CBL & Associates Properties, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Unaudited results; dollar figures below are in millions unless stated otherwise. CBL is a REIT focused on regional malls, outlet and open-air centers, community centers, and office properties, primarily in the southeastern and midwestern United States.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $255.6 | $262.1 | $506.3 | $529.3 |
| Operating income | $95.2 | $96.8 | $187.8 | $195.7 |
| Operating margin | 37.2% | 36.9% | 37.1% | 37.0% |
| Interest expense | $61.4 | $70.9 | $121.5 | $139.1 |
| Income from continuing operations | $39.4 | $32.6 | $75.1 | $68.7 |
| Net income attributable to common shareholders | $18.8 | $9.8 | $34.3 | $46.5 |
| Diluted EPS | $0.12 | $0.07 | $0.23 | $0.31 |
| Common dividends declared per share | $0.22 | $0.21 | $0.44 | $0.42 |
- Q2 revenue declined 2.5% year over year; first-half revenue declined 4.4%. Management attributed much of the decrease to the October 2011 deconsolidation of three CBL/T-C properties, partly offset by new properties and comparable-property growth.
- Comparable-property revenue improved: management cited higher occupancy, leasing spreads, and a $1.6 million former-tenant bankruptcy recovery. Same-center NOI excluding lease-termination fees rose 2.7% in Q2 and 1.7% in the first half.
- Lower interest expense reflected refinancing at lower rates and lower debt compared with the prior year. Common-shareholder earnings comparisons are also affected by prior-year discontinued operations, including a $31.4 million debt-extinguishment gain in the first half of 2011.
- Operating cash flow was $219.8 million, versus $197.6 million in the first half of 2011. Investing activities used $108.8 million and financing activities used $95.5 million. Cash increased $15.4 million from year-end to $71.5 million.
- FFO of the Operating Partnership was $100.8 million in Q2 and $193.3 million in the first half. First-half FFO was $185.3 million in 2011 excluding the prior-year debt-extinguishment gain.
Portfolio, debt, and liquidity
- At June 30, CBL reported 77 controlled regional malls/open-air centers, 29 associated centers, six community centers, and 13 office buildings; it also held noncontrolling interests in additional properties.
- Portfolio occupancy was 92.3%, up 170 basis points year over year. Stabilized mall sales per square foot increased 4.3% in the first half; trailing-12-month comparable mall sales were $341 per square foot, up 4.0%.
- Leases signed in Q2 had average gross-rent spreads 10.0% above prior rents; stabilized mall spreads were 10.2%. Management reported signing approximately 1.2 million square feet of leases in the quarter.
- Consolidated mortgage and other indebtedness was $4.69 billion, compared with $4.49 billion at December 31, 2011. CBL’s pro rata share of consolidated and unconsolidated debt was $5.42 billion, with a 4.96% weighted-average interest rate; 17.2% of that pro rata debt was variable-rate.
- Reported leverage measures were 52.5% debt to gross asset value and 55.9% debt to total market capitalization. Rolling-12-month interest coverage was 2.54x and debt-service coverage was 1.97x; CBL stated it was in compliance with debt covenants.
- CBL had $110 million outstanding on secured credit lines with $1.15 billion total capacity. Approximately $211.9 million of consolidated debt maturities remained for 2012 after available extensions; management expected to retire or refinance them. It said operating cash flow, financing access, and credit-line availability should provide adequate liquidity.
Outlook, risks, and unusual items
- Management expected year-end 2012 occupancy to be 50–100 basis points above 2011 and anticipated continued steady improvement in mall sales. The filing does not provide full-year earnings or FFO guidance.
- Development activity included The Outlet Shoppes at Atlanta, expected to open in summer 2013 and reported 72% leased or committed, as well as outlet expansions and mall redevelopments. CBL estimated $23 million for renovations at four malls.
- Columbia Place’s $27.3 million nonrecourse mortgage was in default; the lender received the property’s net operating cash flow in lieu of scheduled monthly payments. The property generated insufficient income to cover debt service.
- A guaranteed Lee’s Summit, Missouri, third-party loan was in default as of July 1, 2012 after specified conditions were not met. CBL had guaranteed $16.4 million of the outstanding loans and said it had not accrued a contingent obligation because payment was not considered probable.
- CBL guaranteed $45.6 million of West Melbourne affiliate debt and $65.0 million of Port Orange affiliate debt. The Westfield preferred joint-venture interest was $423.8 million; its distribution rate could rise to 9% under specified redemption conditions, versus 5% currently and 6% scheduled from July 2013.
- Other risks include substantial leverage and refinancing needs, interest-rate exposure, retail tenant failures and store closures, competition from online and other retail formats, regional economic concentration, development cost and leasing risks, environmental exposure, and the possibility that joint-venture guarantees require funding.
- CBL disclosed ongoing construction-related litigation involving a subsidiary, contractors, Kohl’s, and insurers. Management did not believe pending litigation would materially affect financial position or results; the filing does not quantify potential exposure.
Important facts for investors to verify
- How much of reported revenue and NOI trends reflects property operations versus the deconsolidation of the CBL/T-C properties and recent acquisitions?
- Whether the 2012 maturities were refinanced or repaid as planned, and the status and terms of the November 2012 unsecured term-loan maturity.
- Developments in the Columbia Place and Lee’s Summit defaults, including any property or guarantee cash exposure.
- Whether occupancy, leasing spreads, and same-center NOI continued to improve, and whether the stated year-end occupancy outlook was achieved.
- Potential cash requirements tied to Westfield’s preferred units, affiliate debt guarantees, and the remaining $19.1 million parking-deck commitment for West County Center.