CBL & Associates Properties, Inc. — Q2 2015 Form 10-Q
Business context and period. This unaudited combined filing covers the quarter and six months ended June 30, 2015, for CBL, a retail-focused REIT operating through CBL & Associates Limited Partnership. At quarter-end, the portfolio included 111 consolidated and 23 unconsolidated properties across 27 states, primarily in the Southeast and Midwest.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $253.8 million | $256.9 million | $514.8 million | $518.2 million |
| Income from operations | $89.9 million | $97.3 million | $174.9 million | $173.4 million |
| Net income | $48.3 million | $44.1 million | $101.5 million | $107.9 million |
| Net income attributable to common shareholders | $30.7 million | $26.7 million | $65.6 million | $70.8 million |
| Diluted EPS | $0.18 | $0.16 | $0.38 | $0.42 |
| Adjusted FFO per diluted share | $0.54 | $0.55 | $1.05 | $1.06 |
Cash flow and liquidity. For the first six months, operating cash flow was $219.4 million, investing cash outflow was $240.8 million, and financing cash inflow was $14.1 million. Cash declined $7.3 million to $30.6 million. The investing outflow included the $192.0 million Mayfaire acquisition. At June 30, consolidated mortgage and other debt was $4.834 billion; the company’s pro rata consolidated and unconsolidated debt was $5.486 billion, with a 4.75% weighted-average rate. Unsecured credit facilities had $453.5 million drawn and approximately $846.5 million available. The debt-to-total-market-capitalization ratio was 58.7%.
Operating indicators. Same-center NOI increased 0.3% in Q2 and 0.4% for the six-month period. Same-store sales per square foot rose 3.7% for the trailing twelve months to $368. Same-center stabilized mall occupancy was 89.9%, down from 93.2% a year earlier; total portfolio occupancy was 91.0%, versus 93.5%. Q2 stabilized mall leasing spreads were 8.7%. Common dividends declared were $0.265 per share per quarter.
Material changes versus prior periods
- Q2 revenue declined $3.1 million, primarily reflecting dispositions, partly offset by revenue from newly opened or acquired properties. Six-month revenue fell $3.4 million.
- Q2 operating income decreased $7.4 million. General and administrative expense rose $4.9 million, including $3.0 million of litigation-settlement and consulting costs; depreciation and amortization also increased.
- Q2 net income rose year over year, supported by $14.2 million of real estate sale gains, compared with $1.9 million a year earlier. For the six months, net income declined, in part because 2014 included a $42.7 million gain on extinguishment of debt; 2015 also included a $16.6 million gain from selling marketable securities.
- Adjusted FFO per diluted share was slightly lower in both periods: $0.54 versus $0.55 for Q2 and $1.05 versus $1.06 year to date. Management attributed the declines mainly to income lost from sold properties and higher G&A, partly offset by new-property income.
- Debt increased from $4.700 billion at year-end 2014 to $4.834 billion, reflecting acquisition financing and greater use of credit lines. The pro rata variable-rate share of consolidated and unconsolidated debt rose to 18.8% from 14.7%.
Outlook, risks and unusual items
- Management expected year-end 2015 occupancy of 92.5%–93.5%, 150–200 basis points below 2014, with improvement anticipated as replacement tenants open in late 2015 and 2016. Of 175 bankruptcy-related store closures, more than 65% of the space was leased, committed, or under active negotiation.
- Management described portfolio transformation and dispositions of lower-productivity properties as priorities, and said the disposition process could take at least the three years initially anticipated. It believed operating cash flow, financing sources, and credit-facility availability would provide adequate near-term liquidity.
- At June 30, the company reported $730.2 million of its pro rata debt scheduled to mature during the rest of 2015, including $639.8 million requiring retirement or refinancing after available extensions. Subsequent to quarter-end, it retired four property loans totaling $322.7 million and extended a $5.4 million joint-venture loan to July 2017.
- In July 2015, the board authorized a common-stock repurchase program of up to $200 million through August 31, 2016, expected to be funded partly from excess asset-sale proceeds. The filing does not provide a completed repurchase amount.
- Unusual items included a $3.0 million Q2 litigation-settlement and consulting expense, a $2.8 million noncash impairment related mainly to Madison Square Mall, and the $16.6 million securities-sale gain in the first half. The company also disclosed ordinary-course litigation, environmental matters considered reasonably possible but not expected to cause material losses, joint-venture debt guarantees, and a York Town Center lease-performance guarantee capped at $15.6 million as of quarter-end.
- Key risks cited include interest-rate movements, refinancing and capital availability, tenant bankruptcies and store closures, retail demand, occupancy and rents, operating costs, and execution of acquisitions and dispositions. Management reported covenant compliance at June 30; disclosure controls were deemed effective.
Important facts for investors to verify
- Progress and costs of refinancing remaining 2015 maturities, including joint-venture loans, and the extent to which lower-cost unsecured debt replaces secured debt.
- Whether replacement tenants open as expected and occupancy recovers within management’s stated range.
- Underlying recurring performance apart from property-sale gains, the securities-sale gain, litigation-related items, and the prior-year debt-extinguishment gain.
- Execution and funding of the $200 million repurchase authorization, alongside dividends, acquisition spending, and development commitments.
- Exposure from joint-venture guarantees and the financial and leasing performance of properties classified as lender, redevelopment, or repositioning assets.