CBL & Associates Properties, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparative period is Q1 2016. CBL is a REIT focused on malls and other retail, mixed-use and office properties, primarily in the southeastern and midwestern United States. It operated 93 consolidated properties and held interests in 17 unconsolidated properties. The Operating Partnership holds substantially all assets and debt.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $238.0 million | $263.1 million |
| Income from operations | $77.1 million | $63.8 million |
| Net income | $38.5 million | $41.9 million |
| Net income attributable to common shareholders; diluted EPS | $22.9 million; $0.13 | $28.9 million; $0.17 |
| Operating cash flow | $104.9 million | $85.8 million |
| Cash and cash equivalents at period end | $27.6 million | $25.0 million |
| Net mortgage and other debt | $4,522.5 million | $4,465.3 million at Dec. 31, 2016 |
- Revenue decreased 9.5%. Operating expenses fell to $160.9 million from $199.2 million, including lower impairment charges and expenses associated with dispositions; income from operations therefore increased despite lower revenue.
- Interest expense was $56.2 million, versus $55.2 million. The filing does not report a consolidated operating margin measure.
- Net cash used in investing activities was $120.1 million, largely reflecting $79.8 million of store acquisitions and increased real estate investment. Financing activities provided $23.9 million; cash increased $8.6 million overall.
- Adjusted FFO per diluted share was $0.52, down from $0.56; FFO per diluted share was $0.53 versus $0.68. Same-center NOI declined 1.0%, to $173.0 million from $174.8 million.
- Common dividends declared were $0.265 per share, unchanged year over year. The Operating Partnership declared distributions of $0.273 per common unit.
Material changes and operating trends
- Management attributed lower revenue principally to dispositions and weaker comparable-property rents and reimbursements. Same-center revenue fell $2.6 million, with a $4.6 million decline in percentage rents, tenant reimbursements and other rents partly offset by $2.0 million of growth in minimum rents and other income.
- Comparable mall same-center sales per square foot declined 2.6% to $372. Same-center mall occupancy was 90.5%, down 1.0 percentage point year over year; total portfolio occupancy rose to 92.1% from 91.6%. Same-center stabilized mall base rent increased to $32.61 per square foot from $32.02.
- CBL acquired five Sears stores and two auto centers for $72.8 million, plus four Macy’s stores for $7.0 million, for redevelopment or continued operation under leases. Three Macy’s locations had closed by March.
- Four property-level loans totaling $159.7 million were repaid using credit-facility borrowings. CBL sold two office buildings for gross proceeds of $6.3 million. Midland Mall was transferred to its lender in satisfaction of $32.0 million of non-recourse debt.
Liquidity, debt and outlook
- At March 31, 2017, CBL had $252.1 million drawn on $1.1 billion of unsecured credit facilities, leaving approximately $847.9 million available. Consolidated cash was $27.6 million. Management stated that operating cash flows, debt and equity sources, facility availability and asset-sale proceeds should provide adequate liquidity for the foreseeable future.
- Debt was primarily at the Operating Partnership, not CBL itself. Consolidated debt was $4.54 billion before financing costs; the reported net balance was $4.52 billion. Its weighted-average interest rate was 4.65%. Including CBL’s pro rata share of unconsolidated affiliate debt, total debt was approximately $5.03 billion and the weighted-average rate was 4.56%.
- Approximately $534.7 million of pro rata debt was scheduled to mature in 2017. The $350 million unsecured term loan and an $11.0 million joint-venture loan had extension options. CBL was negotiating to restructure the $125.0 million Acadiana Mall loan, which matured in April, and expected to refinance two joint-venture loans totaling $48.7 million.
- Chesterfield Mall and Wausau Center loans, with aggregate debt of $157.7 million, were in default and receivership; foreclosure was expected to conclude in Q2 2017. The company also identified an existing $17.7 million Wausau loan as in foreclosure. Actual outcomes and timing remain uncertain.
- Management emphasized redevelopment and re-tenanting to adapt malls to changing consumer preferences, including fitness, entertainment and restaurant uses. The Outlet Shoppes at Laredo opened in April at approximately 82% leased. No quantitative full-year earnings or FFO guidance is provided in the supplied filing text.
- In April, CBL sold its interest in The Outlet Shoppes at Oklahoma City for $130 million gross. It expected to record its share of a gain of approximately $50.1 million and a debt-extinguishment loss of approximately $5.5 million in Q2.
Risks, contingencies and unusual items
- Q1 included a $4.1 million gain on extinguishment of debt related to Midland Mall, a $6.0 million gain on real estate sales, and $3.3 million of impairment losses. Equity earnings from unconsolidated affiliates fell to $5.4 million from $32.4 million, largely because Q1 2016 included a $26.4 million gain on an affiliate sale.
- Interest-rate exposure increased: 24.2% of pro rata consolidated and unconsolidated debt was variable rate, compared with 19.3% at year-end 2016. Management estimated that a 0.5 percentage-point rate increase would raise annual interest expense by approximately $6.0 million after capitalized interest.
- Key business risks include retailer bankruptcies and closures, weak retail sales, online-shopping competition, occupancy and rental-rate pressures, refinancing availability and cost, interest-rate fluctuations, and access to capital. The filing also notes ordinary-course litigation, mostly expected to be insured, and environmental matters assessed as reasonably possible but not expected to be material.
- CBL reported compliance with its debt covenants at March 31, 2017. It also reported a $14.0 million maximum guarantee related to York Town Center lease performance, plus guarantees of certain joint-venture debt; the recorded liability for the latter was $0.4 million.
Investor verification points
- Track renewal and new leasing spreads, mall sales, occupancy and same-center NOI to test whether retail pressure is stabilizing.
- Verify refinancing or extension outcomes for the Acadiana Mall loan and other 2017 maturities, and progress of the Chesterfield and Wausau foreclosures.
- Assess leverage, variable-rate debt exposure, credit-facility availability and the ability to fund dividends, redevelopment and debt service.
- Confirm the realized Q2 proceeds, debt repayments and gains or losses from the Oklahoma City sale, and evaluate the Sears/Macy’s redevelopment plans and returns.
- Review subsequent filings for changes to dividends, guidance, guarantees, litigation or other contingencies; this filing provides no quantitative full-year guidance.