CBL & Associates Properties, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. CBL is a shopping-center REIT operating primarily in the southeastern and midwestern United States, with 112 consolidated properties and interests in 23 unconsolidated properties. The filing presents CBL and its Operating Partnership together; most operating assets and debt reside in the partnership.
Financial results and liquidity
- Q3 revenue: $258.7 million, up 0.5% from $257.5 million. Income from operations was $97.4 million versus $97.7 million.
- Q3 earnings: Net income attributable to common shareholders was $38.1 million, or $0.22 per share, compared with $23.1 million, or $0.14, a year earlier. The quarter included an $18.3 million gain on extinguishment of debt, mainly from transferring Chapel Hill Mall to its lender.
- Nine-month revenue and earnings: Revenue was $776.9 million versus $771.6 million. Common-shareholder net income was $108.9 million, or $0.64 per share, versus $42.7 million, or $0.26. The 2014 result included $60.9 million in net debt-extinguishment gains and $17.8 million in continuing-operations impairment charges.
- Operating trends: Same-center NOI rose 3.0% in Q3 and 2.2% year to date. Adjusted FFO allocable to common shareholders was $93.0 million in Q3 versus $87.3 million, and $273.8 million for nine months versus $263.8 million.
- Cash flow: Nine-month operating cash flow was $329.3 million, down from $336.0 million. Investing used $143.4 million and financing used $206.4 million. Cash declined $20.4 million to $45.1 million.
- Debt and liquidity: Consolidated mortgage and other debt was $4.71 billion, down from $4.86 billion at year-end 2013; pro rata debt including unconsolidated affiliates was $5.38 billion. Weighted-average interest rate on consolidated debt was 4.75%. Credit facilities had $1.30 billion capacity, $358.2 million drawn and approximately $941.8 million available at quarter-end. The company reported covenant compliance. Debt-to-total-market-capitalization was 56.2%.
- Dividends: Common dividends declared were $0.245 per share in Q3; $0.735 per share for the first nine months. Preferred dividends were also paid.
Changes versus the prior comparable period
- Revenue growth was modest; management attributed comparable-property gains to improved occupancy and leasing, partly offset by dispositions and weaker non-core properties.
- Q3 same-center NOI growth accelerated to 3.0%; comparable mall base rents improved, while same-center stabilized mall occupancy was 93.3% versus 93.6% a year earlier.
- Q3 interest expense increased $3.9 million, and nine-month interest expense increased $6.6 million, reflecting the 2023 senior notes issued in late 2013, partly offset by lower property-level interest on comparable assets.
- Cash from operations decreased year over year. Investing cash outflow increased, while financing cash outflow decreased, principally because 2013 included a large redemption of preferred joint-venture interests.
Outlook, management commentary, risks and unusual items
- Management reported 17.6% leasing spreads for stabilized mall leases signed in Q3, 93.3% occupancy at same-center stabilized malls, and a 40-basis-point sequential occupancy improvement. It forecast 2014 total-portfolio and stabilized-mall occupancy improvement of 0–25 basis points versus 2013.
- Management’s longer-term aims are to generate more than 90% of mall NOI from Tier One and Tier Two malls and achieve sustainable same-center NOI growth of 2–4%. It identified 21 malls and related centers for potential disposition. These are strategic targets, not a specific earnings forecast.
- Trailing-12-month comparable mall sales per square foot fell about 1.9% to $356. Management expected sales to be flat for 2014 despite anticipated holiday-season growth.
- Management said operations, debt and equity sources, and credit-facility availability should provide adequate liquidity. Its stated goal is to reduce debt to total asset value below 50% over the next few years. In October, the partnership issued $300 million of 4.60% senior notes and used net proceeds primarily to reduce credit-facility borrowings; it also repaid a $113.4 million Mall del Norte loan.
- Portfolio repositioning included the 2014 sales of Lakeshore Mall and other assets, the September deed-in-lieu transfer of Chapel Hill Mall, and the October transfer of Columbia Place. Citadel Mall’s foreclosure was completed in January 2014. These transactions generated material impairment and debt-extinguishment items; debt-related gains boosted reported earnings but were not recurring property operations.
- Key exposures include retail demand and tenant failures, occupancy and rental rates, property operating costs, interest rates, access to refinancing and capital, and the performance of non-core or lender-controlled properties. At quarter-end, variable-rate debt exposure meant a 0.5-percentage-point rate increase was estimated to raise annual interest expense by about $4.9 million after capitalized interest.
- Guarantees included joint-venture debt guarantees and a York Town Center lease-performance guarantee with a maximum obligation of $16.4 million at quarter-end. Ordinary-course litigation was not expected by management to have a material adverse effect; related claims and insurance litigation remained ongoing. An October 2014 settlement with EMJ provided payments and potential remediation-cost coverage, with other litigation continuing.
Investor verification priorities
- Separate recurring operating performance from the $60.9 million year-to-date debt-extinguishment gain, impairment charges, and other unusual items; confirm the reported and adjusted FFO reconciliations.
- Review property-level results and debt status for Columbia Place, Chapel Hill Mall, Citadel Mall, and other non-core or lender properties, including the effect of their transfers on future revenue and debt.
- Confirm execution and terms of the October $300 million note issuance and Mall del Norte refinancing, and track remaining maturities, credit-facility availability, covenant headroom, and management’s leverage target.
- Monitor same-center NOI, mall sales, leasing spreads, occupancy, tenant bankruptcies or closures, and progress toward the targeted portfolio mix.
- Assess joint-venture guarantees, the York Town Center lease guarantee, and the status and recoveries associated with the EMJ and insurance-related litigation.