CBL

Business Context and Reporting Period

Company: CBL & Associates Properties, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: CBL is a self-managed, self-administered Real Estate Investment Trust (REIT) owning, developing, and operating regional malls, open-air centers, community shopping centers, and office buildings. As of year-end 2007, the portfolio included interests in 84 regional malls, 32 associated centers, 15 community centers, and 19 office buildings, primarily located in the southeastern and midwestern United States.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased by $45.1 million (4.5%) driven by $29.8 million from new properties and $13.9 million from comparable properties. Comparable property revenue growth was offset by a 90 basis point reduction in occupancy and lower lease termination fees.
• Profitability Decline: Net income available to common shareholders decreased by 31.7% to $59.4 million. This decline was primarily due to an $18.5 million non-cash impairment charge on marketable real estate securities, higher interest expense ($30.8 million increase), and lower gains from outparcel sales.
• FFO Decline: FFO of the Operating Partnership decreased by $28.6 million (7.3%) to $361.5 million, largely attributed to the securities write-down and lower lease termination fees.
• Debt Expansion: Total consolidated debt increased by $1.3 billion to $5.87 billion, reflecting significant acquisitions and refinancing activities. Interest expense rose to $287.9 million.
• Occupancy: Total portfolio occupancy remained relatively stable at 94.0%, though stabilized mall occupancy dipped slightly to 94.2% from 94.5%.

Guidance, Outlook, and Risks

Management Commentary: Management described 2007 as an "uncharacteristically disappointing year," marking the first negative growth in FFO in 13 years. Challenges included delays in tenant openings for new developments, flat same-store sales for stabilized malls, and inflationary pressures on utility and interest costs. Management expressed "cautious optimism" for 2008, anticipating benefits from 2007 expansions and Q4 2007 acquisitions.

Outlook: The company is taking a "more guarded approach" to business due to a slower start in 2008 and reduced retailer growth plans. However, management views capital constraints as an opportunity to enhance credit quality and increase productivity.

Key Risks and Contingencies:

• Market Risk: Exposure to rising interest rates on variable-rate debt (22.0% of total debt share). A 0.5% rate increase would decrease annual earnings by approximately $5.6 million.
• Tenant Risk: Potential impact from retailer bankruptcies and store closures (e.g., Bombay, Ann Taylor, Talbot's). Management believes the impact on the portfolio is not expected to be significant but is actively negotiating replacements.
• Debt Maturities: Approximately $380 million of non-recourse debt matures in 2008. The company is working with lenders to refinance or extend these loans.
• Impairment: Recognized an $18.5 million impairment on marketable securities due to a significant decline in fair value.

Investor Verification Checklist

• Debt Refinancing: Verify the company's ability to refinance or extend the ~$380 million of debt maturing in 2008 amidst tightening credit markets.
• Tenant Bankruptcies: Monitor the impact of announced retailer bankruptcies (e.g., Bombay, Friedman's) on occupancy rates and rental income.
• Acquisition Integration: Assess the performance contribution of the $1.04 billion Westfield acquisition and the $184.2 million Starmount portfolio acquired in late 2007.
• FFO Trends: Confirm whether the negative FFO growth trend reverses in 2008 as new developments open and comparable property leasing improves.
• Interest Rate Exposure: Evaluate the effectiveness of the $250 million interest rate swap in mitigating variable-rate debt risks.