CBL & Associates Properties, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. CBL is a retail-focused REIT operating primarily through CBL & Associates Limited Partnership; the combined filing presents separate statements for the two entities, whose operating results are substantially the same.
Business context
CBL owned controlling interests in 75 regional mall, open-air and outlet centers, 25 associated centers, seven community centers and eight office buildings. Properties were located in 27 states, primarily in the Southeast and Midwest.
Financial and operating performance
- Revenue: Q3 revenue was $257.5 million, up 3.4% from $249.2 million. Nine-month revenue was $771.6 million, up 5.3% from $732.6 million.
- Profit: Q3 net income was $44.2 million versus $12.5 million; income attributable to common shareholders was $23.1 million, or $0.14 per share, versus a $2.5 million loss, or $(0.02) per share. Nine-month common-shareholder income was $42.7 million, or $0.26 per share, versus $31.7 million, or $0.21 per share.
- Operating results and margins: Operating income was $97.7 million in Q3 versus $94.4 million, with an operating margin of about 38.0% versus 37.9%. Nine-month operating income was $268.4 million versus $275.9 million; margin was about 34.8% versus 37.6%, reflecting higher operating costs and impairment charges.
- Cash flow: Nine-month cash from operations was $336.0 million, up from $319.6 million. Investing used $63.4 million, compared with $163.7 million in 2012; financing used $276.3 million, compared with $145.7 million. Cash ended the period at $74.6 million, down $3.7 million from year-end 2012.
- Debt and liquidity: Consolidated debt was $4.868 billion, up from $4.746 billion at December 31, 2012. CBL’s pro rata consolidated and unconsolidated debt was $5.588 billion, up from $5.445 billion; its weighted-average rate was 4.59%. Unsecured credit facilities totaled $1.3 billion, with $664.9 million drawn. Debt-to-total-market-capitalization was 55.7%. The company reported compliance with debt covenants and held investment-grade ratings of Baa3 from Moody’s and BBB- from Fitch, both with stable outlooks.
- Dividends and leasing: The quarterly common dividend was $0.23 per share. Portfolio occupancy rose to 93.8% from 93.0%; Q3 leasing spreads were 12.8%. Comparable mall store sales declined 0.6% for the nine months, while trailing-12-month sales per square foot increased 0.9% to $358.
Material changes versus the prior comparable period
- Q3 revenue growth reflected newly opened or acquired properties and consolidation of the Imperial Valley property, partly offset by lower comparable-property revenue. Nine-month revenue increased $39.0 million, but operating expenses rose $46.5 million, including higher depreciation and impairment.
- Interest expense declined $5.4 million in Q3 and $8.2 million for nine months, chiefly from refinancing higher-rate debt and lower credit-facility pricing following investment-grade ratings.
- CBL sold three malls and three associated centers in August for $176.0 million gross proceeds ($172.0 million net proceeds), and sold five office buildings earlier in 2013. Net sale proceeds were used to reduce credit-facility borrowings.
- CBL redeemed Westfield’s preferred joint-venture units for approximately $413.0 million, funded with credit-facility borrowings. It also raised $209.6 million net through its at-the-market equity program, issuing 8.4 million shares; about $88.5 million of program capacity remained.
Outlook, commentary and risks
- Management forecast 2013 portfolio occupancy improvement of 25–50 basis points from the prior year, to approximately 95%. This is an operating forecast; the filing provides no formal earnings or FFO guidance.
- Management cited improving occupancy, double-digit leasing spreads, development and refinancing activity as positives. Projects under construction included outlet and community-center developments expected to open in 2014.
- Unusual items included an $8.2 million litigation settlement recorded in Q3 interest and other income; a $5.2 million Q3 impairment for properties sold; a $20.5 million noncash impairment at Citadel Mall and a $0.6 million aircraft impairment during the nine months; a $9.1 million debt-extinguishment loss; and a $2.4 million gain on repayment of a China-related note.
- Citadel Mall’s mortgage was in default and foreclosure proceedings were initiated, with a sale scheduled for January 2014; Columbia Place was also in default, with foreclosure anticipated by Q1 2014. CBL classified Citadel Mall as non-core after recording its impairment.
- Interest-rate exposure, refinancing needs, retail tenant bankruptcies or store closures, occupancy and rental-rate changes, and access to capital remain material risks. CBL reported guarantees on certain joint-venture and development debt; subsequent to quarter-end, some guarantees were reduced or released.
- Management said ordinary-course litigation was not expected to materially harm the company. A related construction-damage case remained ongoing after a partial settlement; environmental exposure was considered reasonably possible but not expected to be material.
Important facts for investors to verify
- Whether projected occupancy gains and development openings are achieved, and whether leasing spreads translate into comparable-property NOI growth.
- Citadel Mall and Columbia Place foreclosure outcomes, debt treatment and any further impairment or operating effects.
- Near- and medium-term maturities, refinancing terms, variable-rate exposure and compliance with covenants; the filing lists substantial scheduled maturities in 2015 and 2016.
- The impact of the $413.0 million preferred-unit redemption, share issuance and remaining ATM capacity on leverage, interest costs and per-share results.
- The sustainability of reported earnings and cash generation after separating recurring property performance from settlements, impairments, asset sales and other unusual items.