CBL & Associates Properties, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. The unaudited filing covers a U.S. REIT that owns, develops, leases and operates malls, open-air and other retail centers, and office properties, primarily in the Southeast and Midwest. Unless stated otherwise, financial statement amounts below are in millions of dollars.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $259.6 | $267.3 | $763.3 | $793.4 |
| Income from operations | $80.3 | $51.9 | $268.2 | $247.8 |
| Net income (loss) attributable to common shareholders | $(2.5) | $(27.3) | $31.7 | $19.2 |
| Common diluted EPS | $(0.02) | $(0.18) | $0.21 | $0.13 |
| Cash from operating activities | — | — | $319.6 | $318.1 |
| Dividends declared per common share | $0.22 | $0.21 | $0.66 | $0.63 |
- GAAP operating margin was approximately 30.9% in Q3 versus 19.4% in the prior-year quarter, and 35.1% for the nine months versus 31.2%. Lower impairment expense materially affects these comparisons.
- Same-center NOI, excluding lease termination fees, rose 1.2% in Q3 to $177.5 million and 2.0% year to date to $530.2 million. Management attributed growth mainly to occupancy gains and positive leasing spreads, partly offset by higher property costs.
- At September 30, cash and cash equivalents were $66.4 million; consolidated debt was $4.701 billion, compared with $4.489 billion at December 31, 2011. Pro rata consolidated and unconsolidated debt was $5.431 billion, at a 4.91% weighted-average rate.
- Variable-rate debt was $1.009 billion on a pro rata basis. A 0.5 percentage-point rate increase was estimated to raise annual interest expense by about $4.8 million, after capitalized interest.
- Debt-to-gross-asset value was 52.5%; rolling-12-month interest coverage was 2.59x and debt-service coverage was 2.00x. The company reported compliance with its financial covenants.
- Nine-month investing cash outflow was $163.7 million and financing cash outflow was $145.7 million. Capital expenditures, including the company’s share of unconsolidated affiliates, were $86.8 million for the nine months.
Changes versus prior comparable periods
- Revenue declined 2.9% in Q3 and 3.8% year to date. The principal reporting comparison was the October 2011 deconsolidation of the CBL/T-C properties, which reduced reported rental revenue and expenses. New properties and comparable-property growth partly offset this effect.
- Comparable-property revenue benefited from higher occupancy and leasing spreads. The company reported portfolio occupancy of 93.0%, up 170 basis points year over year; stabilized mall sales per square foot increased 4.1% for the nine months.
- Interest expense fell $7.7 million in Q3 and $24.5 million year to date, reflecting lower-cost refinancings and debt reduction, partly offset by debt associated with new properties.
- Impairment expense in continuing operations was $21.7 million in Q3 and year to date, down from $51.3 million in the comparable 2011 periods. Discontinued operations included an $8.4 million Q3 impairment of two malls held for sale.
- Net income attributable to common shareholders improved year over year, but Q3 remained a loss after preferred dividends and losses from discontinued operations. Nine-month 2011 results included a substantial debt-extinguishment gain from the Oak Hollow Mall disposition; 2012 did not.
Outlook, liquidity, risks and unusual items
- Management expected year-end 2012 portfolio occupancy of 94.6%–95.1%, representing a 50–100 basis-point increase from year-end 2011, and anticipated mall sales would continue improving at a steady pace. It reported Q3 leases signed at an 8.7% increase in average gross rent per square foot over prior rents.
- After quarter-end, the company received commitments to extend and modify its two largest credit facilities: aggregate capacity was to rise by $155 million to $1.2 billion, convert from secured to unsecured, and extend maturities to November 2015 and November 2016, each with a one-year extension option. The filing said it expected closing by mid-November 2012.
- In October 2012, CBL issued $166.6 million net of 6.625% Series E preferred stock, redeemed its 7.75% Series C preferred stock for approximately $115.9 million, and used remaining proceeds to reduce credit-facility borrowings. The new preferred shares carry about $11.4 million in annual dividends. CBL also reported subsequent property sales and repayment of a $106.9 million Monroeville Mall mortgage.
- Management anticipated redeeming Westfield’s $423.8 million preferred joint-venture interest around mid-2013 using multiple funding sources. If specified redemption or property conditions are not met, the preferred distribution rate may rise to 9.0% from 2013; the filing describes a potential $10 million reduction if qualifying redemption terms are met.
- Columbia Place’s $27.3 million non-recourse mortgage was in default; the lender received the property’s net operating cash flow instead of scheduled monthly payments. CBL also had significant joint-venture debt guarantees, including guarantees of construction loans, and outstanding performance bonds of $28.0 million.
- Other material risks include substantial leverage and refinancing needs, interest-rate exposure, retail tenant bankruptcies or store closures, competition including online retail, regional economic concentration, property impairment and development risks, and possible effects of litigation and environmental obligations. The company disclosed a $3.1 million liability for potential asbestos abatement. It said pending litigation was not expected to materially affect its financial position or results.
- Management’s FFO allocable to common shareholders, adjusted to exclude debt-extinguishment gains, was $84.8 million in Q3 versus $71.0 million, and $236.8 million for nine months versus $215.3 million. FFO is a non-GAAP supplemental measure, not a substitute for GAAP earnings or cash flow.
Important facts for investors to verify
- Confirm completion and final terms of the proposed $1.2 billion unsecured credit facilities, and track scheduled maturities and refinancing costs.
- Assess the timing, funding mix and distribution-rate consequences of any Westfield preferred-unit redemption.
- Monitor Columbia Place’s default status, property cash flows and any lender action, as well as exposure under joint-venture guarantees.
- Review the assumptions supporting the $21.7 million continuing-operations impairments and $8.4 million discontinued-operations impairments, including sale outcomes for the held-for-sale malls.
- Separate underlying comparable-property performance from portfolio changes, including CBL/T-C deconsolidation, acquisitions and new developments; also compare NOI and leasing trends with reported GAAP revenue and earnings.