acquisitions discussed in Notes 3 and 5. The 237,390 common units issued in connection with the acquisition of Panama City Mall, which is discussed in Note 3, receive a minimum annual dividend of $1.6875 per unit until May 2012. When the distribution on the common units exceeds $1.6875 per unit, these common units will receive a distribution equal to that paid on the common units. Additionally, if the annual distribution on the common units should ever be less than $1.11 per unit, the $1.6875 per unit dividend will be reduced by the amount the per unit distribution is less than $1.11 per unit. During 2004, holders elected to exchange 62,392 special common units and 683,250 common units. The Company elected to exchange $5,949 of cash and 525,636 shares of common stock for these units. The Company purchased 920,166 common units from a former executive of the Company who retired in 1997 for $21,013 during 2003. During 2002, third parties converted 893,304 common units to shares of the Company's common stock. Outstanding rights to convert minority interests in the Operating Partnership to common stock were held by the following parties at December 31, 2004 and 2003:
December 31, -------------------------------- 2004 2003 --------------- ---------------- Common shares outstanding 62,667,104 60,646,952 Outstanding rights: Jacobs 23,845,414 23,907,806 CBL's Predecessor 17,511,224 17,511,224 Third parties 9,904,486 9,026,794 --------------- ---------------- Total Operating Partnership Units 113,928,228 111,092,776 =============== ================
62 Minority Interest in Shopping Center Properties The Company's consolidated financial statements include the assets, liabilities and results of operations of 13 properties that the Company does not wholly own. The minority interests in shopping center properties represents the aggregate ownership interest of third parties in these properties. The total minority interests in shopping center properties was $11,977 and $3,652 at December 31, 2004 and 2003, respectively. The assets and liabilities allocated to the minority interests in shopping center properties are based on the third parties' ownership percentages in each shopping center property at December 31, 2004 and 2003. Income is allocated to the minority interests in shopping center properties based on the third parties' weighted average ownership in each shopping center property during the year. NOTE 10. MINIMUM RENTS The Company receives rental income by leasing retail shopping center space under operating leases. Future minimum rents are scheduled to be received under noncancellable tenant leases at December 31, 2004, as follows:
2005 $452,324 2006 386,423 2007 335,734 2008 287,209 2009 241,567 Thereafter 769,526
Future minimum rents do not include percentage rents or tenant reimbursements that may become due. NOTE 11. MORTGAGE NOTES RECEIVABLE Mortgage notes receivable are collateralized by first mortgages, wrap-around mortgages on the underlying real estate and related improvements or by assignment of 100% of the partnership interests that own the real estate assets. Interest rates on notes receivable range from 3.63% to 9.50% at December 31, 2004. Maturities of notes receivable range from 2005 to 2019. NOTE 12. SEGMENT INFORMATION The Company measures performance and allocates resources according to property type, which is determined based on differences such as nature of tenants, capital requirements, economic risks and leasing terms. Rental income and tenant reimbursements from tenant leases provide the majority of revenues from all segments. The accounting policies of the reportable segments are the same as those described in Note 2. Information on the Company's reportable segments is presented as follows:
Associated Community Year Ended December 31, 2004 Malls Centers Centers All Other(2) Total ---------------------------------------------------------------------------------------------------------------------- Revenues $ 684,756 $ 30,921 $ 15,222 $ 26,354 $ 757,253 Property operating expenses (1) (219,096) (6,536) (4,771) 13,618 (216,785) Interest expense (159,998) (5,063) (3,154) (9,004) (177,219) Other expense - - - (16,373) (16,373) Gain on sales of real estate assets 847 322 24,945 3,158 29,272 ------------------------------------------------------------------- Segment profit and loss $ 306,509 $ 19,644 $ 32,242 $ 17,753 376,148 ======================================================= Depreciation and amortization expense (142,043) General and administrative expense (35,338) Interest income 3,355 Loss on impairment of real estate assets (3,080) Equity in earnings and minority interest (80,243) ------------ Income before discontinued operations $ 118,799 ============ Total assets (2) $ 4,653,707 $ 273,166 $155,042 $122,585 $5,205,400 Capital expenditures (2) $ 1,081,529 $ 56,109 $ 18,631 $ 20,541 $1,176,810
63
Associated Community Year Ended December 31, 2003 Malls Centers Centers All Other(2) Total ---------------------------------------------------------------------------------------------------------------------- Revenues $ 580,117 $ 24,961 $ 49,239 $ 9,995 $ 664,312 Property operating expenses (1) (194,301) (5,614) (11,290) 17,360 (193,845) Interest expense (139,900) (5,381) (6,746) (1,294) (153,321) Other expense - - - (11,489) (11,489) Gain(loss) on sales of real estate assets 2,214 - 75,559 (8) 77,765 ------------------------------------------------------------------- Segment profit and loss $ 248,130 $ 13,966 $106,762 $ 14,564 383,422 ======================================================= Depreciation and amortization expense (112,857) General and administrative expense (30,395) Interest income 2,485 Loss on extinguishment of debt (167) Equity in earnings and minority interest (104,349) ------------ Income before discontinued operations $138,139 ============ Total assets (2) $ 3,682,158 $ 199,356 $265,467 $117,329 $4,264,310 Capital expenditures (2) $ 651,567 $ 28,901 $ 32,063 $ 31,274 $ 743,805
Associated Community Year Ended December 31, 2002 Malls Centers Centers All Other(2) Total ---------------------------------------------------------------------------------------------------------------------- Revenues $ 498,834 $ 19,511 $ 56,457 $ 9,329 $ 584,131 Property operating expenses (1) (171,951) (4,268) (14,440) 16,471 (174,188) Interest expense (123,977) (3,968) (9,137) (5,826) (142,908) Other expense - - - (10,307) (10,307) Gain (loss) on sales of real estate assets (251) - 925 2,130 2,804 ------------------------------------------------------------------- Segment profit and loss $ 202,655 $ 11,275 $ 33,805 $ 11,797 259,532 ======================================================= Depreciation and amortization expense (93,418) General and administrative expense (23,332) Interest income 1,853 Loss on extinguishment of debt (3,872) Equity in earnings and minority interest (59,316) ------------ Income before discontinued operations $ 81,447 ============ Total assets (2) $ 3,067,611 $ 151,606 $418,856 $157,041 $3,795,114 Capital expenditures (2) $ 454,727 $ 29,164 $ 25,930 $ 49,903 $ 559,718 (1) Property operating expenses include property operating, real estate taxes and maintenance and repairs. (2) The All Other category includes mortgage notes receivable, the Company's office building and the Management Company.
NOTE 13. OPERATING PARTNERSHIP Condensed consolidated financial statement information for the Operating Partnership is presented as follows:
December 31, ---------------------------------- 2004 2003 ---------------------------------- ASSETS: Net investment in real estate assets $4,894,780 $3,912,220 Investment in unconsolidated affiliates 84,782 96,989 Other assets 224,476 253,985 ---------------------------------- Total assets $5,204,038 $4,263,194 ================================== LIABILITIES: Mortgage and other notes payable $3,371,679 $2,738,102 Other liabilities 185,839 138,210 ---------------------------------- Total liabilities 3,557,518 2,876,312 Minority interests 11,977 3,652 OWNERS' EQUITY 1,634,543 1,383,230 ---------------------------------- Total liabilities and owners' equity $5,204,038 $4,263,194 ==================================
64
Year Ended December 31, --------------------------------------------------------- 2004 2003 2002 --------------------------------------------------------- Total revenues $ 757,253 $ 664,312 $584,131 Depreciation and amortization (142,043) (112,857) (93,418) Other operating expenses (270,185) (234,246) (206,631) --------------------------------------------------------- Income from operations 345,025 317,209 284,082 Interest income 3,355 2,485 1,850 Interest expense (177,191) (153,314) (142,910) Loss on extinguishment of debt -- (167) (3,872) Gain on sales of real estate assets 29,272 77,765 2,804 Equity in earnings of unconsolidated affiliates 10,308 4,941 8,215 Minority interest in shopping center properties (5,365) (2,758) (3,280) --------------------------------------------------------- Income before discontinued operations 205,404 246,161 146,889 Operating income of discontinued operations 1,467 1,958 3,087 Gain on discontinued operations 845 4,042 372 --------------------------------------------------------- Net income $207,716 $252,161 $150,348 =========================================================
NOTE 14. NONCASH INVESTING AND FINANCING ACTIVITIES The Company's noncash investing and financing activities were as follows for 2004, 2003 and 2002:
2004 2003 2002 --------------- -------------------------------- Cash paid during the year for interest, net of amounts capitalized $ 174,496 $ 151,012 $ 141,425 Debt assumed to acquire property interests 304,646 209,834 149,687 Premiums related to debt assumed to acquire property interests 19,455 26,290 -- Issuance of minority interest to acquire property interests 46,212 -- 60,788 Debt consolidated from application of FIN 46(R) 38,147 -- -- Land purchase obligation related to acquired property 11,950 -- -- Conversion of Operating Partnership units into common stock 5,630 -- 7,163 Short-term notes payable issued to acquire property interests -- 11,617 -- Note receivable from sale of real estate assets -- 4,813 --
NOTE 15. DERIVATIVE FINANCIAL INSTRUMENTS The Company uses derivative financial instruments to manage its exposure to changes in interest rates. The Company does not use derivative financial instruments 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 upon their credit ratings and other factors. The Company's objective in using derivatives is to manage its exposure to changes in interest rates. To accomplish this objective, the Company primarily uses interest rate swap and cap agreements as part of its cash flow hedging strategy. At December 31, 2003, the Company had one interest rate cap agreement that was already in place on $40,000 of variable-rate debt that was assumed in connection with the acquisition of Sunrise Mall in 2003 (see Note 3). The interest rate cap matured in May 2004. The interest rate cap's fair value was $0 at both the acquisition date and December 31, 2004. Interest rate swap agreements designated as cash flow hedges involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without the exchange of the underlying principal amount. During 2002, such derivatives were used to hedge the variable cash flows associated with variable-rate debt. Under an interest rate swap in place, the Company received interest payments at a rate equal to LIBOR and paid interest at a fixed rate of 5.83%. The interest rate swap had a notional amount of $80,000 65 and expired August 30, 2003. The change in net unrealized gains on cash flow hedges in 2003 and 2002 reflects a reclassification of net unrealized gains from accumulated other comprehensive loss to interest expense in the amounts of $2,397 and $4,387, respectively, related to this interest rate swap agreement. NOTE 16. RELATED PARTY TRANSACTIONS CBL's Predecessor and certain officers of the Company have a significant minority interest in the construction company that the Company engaged to build substantially all of the Company's development properties. The Company paid approximately $81,153, $163,617 and $96,185 to the construction company in 2004, 2003, and 2002, respectively, for construction and development activities. The Company had accounts payable to the construction company of $7,774 and $8,082 at December 31, 2004 and 2003, respectively. The Management Company provides management, development and leasing services to the Company's unconsolidated affiliates and other affiliated partnerships. Revenues recognized for these services amounted to $5,970, $3,030 and $3,493 in 2004, 2003 and 2002, respectively. NOTE 17. 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. Additionally, management believes that, based on environmental studies completed to date, any exposure to environmental cleanup will not materially affect the financial position and results of operations of the Company. The Company has guaranteed 50% of the debt of Parkway Place L.P., an unconsolidated affiliate in which the Company owns a 45% interest. The total amount outstanding at December 31, 2004, was $53,323, of which the Company has guaranteed $26,662. The Company did not receive a fee for 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 $1,572 for this guaranty when it was issued during 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 5, 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 $568 and $218 related to this guaranty during 2004 and 2003, respectively. The Company has guaranteed 100% of the debt of Imperial Valley Mall L.P., an unconsolidated affiliate in which the Company owns a 60% interest. The total amount outstanding at December 31, 2004 was $39,943. The Company has issued various bonds that it would have to satisfy in the event of non-performance. The total amount outstanding on these bonds was $11,789 at December 31, 2004. NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values of cash and cash equivalents, receivables, accounts payable and accrued liabilities are reasonable estimates of their fair values because of the short maturity of these financial instruments. Based on the interest rates for similar financial instruments, the carrying value of mortgage notes receivable is a reasonable estimate of fair value. The fair value of mortgage and other notes payable was $3,667,151 and $3,094,285 at December 31, 2004 and 2003, respectively. The fair value was calculated by discounting future cash flows for the notes payable using estimated rates at which similar loans would be made currently. 66 NOTE 19. STOCK INCENTIVE PLAN The Company maintains the CBL & Associates Properties, Inc. Amended and Restated Stock Incentive Plan, as amended, which permits the Company to issue stock options and common stock to selected officers, employees and directors of the Company. The shares available under the plan were increased from 8,000,000 to 10,400,000 during 2002. The Compensation Committee of the Board of Directors (the "Committee") administers the plan. Stock Options Stock options issued under the plan allow for the purchase of common stock at the fair market value of the stock on the date of grant. Stock options granted to officers and employees vest and become exercisable in installments on each of the first five anniversaries of the date of grant and expire 10 years after the date of grant. Stock options granted to independent directors are fully vested upon grant. However, the independent directors may not sell, pledge or otherwise transfer their stock options during their board term or for one year thereafter. The Company's stock option activity for 2004, 2003 and 2002 is summarized as follows:
2004 2003 2002 -------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------------------------------------------ ------------------------------------------- Outstanding, beginning of year 4,368,216 $12.84 5,066,834 $12.76 4,703,934 $11.70 Granted - - - - 859,500 18.28 Exercised (1,324,374) 11.53 (646,518) 12.00 (419,200) 11.95 Canceled (10,300) 15.76 (52,100) 15.46 (77,400) 14.14 ------------- -------------- --------------- Outstanding, end of year 3,033,542 13.39 4,368,216 12.84 5,066,834 12.76 ============= ============== =============== Options exercisable at end of year 2,150,242 12.35 2,923,316 11.60 2,851,634 11.13 ============= ============== =============== Weighted average fair value of options granted during the year - - $ 1.75 ============= ============== ===============
The following is a summary of the stock options outstanding at December 31, 2004:
Weighted Weighted Weighted Average Average Average Remaining Exercise Price Exercise Price Options Contractual of Options Options of Options Exercise Price Range Outstanding Life in Years Outstanding Exercisable Exercisable ------------------------ -------------- ----------------- ----------------- --------------- ----------------- $9.78125 - $10.8125 105,000 0.4 $9.82 105,000 $9.82 $11.8125 - $12.8125 1,749,538 3.3 11.59 1,617,638 11.57 $13.8375 - $19.9000 1,179,004 6.9 16.39 427,604 15.91 -------------- ----------------- ----------------- --------------- ----------------- Totals 3,033,542 4.6 $13.39 2,150,242 $12.34 ============== ================= ================= =============== =================
Stock Awards Under the plan, common stock may be awarded either alone, in addition to, or in tandem with other stock awards granted under the plan. The Committee has the authority to determine eligible persons to whom common stock will be awarded, the number of shares to be awarded, and the duration of the vesting period, as defined. The Committee may also provide for the issuance of common stock under the plan on a deferred basis pursuant to deferred compensation arrangements, as described in Note 20. 67 The Company granted awards for 93,600 and 86,450 shares of the Company's common stock to employees in May 2004 and May 2003, respectively. The terms of the awards allow for a recipient to vest and receive shares of common stock in equal installments on each of the first five anniversaries of the date of grant. Under the terms of the awards, the Company pays the recipient additional compensation, in an amount equal to the dividends paid on the Company's common stock, on the unvested portion of the award as if the recipient owned the unvested shares. The Company recorded deferred compensation of $2,206 and $1,870 when the awards were granted in May 2004 and 2003, respectively, based on the market value of the Company's common stock on the grant dates, which was $23.57 and $21.53 per share, respectively. The deferred compensation is being amortized on a straight-line basis as compensation expense over the five-year vesting period. The Company recognized $664 and $248 of compensation expense in 2004 and 2003, respectively, related to the amortization of deferred compensation. The Company also recorded a reduction to deferred compensation of $68 and $15 for grants that were canceled during 2004 and 2003, respectively. During 2004, the Company issued an additional 63,314 shares of common stock to employees and nonemployee directors with a weighted-average grant date fair value of $30.56. The shares vested immediately. During 2003, the Company issued an additional 87,212 shares of common stock to employees and nonemployee directors with a weighted-average grant date fair value of $21.51. The shares vested immediately. During 2002, the Company issued 146,456 shares of common stock to employees with a weighted average grant-date fair value of $17.61 per share. There were 83,032 shares that vested immediately. The remaining 63,424 shares vest at various dates from 2003 to 2007. NOTE 20. EMPLOYEE BENEFIT PLANS 401(k) Plan The Management Company maintains a 401(k) profit sharing plan, which is qualified under Section 401(a) and Section 401(k) of the Code to cover employees of the Management Company. All employees who have attained the age of 21 and have completed at least one year of service are eligible to participate in the plan. The plan provides for employer matching contributions on behalf of each participant equal to 50% of the portion of such participant's contribution that does not exceed 2.5% of such participant's compensation for the plan year. Additionally, the Management Company has the discretion to make additional profit-sharing-type contributions not related to participant elective contributions. Total contributions by the Management Company were $657, $518 and $439 in 2004, 2003 and 2002, respectively. Employee Stock Purchase Plan The Company maintains an employee stock purchase plan that allows eligible employees to acquire shares of the Company's common stock in the open market without incurring brokerage or transaction fees. Under the plan, eligible employees make payroll deductions that are used to purchase shares of the Company's common stock. The shares are purchased by the fifth business day of the month following the month when the deductions were withheld. The shares are purchased at the prevailing market price of the stock at the time of purchase. Deferred Compensation Arrangements The Company has entered into agreements with certain of its officers that allow the officers to defer receipt of selected salary increases and/or bonus compensation for periods ranging from 5 to 10 years. For certain officers, the deferred compensation arrangements provide that when the salary increase or bonus compensation is earned and deferred, shares of the Company's common stock issuable under the Amended and Restated Stock 68 Incentive Plan are deemed set aside for the amount deferred. The number of shares deemed set aside is determined by dividing the amount of compensation deferred by the fair value of the Company's common stock on the deferral date, as defined in the arrangements. The shares set aside are deemed to receive dividends equivalent to those paid on the Company's common stock, which are then deemed to be reinvested in the Company's common stock in accordance with the Company's dividend reinvestment plan. When an arrangement terminates, the Company will issue shares of the Company's common stock to the officer equivalent to the number of shares deemed to have accumulated under the officer's arrangement. At December 31, 2004 and 2003, respectively, there were 214,196 and 187,592 shares that were deemed set aside in accordance with these arrangements. For other officers, the deferred compensation arrangements provide that their bonus compensation is deferred in the form of a note payable to the officer. Interest accumulates on these notes at 7.0%. When an arrangement terminates, the note payable plus accrued interest is paid to the officer in cash. At December 31, 2004 and 2003, respectively, the Company had notes payable, including accrued interest, of $52 and $296 related to these arrangements. NOTE 21. DIVIDENDS On November 4, 2004, the Company declared a cash dividend of $0.40625 per share of common stock for the quarter ended December 31, 2004. The dividend was paid on January 14, 2005, to shareholders of record as of December 31, 2004. The total dividend of $25,459 is included in accounts payable and accrued liabilities at December 31, 2004. On November 4, 2004, the Operating Partnership declared a distribution of $21,185 to the Operating Partnership's limited partners. The distribution was paid on January 14, 2005. This distribution represented a distribution of $0.40625 per unit for each common unit and $0.40625 to $0.648 per unit for the special common units in the Operating Partnership. The total distribution is included in accounts payable and accrued liabilities at December 31, 2004. On October 29, 2003, the Company declared a cash dividend of $0.3625 per share of common stock for the quarter ended December 31, 2003. The dividend was paid on January 16, 2004, to shareholders of record as of December 31, 2003. The total dividend of $21,985 is included in accounts payable and accrued liabilities at December 31, 2003. On October 29, 2003, the Operating Partnership declared a distribution of $18,309 to the Operating Partnership's limited partners. The distribution was paid on January 16, 2004. This distribution represented a distribution of $0.3625 per unit for each common unit and $0.363 to $0.422 per unit for the special common units in the Operating Partnership. The total distribution is included in accounts payable and accrued liabilities at December 31, 2003. The allocations of dividends declared and paid for income tax purposes are as follows:
Year Ended December 31, 2004 2003 2002 --------------- ------------------- ----------------- Dividends declared: Common stock $1.49375 $ 1.345 $ 1.16 Series A preferred stock -- $ 2.05 $ 2.25 Series B preferred stock 4.37505 $ 4.3752 $ 2.3942 Series C preferred stock 19.3750 $ 6.99653(1) $ -- Series D preferred stock -- $ -- $ -- Allocations: (2) Ordinary income 87.41% 98.83% 95.63% Capital gains 15% rate 11.27% 0.00% 0.00% Capital gains 20% rate 0.00% 0.00% 0.13% Capital gains 25% rate 1.32% 1.17%(3) 4.24% Return of capital 0.00% 0.00% 0.00% --------------- ------------------- ----------------- Total 100.00% 100.00% 100.00% 69 =============== =================== ================= (1) Represents a dividend of $1.9375 and $0.699653 per depositary share in 2004 and 2003, respectively. (2) The allocations for income tax purposes are the same for the common stock and each series of preferred stock for each period presented. (3) All of the 2003 capital gains represent pre-May 6, 2003 capital gains.
NOTE 22. QUARTERLY INFORMATION (UNAUDITED) The following quarterly information differs from previously reported results since the results of operations of long-lived assets disposed of subsequent to each quarter end in 2004 have been reclassified to discontinued operations for all periods presented. Additionally, total revenues differs from previously reported amounts due to a reclassification made to conform to the fourth quarter and year-end presentations.
2004 First Second Third Fourth Total (1) Quarter Quarter Quarter Quarter ------------- ------------ ------------ ------------ ------------ Total revenues $172,158 $175,502 $193,637 $215,956 $757,253 Income from operations 77,418 79,092 83,442 103,682 343,634 Income before discontinued operations 34,282 24,977 23,566 35,974 118,799 Discontinued operations 324 1,147 613 228 2,312 Net income available to common shareholders 30,189 21,708 19,764 31,141 102,802 Basic per share data: Income before discontinued operations, net of preferred dividends $ 0.49 $ 0.34 $ 0.31 $ 0.50 $ 1.64 Net income available to common shareholders $ 0.50 $ 0.36 $ 0.32 $ 0.50 $ 1.68 Diluted per share data: Income before discontinued operations, net of preferred dividends $ 0.47 $ 0.32 $ 0.30 $ 0.48 $ 1.57 Net income available to common shareholders $ 0.48 $ 0.34 $ 0.31 $ 0.48 $ 1.61
First Second Third Fourth 2003 Quarter Quarter Quarter Quarter Total (1) ------------- ------------ ------------ ------------ ------------ Total revenues $162,931 $161,748 $162,293 $177,340 $664,312 Income from operations 77,744 77,357 77,342 83,283 315,726 Income before discontinued operations 23,064 24,293 23,871 66,909 138,139 Discontinued operations 3,408 414 1,038 1,140 6,000 Net income available to common shareholders 22,776 21,022 20,225 60,483 124,506 Basic per share data: Income before discontinued operations, net of preferred dividends $ 0.33 $ 0.34 $ 0.32 $ 0.99 $ 1.98 Net income available to common Shareholders $ 0.38 $ 0.35 $ 0.34 $ 1.01 $ 2.08 Diluted per share data: Income before discontinued operations, net of preferred dividends $ 0.31 $ 0.33 $ 0.31 $ 0.94 $ 1.89 Net income available to common shareholders $ 0.37 $ 0.34 $ 0.33 $ 0.96 $ 2.00 (1) The sum of quarterly earnings per share may differ from annual earnings per share due to rounding.
NOTE 23. SUBSEQUENT EVENTS Discontinued Operations In March 2005, the Company sold five community centers for an aggregate sales price of $12,100. The Company recognized an aggregate loss on impairment of real estate assets of $617 on these community centers in December 2004 and 70 recognized an additional loss on impairment of $32 during the three months ended March 31, 2005. Total revenues for these community centers were $1,911, $1,684 and $1,706 in 2004, 2003 and 2002, respectively. Certain amounts in the consolidated financial statements have been reclassified to reflect the results of operations of these properties as discontinued operations in all periods presented. Common Stock-Split At the Company's Annual Meeting of Shareholders on May 9, 2005, the Company's shareholders approved an increase in the authorized shares of the common stock under the Company's amended and restated certificate of incorporation to 180,000,000 shares from 95,000,000 shares. On May 10, 2005, the Company's Board of Directors approved a two-for-one stock split of the Company's common stock, which was effected in the form of a stock dividend. The record date for the stock split was June 1, 2005, and the distribution date was June 15, 2005. The Company retained the current par value of $0.01 per share for all shares of common stock. All references to numbers of common shares and per share data in the accompanying consolidated financial statements and notes thereto have been adjusted to reflect the stock split on a retroactive basis. Shareholders' equity reflects the stock split through a reclassification of $313 from Additional Paid-In Capital to Common Stock, which represents the par value of the additional shares resulting from the stock split. The Operating Partnership currently has common units and special common units of limited partner interest outstanding that may be exchanged by their holders, under certain circumstances, for shares of common stock on a one-for-one basis. These common units and special common units were also split on a two-for-one basis so that they continue to be exchangeable on a one-for-one basis into shares of the Company's common stock.