CBL & Associates Properties, Inc. — Q1 2014 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2014, compared with the same 2013 period. CBL is a REIT operating primarily through CBL & Associates Limited Partnership. Its portfolio includes malls, outlet and open-air centers, community centers and office properties across 27 states, concentrated in the Southeast and Midwest. Unless stated otherwise, amounts below are for the consolidated company and are in U.S. dollars.
Key financial and operating metrics
| Metric | Q1 2014 | Q1 2013 or prior date |
|---|---|---|
| Total revenue | $261.2 million | $258.5 million |
| Income from operations | $76.2 million | $93.6 million |
| Net income | $63.8 million | $39.9 million |
| Net income attributable to common shareholders | $44.1 million; $0.26 per diluted share | $19.1 million; $0.12 per diluted share |
| Net cash provided by operating activities | $86.9 million | $67.5 million |
| Cash and cash equivalents | $56.2 million at March 31 | $65.5 million at December 31, 2013 |
| Consolidated mortgage and other indebtedness | $4.800 billion; weighted-average rate 4.77% | $4.858 billion at December 31, 2013 |
| Available capacity on credit facilities | $918.8 million | — |
| Same-center NOI | $171.1 million, up 1.5% | $168.5 million |
| Common dividend declared per share | $0.245 | $0.230 |
Operating Partnership debt including CBL’s pro rata share of unconsolidated affiliates was $5.462 billion. Operating cash flow increased, while investing activities used $42.8 million and financing activities used $53.4 million; cash declined by $9.3 million during the quarter. Adjusted FFO for the Operating Partnership was $102.9 million versus $101.6 million; reported FFO was $146.4 million versus $101.6 million, reflecting unusual gains. The filing does not provide a single conventional operating-margin measure.
Material changes versus the prior comparable period
- Revenue rose modestly, but operating income declined, principally reflecting a $17.2 million non-cash real estate impairment charge and higher maintenance, general and administrative expenses.
- Net income benefited from a $43.9 million gain when Citadel Mall was transferred to its lender in satisfaction of non-recourse debt. The reported $42.7 million net gain on debt extinguishment also reflects a $1.2 million prepayment fee on the St. Clair Square loan.
- Same-center NOI increased 1.5%. Management said leasing and expansions contributed, while tenant bad debt, snow removal and utility costs weighed on growth. Excluding those costs and a favorable insurance adjustment, management estimated NOI growth would have been 3%.
- Portfolio occupancy was 92.5%, up 30 basis points year over year. Comparable mall store sales fell 7.4% for the quarter; trailing-twelve-month sales per square foot were $351 versus $363.
- Debt decreased from year-end. CBL repaid a $122.4 million St. Clair Square mortgage using credit-facility borrowings and acquired the remaining 12% interest in Pearland Town Center for $17.9 million.
Outlook, commentary and risks
- No formal earnings or FFO guidance is provided. Management forecast 2014 occupancy improvement of 0–25 basis points for both the total portfolio and stabilized malls. It cited positive leasing spreads and expected retailers to continue expansion in 2014 and 2015.
- Longer-term objectives include generating more than 90% of mall NOI from Tier One and Tier Two malls, achieving sustainable same-center NOI growth of 2–4%, and reducing debt to total asset value below 50% over the next few years. Management identified 21 malls and associated centers for potential disposition. Lakeshore Mall was sold in May 2014 for $14.0 million.
- Development and redevelopment projects under way had estimated total costs of $202.6 million, with $99.1 million incurred by March 31. Management reported that the outlet center in Simpsonville, Kentucky was approximately 96% leased or committed.
- Credit agreements were reported in compliance with covenants. The debt-to-total-asset-value covenant measure was 51.2% against a limit below 60%. CBL’s debt-to-total-market-capitalization ratio was 56.7%, up from 51.0% a year earlier, partly due to a lower share price.
- Property-level stress remains significant: Chapel Hill Mall’s $68.6 million mortgage was in default and the property was impaired after cash flows failed to cover debt service. Columbia Place’s $27.3 million loan was past maturity and foreclosure was anticipated. Citadel Mall’s foreclosure was completed in January 2014.
- Other risks include interest-rate changes, tenant bankruptcies and store closures, retail demand and rental-rate shifts, refinancing and capital availability, and construction or development execution. A 0.5% increase in rates was estimated to increase annual interest expense by about $4.9 million on the company’s pro rata variable-rate debt.
- Ordinary-course litigation was not expected by management to materially affect the business or financial condition. A construction-related lawsuit remains ongoing; the company received a $0.8 million partial settlement in February 2014. Environmental exposure was described as reasonably possible but not expected to be material.
Important facts for investors to verify
- How much reported earnings and FFO depend on the Citadel Mall debt-extinguishment gain and other nonrecurring items; compare reported with adjusted FFO.
- Current status and potential outcomes for Chapel Hill Mall and Columbia Place, including foreclosure, debt-service shortfalls and any further impairment.
- Refinancing or repayment plans for 2014 maturities, the use of credit facilities, and actual available liquidity after commitments and letters of credit.
- Whether occupancy, leasing spreads and same-center NOI can improve while mall sales are declining and tenant bad debt and winter-related costs remain elevated.
- Execution, leasing, cost and funding progress for development projects and the planned disposition of identified non-core properties.