CBL & Associates Properties, Inc. — 2018 Form 10-K
Business context and reporting period. This combined annual report covers CBL & Associates Properties, Inc. and its operating partnership for the fiscal year ended December 31, 2018; it is not a stand-alone quarterly filing. CBL is a REIT operating primarily regional malls and other retail properties in 26 states, with most revenue from the Southeast and Midwest. The company reported 59 malls in which it held a controlling interest and interests in additional malls and other property types.
Key financial metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $858.6 million | $927.3 million |
| Net income (loss) | ($99.2 million) | $159.0 million |
| Net income (loss) attributable to common shareholders | ($123.5 million); diluted EPS ($0.72) | $76.0 million; diluted EPS $0.44 |
| Operating cash flow | $377.2 million | $430.4 million |
| Cash used in investing activities | $27.5 million | $75.8 million |
| Cash used in financing activities | $360.4 million | $351.5 million |
| Adjusted FFO allocable to Operating Partnership common unitholders | $345.1 million; $1.73 per diluted share | $413.7 million; $2.08 per diluted share |
| Same-center NOI | $625.5 million, down 6.0% | $665.6 million |
| Cash, cash equivalents and restricted cash at year-end | $57.5 million, including $25.1 million unrestricted | $68.2 million |
Net investment in real estate assets was $4.79 billion and total assets were $5.34 billion at year-end. Consolidated mortgage and other indebtedness, net, was $4.04 billion. CBL’s pro rata share of consolidated and unconsolidated debt was approximately $4.66 billion before deferred financing costs. Variable-rate debt at the company’s share was approximately $1.06 billion. The company reported an 82.2% debt-to-total-market-capitalization ratio, up from 73.1% in 2017, largely reflecting the decline in its common-stock price.
The common dividend declared for 2018 was $0.675 per share, versus $0.995 in 2017; preferred dividends were $44.9 million. The filing does not provide a clear consolidated profit margin figure. Same-center NOI declined, and the cost-recovery ratio fell to 89.4% from 97.7%.
Material changes versus the prior comparable period
- Revenue fell $68.7 million, or about 7.4%, and net results swung from $159.0 million income to a $99.2 million loss.
- Impairment losses rose to $174.5 million from $71.4 million, primarily involving four malls and undeveloped land. The company also recorded a $1.0 million share of an impairment at an unconsolidated affiliate.
- Same-center NOI declined 6.0%, mainly from lost rent, concessions and tenant reimbursements following retailer bankruptcies and store closures. Stabilized mall sales per square foot edged up to $377 from $375, while comparable small-shop leasing spreads declined 10.8%.
- Adjusted FFO per diluted share fell 16.8%. Management attributed the FFO decline primarily to asset-sale dilution, lower gains on outparcel sales and lower property NOI.
- Operating cash flow decreased $53.2 million. Year-end debt was lower than 2017, but leverage against market capitalization increased materially.
Outlook, management commentary, risks and unusual items
- Outlook: Management gave no specific earnings or FFO guidance. It expects negative leasing spreads to persist in the near term, while expressing optimism that positive 2018 sales trends and redevelopment and tenant-mix diversification can help stabilize the portfolio. In 2018, more than 67% of new leasing was with non-apparel tenants.
- Liquidity and refinancing: In January 2019, the Operating Partnership replaced its unsecured bank facilities and term loans with a $1.185 billion secured facility: a $685 million revolver and a $500 million term loan. The facility matures in July 2023, bears variable interest at LIBOR plus 225 basis points, and is secured by 17 malls and 3 associated centers. At closing, the revolver had $265.2 million available. Term-loan principal is scheduled to decline by $35 million annually.
- Property transfers: In January 2019, Acadiana Mall was transferred to its lender in satisfaction of a $119.8 million non-recourse loan, and Cary Towne Center was sold with proceeds applied to its $43.7 million loan. The company expected to recognize approximately $73.6 million in aggregate gains on extinguishment of debt in the first quarter of 2019.
- Debt and refinancing risk: The company reported approximately $447.4 million, $438.7 million and $820.3 million of its share of debt maturing in 2019, 2020 and 2021, respectively, after available extensions. Some property loans were in default or under lender discussions. Credit ratings were below investment grade with negative outlooks.
- Retail and occupancy risk: Bon-Ton and Sears bankruptcies contributed to more than 40 announced anchor closures in 2018. Management estimated 2019 closures related to Gymboree, Charlotte Russe, Things Remembered and Payless could affect approximately 137 stores and $12.7 million in annual gross rent, with additional Charlotte Russe rent at risk. Mall occupancy was 91.8%, versus 92.0% in 2017.
- Legal contingency: A putative tenant class action alleging electricity overcharges received partial class certification in January 2019. The company disputed the claims, recorded no accrual because a loss was not considered probable, and stated it could not reasonably estimate a potential loss. The matter was uninsured and could have a material adverse effect if decided adversely.
- Other items: The company adopted new revenue-recognition guidance in 2018, with an immaterial expected effect on revenue; reported cumulative accounting adjustments to opening equity; and adopted lease accounting in January 2019, expecting to record approximately $4.4 million in right-of-use assets and lease liabilities for identified leases.
Important facts for investors to verify
- Debt maturities, covenant headroom and available borrowing capacity under the January 2019 secured facility, including the effect of pledging properties as collateral.
- Whether expected debt-extinguishment gains from the Acadiana Mall and Cary Towne Center transactions were realized, and their cash and balance-sheet effects.
- Actual anchor and small-shop closures, resulting rent losses, occupancy trends, leasing spreads and cost recovery.
- Further impairments, defaults, restructurings or lender actions, particularly at properties already classified as lender or repositioning malls.
- Developments in the uninsured electricity-overcharge litigation, including any loss estimate or accrual.
- The sustainability of cash flow, common dividends and preferred distributions in light of declining NOI and FFO and substantial debt obligations.