CBL & ASSOCIATES PROPERTIES INC quarterly report, Q3 FY2011

CBL & Associates Properties, Inc. — Q3 2011 Form 10-Q

Reporting period: Three and nine months ended September 30, 2011; filed November 9, 2011. CBL is a REIT focused on malls and other retail properties, primarily in the southeastern and midwestern United States. Unless indicated otherwise, amounts below are in millions of dollars.

Key financial results

MetricQ3 2011Q3 2010Nine months 2011Nine months 2010
Total revenue$270.0$260.7$801.2$780.1
Income from operations$52.6$97.1$244.9$290.8
Net income (loss)$(18.3)$27.7$75.1$59.4
Net income (loss) attributable to common shareholders$(27.3)$9.6$19.2$13.3
Common-share diluted EPS$(0.18)$0.07$0.13$0.10
Operating cash flowNot separately statedNot separately stated$318.1$289.8
  • Revenue grew 3.6% in Q3 and 2.7% year to date. Management attributed rental growth chiefly to higher base rents, improved leasing spreads and occupancy, and the addition of Parkway Place to consolidated results.
  • Q3 operating expenses increased $53.9 million, primarily due to a $51.3 million real estate impairment. The nine-month impairment charge was $55.8 million. The Q3 charge included $50.7 million for Columbia Place, written down from $56.7 million to estimated fair value of $6.1 million.
  • FFO of the Operating Partnership was $40.0 million for Q3 versus $89.5 million a year earlier; excluding impairment charges, it was $91.1 million versus $89.5 million. Nine-month FFO was $252.4 million versus $251.7 million; excluding impairments and the Oak Hollow debt-extinguishment gain, adjusted FFO was $277.0 million versus $277.1 million. FFO is a non-GAAP measure and is not cash flow.
  • Cash and cash equivalents were $61.9 million at September 30, up $11.0 million from year-end 2010. Investing activities used $172.8 million in the first nine months, including $149.3 million of real estate additions. Financing activities used $134.4 million; cash dividends paid to common and preferred holders totaled $123.7 million.
  • Consolidated debt was $5.23 billion, versus $5.21 billion at December 31, 2010; weighted-average interest rate was 4.94%. Including CBL’s proportionate share of unconsolidated affiliates and excluding noncontrolling investors’ share, debt was $5.76 billion, with a 4.97% weighted-average rate. Variable-rate debt was 21.8% of pro rata debt.
  • Management reported approximately $930.1 million available on credit facilities and a debt-to-gross-asset-value ratio of 55.9%; interest coverage was 2.39x. The company was in compliance with its credit covenants at quarter-end.

Material changes and operating trends

  • Q3 revenue increased $9.3 million year over year, while operating income fell $44.5 million, chiefly reflecting the impairment charge. Nine-month net income included a $31.4 million gain on extinguishment of Oak Hollow Mall debt, reported in discontinued operations; Oak Hollow had been sold for $9.0 million gross.
  • Portfolio occupancy was 91.3%, up from 91.0% a year earlier. Stabilized mall occupancy was 91.2%, down from 91.6%; non-stabilized mall occupancy improved to 90.5% from 78.0%.
  • Comparable stabilized mall sales per square foot increased 3.5% for the first nine months; trailing-twelve-month comparable sales were $329 per square foot, up 3.2%. Q3 leasing spreads were up 8.2% overall, and the company signed approximately 2.0 million square feet of leases, nearly double the prior-year quarter.
  • Operating cash flow rose $28.3 million year over year, attributed mainly to higher rental income and lower interest expense. Interest expense declined $6.3 million for the nine-month period, although the company refinanced some credit-line borrowings with mortgages generally carrying higher rates.
  • During the first nine months, CBL closed 13 operating-property loans totaling $794.9 million, largely to refinance debt and reduce secured-line borrowings. Subsequent to quarter-end, it retired $133.9 million and $20.8 million property loans using credit lines.

Outlook, risks and unusual items

  • Management expected total portfolio occupancy at year-end to be 75–100 basis points above the prior year-end level of 92.4%, based on then-current leasing activity. It cited solid back-to-school results and anticipated similar positive trends during the holiday season. This is not earnings guidance.
  • In October 2011, CBL closed a joint venture with TIAA-CREF involving CoolSprings Galleria, West County Center, Oak Park Mall and Pearland Town Center. CBL reported approximately $204.2 million of net proceeds used to repay secured-line borrowings; it retained management and leasing responsibilities.
  • Debt maturities and refinancing remain important risks. CBL intended to exercise extension options on unsecured term loans of $209.2 million (November 2011 maturity) and $228.0 million (April 2012 maturity). Management said $414.7 million of pro rata debt was scheduled to mature during the remainder of 2011, with substantial amounts expected to be retired or extended.
  • Interest-rate sensitivity: management estimated that a 0.5 percentage-point increase in rates would raise annual cash outflows and interest expense by approximately $6.3 million; a 0.5-point decrease would reduce them by approximately $3.0 million.
  • Guarantee exposures include a Lee’s Summit, Missouri loan arrangement in default, with $16.3 million outstanding guaranteed by CBL; management did not accrue a contingent obligation because it did not consider payment probable. CBL also guaranteed $45.5 million of West Melbourne joint-venture loans maturing in November 2011 and $68.3 million of Port Orange joint-venture construction debt maturing in December 2011, subject to available extensions.
  • Westfield holds preferred joint-venture units with a $423.8 million carrying value. Distribution rates and redemption terms could increase the cost if specified redemption conditions are not met, including a potential 9% rate under certain circumstances beginning in 2013.
  • CBL described construction-related litigation involving its subsidiary, contractors, insurers and Kohl’s; the case was in discovery. Management did not expect pending litigation to materially adversely affect financial position or results, but outcomes remain uncertain.
  • Key risks include high leverage, refinancing and capital-market access, interest-rate changes, retail tenant bankruptcies or store closures, consumer weakness, operating-cost recovery, development execution, property impairment, regional concentration and REIT qualification. CBL recorded a $3.0 million liability for potential asbestos abatement.

Important facts for investors to verify

  • Whether Columbia Place’s sharply reduced estimated fair value and impairment assumptions are supported by subsequent leasing, occupancy and cash-flow performance.
  • Actual execution of the stated debt extensions and refinancing plans, covenant headroom, and the effect of post-quarter-end joint-venture proceeds on debt and liquidity.
  • Whether occupancy, leasing spreads and sales trends continued to improve, particularly at stabilized malls and recently opened or redeveloped properties.
  • The status and potential financial exposure of the Lee’s Summit default, the West Melbourne and Port Orange loan extensions, and the litigation and insurance claims.
  • Common and preferred dividend coverage by sustainable operating cash flow and FFO, while distinguishing FFO from GAAP earnings and cash available for distributions.