CBL

Business Context and Reporting Period

Company: CBL & Associates Properties, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: CBL is a self-managed, self-administered Real Estate Investment Trust (REIT) engaged in the ownership, development, acquisition, leasing, management, and operation of regional shopping malls, open-air centers, and community shopping centers. As of June 30, 2008, the company owned controlling interests in 75 regional malls/open-air centers, 28 associated centers, eight community centers, and 13 office buildings across 27 states, primarily in the southeastern and midwestern United States.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased by $52.3 million (10.6%) year-over-year, driven primarily by $51.4 million in revenue from "New Properties" acquired or opened in late 2007 and early 2008. Comparable property revenues decreased slightly due to lower percentage rents from reduced tenant sales.
• Net Income Decline: Net income available to common shareholders decreased by $13.0 million (45.1%) to $15.8 million. This decline was primarily due to increased interest expense ($21.7 million increase) related to new property debt and refinancing, partially offset by gains on sales of real estate assets and discontinued operations.
• Interest Expense: Interest expense rose to $156.7 million for the six-month period, up from $134.9 million in the prior year, reflecting higher outstanding principal balances despite lower weighted average interest rates.
• Discontinued Operations: The company recognized a gain of $3.1 million on the sale of discontinued operations (five community centers and one office property in Greensboro, NC, plus Chicopee Marketplace III), compared to a loss of $0.1 million in the prior year.
• FFO Growth: Despite the drop in GAAP net income, FFO allocable to common shareholders increased by 6.6% to $105.9 million, reflecting the capital-intensive nature of the business and the impact of depreciation.

Guidance, Outlook, Risks, and Unusual Items

• Outlook and Liquidity: Management expressed confidence in liquidity, citing the successful closing of a new $228 million unsecured term facility in April 2008. The company expects to continue funding capital programs through operating cash flows, credit facilities, and equity/debt markets.
• Tenant Bankruptcies: Store closures and bankruptcies increased in 2008. The company identified Steve & Barry's as its largest outstanding bankruptcy exposure (21 locations, $7.3 million annual gross rent). Other affected tenants include Linens 'n Things, Goody's, and The Disney Store. Management noted that closures through June 30 represented less than 1% of total revenues.
• Development Pipeline: Significant development projects are underway, including the mixed-use Pearland Town Center (opened July 2008, 85% leased at opening) and various mall expansions and community centers.
• Debt Maturities: Approximately $1.59 billion of debt is scheduled to mature before June 30, 2009. The company intends to extend, retire, or refinance these obligations, with term sheets already in place for $251.6 million of loans.
• Unusual Items:
  • Discontinued Operations: Results of 19 retail and office properties acquired in late 2007 were reclassified to discontinued operations as they met held-for-sale criteria.
  • Executive Retirement: A charge of $1.2 million was incurred related to the retirement of the Senior Vice President and Director of Corporate Leasing.

Investor Verification Checklist

• Debt Refinancing Risk: Verify the company's ability to refinance the $1.59 billion in debt maturing within 12 months given the tight credit markets mentioned in the filing.
• Tenant Bankruptcy Exposure: Monitor the resolution of the Steve & Barry's bankruptcy and the impact of potential store closures on occupancy rates and rental income.
• Cost Recovery Ratio: Review the decline in the cost recovery ratio (96.4% for six months ended June 30, 2008 vs. 100.7% prior year) and its drivers, specifically bad debt expense.
• Development Progress: Track the opening dates and initial leasing performance of major development projects like Pearland Town Center and Hammock Landing.
• FFO vs. Net Income: Analyze the divergence between GAAP net income and FFO to understand the impact of depreciation and amortization on reported earnings.