CBL & ASSOCIATES PROPERTIES INC quarterly report, Q2 FY2016

CBL & Associates Properties, Inc. — Q2 2016 Form 10-Q

Business context and reporting period. This combined, unaudited filing covers the quarter and six months ended June 30, 2016. CBL is a REIT focused on regional malls and other retail properties, operating primarily through CBL & Associates Limited Partnership. At quarter-end, the portfolio included interests in 127 properties: 103 consolidated and 24 unconsolidated, across 27 states.

Financial performance and liquidity

Metric	Q2 2016	Q2 2015	Six months 2016	Six months 2015
Total revenue	$255.0 million	$253.8 million	$518.0 million	$514.8 million
Net income	$73.1 million	$48.3 million	$115.0 million	$101.5 million
Net income attributable to common shareholders	$51.7 million; $0.30/share	$30.7 million; $0.18/share	$80.5 million; $0.47/share	$65.6 million; $0.38/share
Operating cash flow	Not separately reported for the quarter	$214.2 million	$219.4 million

Q2 same-center NOI rose 3.4%; first-half same-center NOI rose 3.2%. Management attributed growth mainly to higher rents and occupancy, with operating-cost savings.
Adjusted FFO per diluted share was $0.59 for Q2 and $1.15 for the first half, versus $0.54 and $1.05, respectively, in 2015. This is a non-GAAP measure; the filing’s adjustments exclude specified disposal-related equity gains and other unusual items.
Operating margin was pressured by impairment charges: operating income was $52.1 million in Q2 and $115.9 million for the first half, compared with $89.9 million and $174.9 million, respectively, in 2015. Impairment expense was $43.5 million in Q2 and $63.2 million year to date, versus $2.8 million in each 2015 period.
Cash and cash equivalents were $21.1 million at June 30, down from $36.9 million at December 31, 2015. First-half investing activities provided $28.4 million, while financing activities used $258.3 million; cash declined $15.8 million.
Debt on the balance sheet, net, was $4.54 billion, down from $4.71 billion at year-end. Including CBL’s pro rata share of unconsolidated affiliates’ debt, reported debt was $5.10 billion. The pro rata weighted-average interest rate was 4.44%. Debt fair value was estimated at $4.89 billion, above its carrying amount.
Unsecured credit facilities totaled $1.10 billion, with $388.9 million drawn and approximately $711.1 million available. The company reported compliance with debt covenants; key actual ratios included debt to total asset value of 48% against a limit below 60%, and EBITDA to fixed charges of 2.4x against a minimum of 1.5x.
Common dividends declared were $0.265 per share quarterly ($0.530 for the first half). The company’s debt-to-total-market-capitalization ratio was 67.2%, up from 58.7% a year earlier, primarily reflecting a lower share price.

Material changes versus the prior comparable period

Q2 net income increased 51.2%; common-shareholder income rose to $51.7 million from $30.7 million. The improvement was substantially affected by higher equity earnings from unconsolidated affiliates, including gains associated with the Gulf Coast Town Center foreclosure and property sales.
Equity in earnings of unconsolidated affiliates increased $59.5 million in Q2 and $88.0 million in the first half. The first-half comparison also reflects gains from sales of unconsolidated interests; these gains are not a direct measure of recurring property operations.
Interest expense declined $5.6 million in Q2 and $9.5 million year to date, principally as higher-rate property debt was retired or refinanced with lower-rate unsecured debt. Revenue rose modestly, while impairment expense increased sharply.
First-half operating cash flow decreased $5.2 million year over year. Lower acquisition spending and proceeds from property dispositions drove the change in investing cash flows compared with the prior-year period.
Management reported same-center mall occupancy of 91.7%, up from 90.2%, and stabilized mall sales of $377 per square foot for the trailing 12 months, up 1.1%. Q2 stabilized-mall new lease spreads were 25.8%; renewal spreads were 0.2%.

Outlook, risks, contingencies and unusual items

No formal earnings or FFO forecast is provided. Management expected flat to slightly positive mall sales for the remainder of 2016 and described continued investment in redevelopment, expansion and portfolio transformation.
Management said year-to-date dispositions exceeded $300 million at its pro rata share and that proceeds were being used to repay maturing loans, reduce credit-facility balances and increase unencumbered assets. It stated that operating cash flow, debt and equity access, and available credit were expected to meet foreseeable cash needs.
Management identified $133.3 million of 2016 maturities remaining, excluding properties it planned to return to lenders. It was discussing an extension for the $71.3 million Greenbrier Mall loan and planned to use credit-line availability to retire loans on Dakota Square and Governor’s Square. The detailed maturity schedule separately reports $126.5 million of consolidated maturities after excluding Midland and Chesterfield, so the scope of the two figures should be checked.
Wausau Center had declining sales and lost two anchor stores. CBL recorded a $10.7 million impairment, cited a $17.7 million non-recourse loan, and said it would not make the scheduled July 1 payment while discussing foreclosure with the lender. CBL also planned to return Midland Mall and Chesterfield Mall to their lenders.
Gulf Coast Town Center was returned to its lender through foreclosure in June after insufficient cash flow to cover debt service. CBL recorded a $29.3 million gain in equity earnings on its net investment. The Lakes Mall and Fashion Square were classified as held for sale at quarter-end and sold in July for $66.5 million, including assumption of a $38.2 million loan; a $32.1 million impairment was recorded in Q2.
CBL reported $1.1 million of Q2 and first-half nonrecurring professional fees related to an SEC investigation, and $1.7 million of first-half litigation expense. Three putative securities class actions and a shareholder derivative action alleged misleading disclosures and related misconduct; CBL said it considered the claims without merit and intended to defend them. Damages sought were unspecified. Management did not expect ordinary-course litigation, individually or in aggregate, to materially affect the business or financial condition.
Other risks cited include interest-rate changes, refinancing and capital availability, tenant bankruptcies or closures, retail demand and rental-rate changes, vacancy, operating costs, competition and property-sale execution. A 0.5 percentage-point increase in rates was estimated to raise annual interest expense by approximately $6.4 million on CBL’s pro rata variable-rate debt.
Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.

Most important facts for investors to verify

Recurring operating performance excluding impairment charges, property-sale gains, foreclosure-related gains and other adjustments; review the company’s non-GAAP FFO and same-center NOI reconciliations.
Completion and terms of the July sale of The Lakes Mall and Fashion Square, and the status and financial consequences of planned lender returns or restructurings involving Wausau, Midland and Chesterfield.
Resolution of the Greenbrier maturity and repayment or refinancing of the remaining 2016 maturities, alongside actual credit-facility availability and covenant headroom.
Whether same-center occupancy, leasing spreads and sales trends persist, particularly given the portfolio’s retail concentration and management’s flat-to-slightly-positive sales outlook.
Developments in the SEC investigation and shareholder litigation, including any subsequent material disclosures, settlements or financial exposure.
Cash generation and dividend coverage: first-half operating cash flow was below the prior-year period, while debt service, capital projects and distributions remain significant cash demands.