CBL

Business Context and Reporting Period

Company: CBL & Associates Properties, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: CBL is a self-managed, self-administered Real Estate Investment Trust (REIT) owning, developing, and operating regional malls, open-air centers, and community shopping centers. As of December 31, 2006, the portfolio included 77 enclosed regional malls, two open-air centers, 31 associated centers, and five community centers, primarily located in the southeastern and midwestern United States.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased by $94.7 million (10.4%) year-over-year, driven by $91.2 million from new properties opened or acquired since 2005 and $14.8 million from comparable properties.
• Net Income Decline: Net income available to common shareholders decreased by $45.0 million (34.1%). This decline was primarily due to the absence of a $21.6 million gain on the sale of management contracts and a $44.2 million gain related to the redemption of the Galileo America joint venture interest, both realized in 2005.
• Interest Expense: Interest expense increased by $48.9 million to $257.1 million, attributed to debt on new properties, refinancing activities, and higher variable interest rates.
• Asset Sales: In 2006, the company sold five community centers to Galileo America LLC, recognizing a net gain of $7.2 million on three properties and an impairment loss of $0.3 million on two others. This contrasts with 2005, which included significant gains from the Galileo America transaction.
• Development: The company opened five new developments and eight property expansions totaling 1.5 million square feet in 2006. Approximately 3.1 million square feet of new developments and expansions were under construction as of year-end.

Guidance, Outlook, and Risks

• Capital Strategy: Management intends to maintain a conservative debt-to-total-market capitalization ratio. The company expects to refinance approximately $91.8 million of debt maturing in 2007.
• Development Pipeline: The company has approximately $507.4 million of net investment in developments and expansions scheduled to open in 2007 and 2008.
• Key Risks:
  • Tenant Concentration: The top 25 tenants accounted for 34.95% of total revenues. The loss of significant anchor tenants due to bankruptcy or consolidation poses a material risk.
  • Interest Rates: Rising interest rates could increase borrowing costs and decrease stock price. A 0.5% increase in rates would decrease annual earnings by approximately $4.4 million.
  • REIT Qualification: Failure to qualify as a REIT would subject the company to regular corporate income taxes, significantly reducing funds available for distribution.
  • Internal Control Weakness: The company identified a material weakness in internal controls over financial reporting related to the accounting and reporting for income taxes (specifically regarding stock compensation deductions and deferred taxes), resulting in a restatement of retained earnings.

Investor Verification Checklist

• Internal Control Remediation: Verify the progress of remediation plans for the material weakness in income tax accounting controls disclosed in Item 9A.
• Debt Maturities: Review the schedule of debt maturities, specifically the $91.8 million due in 2007, and assess refinancing risks given the variable-rate portion of the debt portfolio.
• Tenant Bankruptcies: Monitor the financial health of major tenants, particularly Limited Brands, Foot Locker, and The Gap, which collectively represent over 10% of revenues.
• Development Costs: Track capital expenditures against the projected $507.4 million investment in new developments to ensure cost overruns do not impact liquidity.
• FFO vs. Net Income: Analyze the divergence between Net Income and Funds From Operations (FFO) to understand the impact of non-cash items like depreciation and one-time gains/losses on asset sales.