CBL & Associates Properties, Inc. — 2016 Form 10-K
Business context and reporting period. This combined filing covers CBL & Associates Properties, Inc. and its Operating Partnership for the fiscal year ended December 31, 2016. CBL is a REIT that owns, leases, manages and develops shopping malls and other retail, mixed-use and office properties, primarily in the southeastern and midwestern United States. At year-end it reported interests in 113 properties, including consolidated and unconsolidated properties. The Company conducts substantially all operations through the Operating Partnership.
Financial performance and condition
- Revenue: $1.028 billion, down 2.5% from $1.055 billion in 2015. Dispositions reduced rental revenue and tenant reimbursements; comparable-property and new-property growth partly offset the decline.
- Profit: Net income was $195.5 million, up from $119.0 million. Net income attributable to common shareholders was $128.0 million, or $0.75 per diluted share, versus $58.5 million, or $0.34, in 2015. The increase included substantial gains from unconsolidated-affiliate property sales and other transactions, so reported earnings reflect significant nonrecurring items.
- Operating performance: Income from operations was $253.6 million, down from $277.6 million. Same-center NOI, a non-GAAP measure, rose 2.3% to $716.1 million. Same-center mall occupancy increased to 94.2% from 93.7%; average annual base rent increased 2.1% to $32.82 per square foot. Same-center mall sales per square foot fell 1.6% to $376.
- FFO: FFO allocable to Operating Partnership common unitholders was $538.2 million, up 11.6%; adjusted FFO was $480.8 million, up 3.9%. Adjusted FFO per diluted share was $2.41 versus $2.32. These are non-GAAP measures and are not equivalent to operating cash flow.
- Cash flow and liquidity: Operating cash flow was $468.6 million, down from $495.0 million. Investing activities used $1.4 million, compared with $259.8 million in 2015, primarily reflecting property-sale proceeds and distributions from affiliates. Financing activities used $485.1 million. Unrestricted cash was $19.0 million at year-end, down $17.9 million; three unsecured credit facilities had $1.1 billion in aggregate capacity and approximately $6.0 million outstanding.
- Debt: The Company’s pro rata share of consolidated and unconsolidated debt was approximately $4.97 billion, with a 4.70% weighted-average rate; 19.3% was variable-rate. Debt equaled 63.0% of total market capitalization. The Operating Partnership issued $400 million of 5.95% unsecured notes due 2026, primarily to reduce credit-facility borrowings. The Company reported compliance with debt covenants at year-end.
- Balance sheet and distributions: Total assets were $6.10 billion; net real estate investment was $5.52 billion; consolidated mortgage and other debt, net, was $4.47 billion. Common dividends were $0.265 per share each quarter, or $1.06 declared for the year; future dividends remain subject to Board discretion and financial, liquidity and contractual constraints.
Material changes versus 2015
- Revenue declined, while comparable-property NOI improved. Total portfolio occupancy rose to 94.8% from 93.6%, but same-center mall sales weakened.
- Impairment losses increased to $116.8 million from $105.9 million. The 2016 charge primarily related to property dispositions, malls in foreclosure and office buildings held for sale.
- Interest expense declined by $13.0 million, reflecting repayment or refinancing of higher-rate property debt, partly offset by corporate borrowing and default interest.
- Property dispositions generated $414.0 million in gross proceeds and $340.0 million in net proceeds ($252.9 million at CBL’s share). The portfolio-refinement program reduced Tier 3 malls’ share of total mall NOI to 6.1% from 11%.
- Unadjusted FFO rose partly because of unusual items; adjusted FFO growth was more moderate. CBL recorded $117.5 million of equity in earnings of unconsolidated affiliates, including significant gains on affiliate property sales.
Outlook, risks and unusual items
- Management described its priorities as refining the portfolio, reducing leverage, strengthening the balance sheet and growing property cash flows through leasing, redevelopment and cost control. It reported no numerical full-year 2017 earnings or FFO guidance in the provided filing text.
- At year-end, three malls—Chesterfield, Midland and Wausau—were in default and receivership, with approximately $189.6 million of associated debt. Midland was returned to its lender in January 2017; foreclosure on the other two was expected to conclude in early 2017. The filing notes that the malls’ income was insufficient to cover debt service.
- Debt refinancing is a key near-term risk. The filing identifies $725.7 million of pro rata 2017 maturities, including a $350 million unsecured term loan; after specified post-year-end repayments, it reports $192.9 million of remaining 2017 property-loan maturities. Management expected to refinance the Outlet Shoppes at El Paso loan and was assessing other loans. Available term-loan extensions are subject to conditions.
- CBL sold interests in multiple properties, recognized $116.8 million in impairment losses and recorded gains from affiliate sales, outparcel sales and investment redemptions. A $15.5 million redemption of its Jinsheng investment generated a $10.1 million gain. These items materially affect year-over-year GAAP earnings.
- Subsequent to year-end, CBL acquired five Sears department-store locations and two auto centers for $72.5 million, leasing the department stores back to Sears under new 10-year leases; it also acquired four Macy’s locations for $7.0 million for future redevelopment. The Outlet Shoppes at Laredo was under development and reported approximately 80% leased or committed.
- Key risks include retail tenant bankruptcies and store closures, competition from e-commerce and other retail formats, regional economic concentration, property impairments, refinancing and interest-rate exposure, covenant compliance, and potential limits on distributions. A 0.5% rate increase was estimated to increase annual interest expense by approximately $4.7 million on variable-rate debt.
- Class-action securities suits and a shareholder derivative suit described in the filing were voluntarily dismissed by early 2017; the Company reported no payment or agreement in those matters. The filing also recorded $2.3 million of nonrecurring professional fees related to a completed SEC investigation and $2.6 million of litigation-settlement expense.
- Management stated that disclosure controls and internal control over financial reporting were effective at December 31, 2016; the independent auditor also reported effective internal control over financial reporting.
Important facts for investors to verify
- Reconcile debt and maturity figures across the filing, including the pro rata debt presentation, the $725.7 million of 2017 maturities and post-year-end repayments, and the status of remaining refinancing or extension plans.
- Assess the outcomes and financial effects of foreclosure or transfer of Chesterfield and Wausau, including any additional impairment, debt extinguishment gains or guarantees.
- Separate recurring property performance from gains on affiliate and property sales, impairment charges, investment gains, default interest and other adjustments when evaluating earnings and FFO.
- Track mall occupancy, sales per square foot, leasing spreads, anchor vacancies and tenant credit exposure, particularly for department-store tenants and properties excluded from core operating metrics.
- Review the sustainability of common and preferred distributions against operating cash flow, capital spending, debt service, covenant restrictions and the REIT distribution requirement.
- Monitor redevelopment spending, leasing and returns for Laredo and acquired Sears and Macy’s locations, as well as the effect of dispositions on future revenue and cash flow.