CBL & Associates Properties, Inc. — FY 2013 Form 10-K
Reporting period: Year ended December 31, 2013. CBL is a REIT focused on regional malls, outlet and open-air centers, community centers, office buildings and related real estate, primarily in the southeastern and midwestern United States. The filing combines CBL and its Operating Partnership; figures below generally refer to the consolidated company unless noted. The filing is an annual report, not a standalone fourth-quarter report.
Financial performance and position
| Metric | FY 2013 / year-end | Comparison |
|---|---|---|
| Revenue | $1,053.6 million | Up 5.1% from $1,002.8 million in 2012 |
| Operating income | $330.8 million; 31.4% of revenue | Down from $369.9 million; 36.9% of revenue in 2012 |
| Net income | $110.4 million | Down from $174.5 million |
| Net income attributable to common shareholders | $40.3 million; $0.24 per share | Down from $84.1 million; $0.54 per share |
| Operating Partnership FFO, adjusted | $435.9 million | Up 5.6% from $412.8 million in 2012 |
| Same-center NOI | $697.9 million | Up 0.9% from $692.0 million |
| Operating cash flow | $464.8 million | Down from $481.5 million |
| Cash and cash equivalents | $65.5 million | Down from $78.2 million at year-end 2012 |
| Consolidated debt | $4,857.5 million | Up from $4,745.7 million |
| CBL pro rata consolidated and unconsolidated debt | $5,507.0 million; 56.7% of total market capitalization | Ratio up from 53.8% in 2012 |
Capital expenditures for development, redevelopment, renovation and expansion totaled $314.3 million. Investing activities used $125.7 million, while financing activities used $351.8 million. The filing reports a 97.9% cost-recovery ratio, down from 100.9% in 2012. Portfolio occupancy was 94.7%, unchanged year over year; comparable mall-store sales were $356 per square foot, down 1.1%.
Material changes versus 2012
- Revenue rose mainly due to acquired and newly developed properties. Comparable-property rental revenue was nearly flat, and non-core and redevelopment properties weighed on results.
- Operating expenses increased $89.9 million, including higher depreciation and a $70.0 million impairment charge in continuing operations, versus $24.4 million in 2012. Total impairment losses, including discontinued operations and other items, were $75.2 million.
- Interest expense fell $10.5 million to $231.9 million, but CBL recorded a $9.1 million loss on early debt extinguishment. Common-share earnings also reflected higher preferred dividends and a larger share count.
- Reported FFO for the Operating Partnership declined 4.5% to $437.5 million; management’s adjusted measure, excluding specified litigation, investment and debt-extinguishment items, increased 5.6%.
- CBL sold three malls, three associated centers and five office buildings for $215.5 million in net proceeds and completed the acquisition of the remaining 51% interest in Kirkwood Mall for $61.1 million, including assumed debt.
Financing, outlook and management commentary
- CBL received investment-grade ratings from Moody’s and Fitch. The Operating Partnership issued $450 million of 5.25% senior notes due 2023; it also obtained $450 million of unsecured term loans and converted its final secured credit facility to unsecured.
- An at-the-market equity program generated $209.6 million in net proceeds from 8.4 million shares issued. Common shares outstanding increased to 170.0 million from 161.3 million at year-end 2012. CBL redeemed Westfield’s preferred joint-venture units for approximately $413 million.
- Management forecast 2014 occupancy improvement of 0 to 25 basis points for both the total portfolio and stabilized malls, and anticipated continued positive leasing spreads. It did not provide a specific earnings or FFO forecast in the supplied filing text.
- Management said tenant-mix upgrades caused longer vacancies and near-term lost rent, but cited 11.8% full-year leasing spreads and expected benefits over time. Same-center NOI growth was below the company’s forecast.
- 2014 plans included redevelopment, renovations and development projects. Projects under construction had projected total costs of approximately $143.8 million, including joint-venture projects; planned 2014 renovations were estimated at $27.4 million.
Risks, contingencies and unusual items
- Asset impairments and stressed properties: CBL impaired Madison Square Mall by $47.2 million and Citadel Mall by $20.5 million in 2013. Citadel Mall was foreclosed in January 2014, extinguishing $68.2 million of non-recourse debt; CBL expected to record an approximately $44.6 million gain in first-quarter 2014. Columbia Place was in foreclosure, and the filing also reports a February 2014 default notice on Chapel Hill Mall’s $68.7 million loan.
- Debt and refinancing: Management reported covenant compliance at year-end, including a 51.6% debt-to-total-asset-value ratio against a limit below 60%, and 2.20x EBITDA-to-fixed-charges against a minimum of 1.50x. The company remains highly leveraged and exposed to refinancing and interest-rate risk. Its $950.2 million pro rata variable-rate debt would add approximately $4.6 million to annual interest expense for a 0.5 percentage-point rate increase, before other effects.
- Litigation: A construction-related lawsuit involving The Promenade D’Iberville remained ongoing. CBL received an $8.2 million partial settlement in 2013 and another $0.8 million after year-end; litigation and insurance-coverage disputes continued. The filing says ordinary-course litigation is not expected to have a material adverse effect, based on current expectations.
- Joint-venture guarantees: CBL has guaranteed certain construction and property loans and lease obligations. These may create cash demands beyond amounts recognized on the balance sheet. Environmental matters include a recorded $2.9 million asbestos-abatement liability; management stated it was not aware of material hazardous-substance claims.
- Retail and portfolio exposure: Risks include tenant bankruptcies or store closures, competition from online and other retail formats, lower consumer spending, operating-cost inflation, regional concentration, joint-venture partner constraints and the limited liquidity of real estate assets. The top 25 tenants accounted for 35.5% of property revenue; no single tenant exceeded 3.4% of total company revenue.
- Other nonrecurring items: 2013 results included an $8.2 million litigation settlement, a $2.4 million recovery on a previously impaired investment note, and the $9.1 million debt-extinguishment loss. The fourth-quarter $47.2 million Madison Square impairment was a particularly significant item.
Most important facts for investors to verify
- Reconcile reported earnings, the $75.2 million total impairment charge and management’s adjusted FFO calculation; confirm the treatment of unusual items and discontinued operations.
- Track refinancing and repayment plans for 2014–2016 maturities, remaining credit-facility capacity, variable-rate exposure and covenant headroom.
- Assess the outlook for Madison Square, Columbia Place and Chapel Hill Mall, and verify the accounting and cash effects of Citadel Mall’s foreclosure and debt extinguishment.
- Monitor occupancy, comparable sales, same-center NOI, leasing spreads and cost recovery to determine whether tenant upgrades translate into sustained growth.
- Verify delivery, total cost, leasing and financing of development and redevelopment projects, as well as the scope of guarantees and joint-venture obligations.
- Evaluate the sustainability of common and preferred dividends against operating cash flow, capital spending, debt service and REIT distribution requirements; note that the common quarterly dividend increased to $0.245 per share in the fourth quarter.