CBL & Associates Properties, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; comparative periods are the corresponding 2015 periods. CBL is a REIT operating primarily through CBL & Associates Limited Partnership. It owned interests in 123 consolidated and unconsolidated properties across 27 states, principally in the Southeast and Midwest. Dollar figures below are in millions unless stated otherwise.
Financial and operating performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $251.7 | $262.6 | $769.8 | $777.4 |
| Net income (loss) | $0.7 | $44.4 | $115.7 | $146.0 |
| Net income (loss) attributable to common shareholders | $(10.2) | $26.3 | $70.4 | $92.0 |
| Common earnings (loss) per share | $(0.06) | $0.15 | $0.41 | $0.54 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $339.6 | $359.9 |
- Property operations: Same-center NOI, a non-GAAP measure, rose 2.6% in Q3 to $176.6 and 3.0% year to date to $531.1. Total portfolio occupancy was 93.5%, up from 92.4%; same-center mall occupancy was 92.7%, up from 91.8%. Same-center mall sales per square foot fell 0.5% to $377 for the trailing 12 months.
- Leasing and rents: Stabilized mall lease spreads were 10.2% in Q3, comprising 19.7% on new leases and 7.3% on renewals. Average same-center mall base rent increased to $32.06 per square foot from $31.41.
- FFO: Adjusted FFO per diluted share was $0.57 for Q3 versus $0.56, and $1.72 for the first nine months versus $1.61. FFO and adjusted FFO are non-GAAP measures and are not substitutes for cash flow or GAAP earnings.
- Debt and liquidity: Consolidated mortgage and other debt, net, was $4.53 billion at September 30, down from $4.71 billion at year-end 2015. Including CBL’s pro rata share of unconsolidated affiliates, debt was $5.01 billion. Cash was $24.5 million, with $661 million available on $1.1 billion of unsecured credit facilities. Pro rata debt was 4.39% weighted-average interest rate; 27.1% of pro rata debt was variable-rate.
- Cash flow and distributions: Nine-month investing cash use was $4.3 million versus $299.6 million in 2015, when the Mayfaire acquisition occurred. Financing cash use was $347.7 million versus $65.8 million, reflecting debt paydown from asset-sale proceeds. Cash declined $12.4 million over the nine months. Common dividends remained $0.265 per share per quarter.
Material changes and unusual items
- Q3 revenue declined $10.9 million year over year, primarily because of dispositions. For the first nine months, revenue declined $7.6 million as disposition-related reductions outweighed growth at comparable and new properties.
- Impairment charges were $53.6 million in Q3 and $116.7 million year to date, versus $0.9 million and $3.7 million in the prior-year periods. The Q3 charge principally included write-downs of three malls, a community center and three office buildings. The three malls under contract for sale were written down to estimated fair value.
- Year-to-date results included higher equity earnings from unconsolidated affiliates, including gains associated with property sales and the Gulf Coast Town Center foreclosure. These items helped offset lower reported earnings; they are not equivalent to recurring property operations.
- CBL sold two malls, a community center and an office building during 2016, and reported $149.97 million in net proceeds from listed consolidated dispositions. Management said disposition proceeds were used to reduce credit-facility borrowings. Three additional malls were classified as held for sale.
- Management described the portfolio transformation as ongoing: Tier 3 malls’ share of mall NOI had declined from approximately 22% in 2014 to approximately 7%. It cited rent growth and occupancy gains, while noting softer sales and the drag from asset sales.
Outlook, risks and contingencies
- The filing provides no formal numerical earnings or FFO guidance. Management was cautiously optimistic about holiday sales, citing positive industry forecasts, but noted the 0.5% decline in trailing-year stabilized mall sales.
- Management identified $840.7 million of scheduled consolidated principal payments in 2017. Three non-recourse mall loans totaling $189.6 million were in default and foreclosure/receivership; CBL planned to return the properties to lenders by year-end or early 2017. A separate $70.8 million Greenbrier Mall loan maturity was under negotiation for extension. Subsequent to quarter-end, CBL repaid a $38.3 million loan using its credit facilities.
- CBL reported compliance with its financial covenants at quarter-end. Its unsecured facility covenant tests included debt to asset value of 49% against a maximum of 60%, and EBITDA to fixed charges of 2.5x against a minimum of 1.5x. Pro rata debt-to-total-market-capitalization was 62.3%.
- Interest-rate exposure remains material: management estimated that a 0.5 percentage-point increase in rates would raise annual interest expense by approximately $6.7 million on its share of variable-rate debt.
- Three putative securities class actions were consolidated, and a shareholder derivative suit was also pending. The complaints seek unspecified damages and allege misleading statements related to financing arrangements and alleged insider trading. CBL said it considers the claims without merit and intends to defend them. Management said ordinary-course litigation was not expected to have a material adverse effect.
- Q3 and year-to-date general and administrative expenses included $0.7 million and $1.8 million, respectively, of nonrecurring professional fees related to a recently completed SEC investigation. Aeropostale store closures and lease modifications were expected to reduce 2017 gross rent by approximately $3.0 million.
Important facts for investors to verify
- Whether the three mall foreclosures and Greenbrier loan negotiations resolve as expected, and the cash or debt effects of upcoming maturities.
- Whether held-for-sale properties close at expected prices and how further dispositions affect recurring revenue, NOI and liquidity.
- Trends in mall sales, occupancy, leasing spreads and tenant credit, including the stated Aeropostale rent impact.
- Progress on the securities and derivative litigation, and any material developments related to the SEC investigation or associated disclosures.
- How much of reported earnings and FFO growth reflects recurring operations versus property-sale, foreclosure and other adjustment items.