CBL & Associates Properties, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited results cover CBL, a retail-focused REIT, and its Operating Partnership; substantially all business and debt are held through the Operating Partnership. Its portfolio included interests in 105 properties across 26 states.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $224.7 million | $251.7 million | $691.9 million | $769.8 million |
| Income from operations | $50.2 million | $36.7 million | $149.6 million | $152.6 million |
| Net income | $9.3 million | $0.7 million | $118.4 million | $115.7 million |
| Net income (loss) attributable to common shareholders | $(2.3) million | $(10.2) million | $50.8 million | $70.4 million |
| FFO per diluted share | $0.52 | $0.56 | $1.63 | $1.97 |
| Adjusted FFO per diluted share | $0.50 | $0.57 | $1.51 | $1.72 |
Revenue fell 10.8% in Q3 and 10.1% year to date, reflecting property sales and weaker comparable-property performance. Same-center NOI declined 2.6% for Q3 and 1.6% year to date. Operating income rose in Q3 despite lower revenue, principally because impairment charges were lower than in the prior-year quarter. GAAP net income included substantial property-sale and debt-extinguishment gains; FFO is a non-GAAP measure.
- Cash flow: Nine-month operating cash flow was $337.0 million, versus $339.6 million. Investing activities used $34.2 million; financing activities used $290.4 million. Cash and cash equivalents were $31.4 million at September 30.
- Debt and liquidity: Consolidated net mortgage and other debt was $4.216 billion, down from $4.465 billion at year-end 2016. Pro rata debt including unconsolidated affiliates was $4.725 billion, with a 4.63% weighted-average rate. About 23.6% of pro rata debt was variable-rate. Credit facilities had $79.97 million drawn and $690.8 million of reported availability after covenant limitations. Scheduled principal payments included $667.3 million in 2018.
- Balance sheet: Total assets were $5.744 billion and total equity was $1.244 billion at quarter-end. The reported debt-to-total-market-capitalization ratio was 67.4%, versus 62.3% a year earlier, largely reflecting the lower share price.
Material changes and operating trends
- Total portfolio occupancy was 93.1%, down from 93.5% a year earlier; same-center mall occupancy was 91.8%, down from 93.0%. Same-center mall occupancy improved 120 basis points from the prior quarter.
- Stabilized mall sales per square foot declined 1.8% to $373. Q3 comparable small-shop leasing spreads were down 13.7% on average, with new lease spreads up 0.3% and renewal spreads down 16.1%. Year-to-date total-portfolio leasing spreads declined 4.0%.
- CBL sold properties and interests, repaid or transferred related debt, and recorded $86.9 million of real-estate sale gains and $30.9 million of debt-extinguishment gains during the first nine months. It also recorded $71.4 million of impairment losses and a $6.2 million loss on its River Ridge Mall joint-venture investment.
- Debt actions included issuing an additional $225 million of 5.95% notes due 2026, retiring loans, and extending or modifying unsecured term loans. The company was discussing a modification and extension of the $123.3 million Acadiana Mall loan, which matured in April 2017.
Outlook, commentary and risks
Management cited retailer bankruptcies and store closures, flat consumer spending, lower occupancy, rent concessions and weaker renewal spreads as ongoing pressures. It is pursuing a broader tenant mix, including fitness, healthcare, beauty and food offerings, to reposition malls as suburban town centers; management noted that the transition takes time. No formal earnings guidance is provided in the filing.
The Board reduced the common dividend effective in Q4 2017 to an annualized $0.80 per share from $1.06, expecting to preserve approximately $50 million of cash annually for redevelopment and debt reduction. Management stated that operating cash flows, financing access and disposition proceeds should provide adequate liquidity, while noting refinancing and capital availability risks. Other disclosed risks include interest-rate changes, tenant failures, retail competition, vacancy and leasing conditions, and general economic conditions.
Impairments included $43.0 million for Acadiana Mall and $24.5 million for Hickory Point Mall. Acadiana faced declining sales and cash flows and an anchor closure; Hickory Point had deteriorating occupancy and cash flows, and CBL was in preliminary loan-modification discussions. The Operating Partnership also guaranteed certain unconsolidated-affiliate debt; a $36.4 million construction loan for the Shoppes at Eagle Point closed after quarter-end and was guaranteed 100% by the Operating Partnership. Ordinary-course litigation was not expected by management to have a material adverse effect; environmental exposures were considered reasonably possible but not expected to be material.
Investor verification priorities
- Check refinancing progress and terms for Acadiana Mall, the 2018 maturities, and other near-term debt; assess covenant headroom and actual revolver availability.
- Track occupancy, retailer bankruptcies and closures, renewal leasing spreads, same-center NOI and sales trends.
- Review the assumptions supporting mall impairments and the sustainability of reported earnings excluding sale and debt-extinguishment gains.
- Confirm the planned use of dividend savings and funding needs for redevelopment, including the Shoppes at Eagle Point loan and guarantee.
- Assess exposure to variable interest rates, joint-venture guarantees and other contingencies.