CBL & Associates Properties, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. CBL is a REIT operating a portfolio of malls and other retail properties through CBL & Associates Limited Partnership. Unless noted, amounts below are in millions; the filing presents financial statements for both entities, whose results are substantially similar.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $214.6 | $229.2 | $434.8 | $467.2 |
| Operating income | $13.3 | $22.3 | $57.4 | $99.4 |
| Net income (loss) | $(30.0) | $70.6 | $(30.6) | $109.1 |
| Net income (loss) attributable to common shareholders | $(35.0) | $30.2 | $(45.3) | $53.1 |
| Common-shareholder EPS | $(0.20) | $0.18 | $(0.26) | $0.31 |
| FFO, as adjusted, per diluted share | $0.46 | $0.50 | $0.88 | $1.02 |
Operating margin, calculated as operating income divided by revenue, was approximately 6.2% in Q2 2018 versus 9.7% a year earlier, and 13.2% for the first half versus 21.3%. Same-center NOI fell 6.9% in Q2 and 6.8% for the first half. Adjusted FFO declined 7.0% and 12.9%, respectively, year over year.
For the six months, operating cash flow was $179.9, down from $205.3. Investing activities used $22.8, versus $18.0 provided in the prior-year period; financing activities used $164.7, versus $211.7. Cash, cash equivalents and restricted cash ended the period at $60.5, including $23.4 of unrestricted cash.
At June 30, total assets were $5.58 billion and net consolidated debt was $4.17 billion. The Operating Partnership’s pro rata share of consolidated and unconsolidated debt was $4.73 billion, at a 4.77% weighted-average interest rate. The company reported $112.6 of borrowings on its unsecured credit lines and $550.3 of additional availability under covenant limits. Key actual covenant ratios included debt to total asset value of 52% against a 60% maximum and fixed-charge coverage of 2.3x against a 1.5x minimum.
Changes versus prior period
- Revenue fell 6.4% in Q2 and 6.9% for the first half, primarily reflecting tenant bankruptcies, store closures, rent concessions and property dispositions.
- Common-shareholder results moved from profit to loss. First-half results included $70.0 of impairment charges, compared with $46.5 in the prior-year period, and substantially lower gains on property sales. Prior-year results included $85.5 of sale gains and a $24.5 debt-extinguishment gain.
- Same-center mall occupancy was 89.5%, down from 90.4%; stabilized mall sales per square foot were broadly flat at $376 versus $375. Comparable small-shop leasing spreads remained negative.
- Common dividends declared declined to $0.20 per share quarterly from $0.265. First-half common dividends paid were $68.7 versus $90.6.
- Debt decreased modestly from year-end on a pro rata basis, while the weighted-average remaining term of total pro rata debt shortened to 4.2 years from 4.6 years.
Outlook, risks and unusual items
- Management said quarterly results were in line with guidance. It planned to pay $0.80 per common share in 2018, subject to board approval, and said it would review the 2019 dividend to preserve liquidity for redevelopment without taking on additional debt. No specific full-year earnings or FFO guidance is stated in the supplied filing text.
- Management said it expected full-year sales to remain positive, while anticipating about 2.0 million square feet of additional store closures in 2018, including approximately 1.9 million square feet from Bon-Ton locations. More than 60% of new leases executed year to date were for non-apparel uses.
- Two malls were impaired: Janesville Mall by $18.1, based on a sale contract, and Cary Towne Center by $52.0 after IKEA terminated its land-purchase contract. Cary’s $46.7 interest-only, non-recourse loan was in default at June 30; the company subsequently entered into a forbearance agreement. Janesville was sold in July for $18.0 gross, with net proceeds used to reduce credit-line borrowings.
- Near-term refinancing is a key concern: $644.0 of scheduled consolidated debt payments fell in 2018, including $540.0 related to two unsecured term loans. After quarter-end, $190.0 was repaid using credit lines; the $350.0 term loan was still being refinanced, and management was discussing collateralizing that loan and the $1.1 billion-capacity credit facilities. The filing said a new loan on The Outlet Shoppes at El Paso was anticipated within 90 days.
- After quarter-end, S&P downgraded the Operating Partnership to BB+, increasing spreads on unsecured facilities and two term loans from September 1, 2018. Management also cited retail competition, tenant failures, occupancy and rental-rate pressure, interest-rate changes, and access to refinancing as risks. A 0.5 percentage-point rate increase was estimated to reduce annual cash flow by about $5.8.
- Accounting changes adopted in 2018 produced opening equity adjustments, including $57.9 related to a previously recorded partial real-estate sale and $11.4 related to intra-entity transfers. These are accounting transition effects, not current-period operating revenue.
- Management said ordinary-course litigation was not expected to materially affect the business; environmental losses were considered reasonably possible but not expected to be material. The Operating Partnership had $17.3 of performance bonds outstanding and recorded $1.2 of liabilities for specified joint-venture debt guarantees.
Investor facts to verify
- Refinancing, repayment or extension outcomes for the $350.0 term loan, credit facilities and other 2018 maturities, and the terms and collateral requirements of any replacement financing.
- Progress under Cary Towne Center’s forbearance agreement and the expected resolution of the defaulted loan; completion and proceeds from the Janesville sale.
- Tenant closures, occupancy, leasing spreads and same-center NOI trends, particularly the replacement and impact of Bon-Ton stores.
- Whether the planned $0.80 2018 dividend is maintained and what the board decides for 2019.
- Effects of the S&P downgrade on borrowing costs, covenant headroom, liquidity and access to capital markets.