CBL & Associates Properties, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; filed November 9, 2011. CBL is a REIT focused on malls and other retail properties, primarily in the southeastern and midwestern United States. Unless indicated otherwise, amounts below are in millions of dollars.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $270.0 | $260.7 | $801.2 | $780.1 |
| Income from operations | $52.6 | $97.1 | $244.9 | $290.8 |
| Net income (loss) | $(18.3) | $27.7 | $75.1 | $59.4 |
| Net income (loss) attributable to common shareholders | $(27.3) | $9.6 | $19.2 | $13.3 |
| Common-share diluted EPS | $(0.18) | $0.07 | $0.13 | $0.10 |
| Operating cash flow | Not separately stated | Not separately stated | $318.1 | $289.8 |
- Revenue grew 3.6% in Q3 and 2.7% year to date. Management attributed rental growth chiefly to higher base rents, improved leasing spreads and occupancy, and the addition of Parkway Place to consolidated results.
- Q3 operating expenses increased $53.9 million, primarily due to a $51.3 million real estate impairment. The nine-month impairment charge was $55.8 million. The Q3 charge included $50.7 million for Columbia Place, written down from $56.7 million to estimated fair value of $6.1 million.
- FFO of the Operating Partnership was $40.0 million for Q3 versus $89.5 million a year earlier; excluding impairment charges, it was $91.1 million versus $89.5 million. Nine-month FFO was $252.4 million versus $251.7 million; excluding impairments and the Oak Hollow debt-extinguishment gain, adjusted FFO was $277.0 million versus $277.1 million. FFO is a non-GAAP measure and is not cash flow.
- Cash and cash equivalents were $61.9 million at September 30, up $11.0 million from year-end 2010. Investing activities used $172.8 million in the first nine months, including $149.3 million of real estate additions. Financing activities used $134.4 million; cash dividends paid to common and preferred holders totaled $123.7 million.
- Consolidated debt was $5.23 billion, versus $5.21 billion at December 31, 2010; weighted-average interest rate was 4.94%. Including CBL’s proportionate share of unconsolidated affiliates and excluding noncontrolling investors’ share, debt was $5.76 billion, with a 4.97% weighted-average rate. Variable-rate debt was 21.8% of pro rata debt.
- Management reported approximately $930.1 million available on credit facilities and a debt-to-gross-asset-value ratio of 55.9%; interest coverage was 2.39x. The company was in compliance with its credit covenants at quarter-end.
Material changes and operating trends
- Q3 revenue increased $9.3 million year over year, while operating income fell $44.5 million, chiefly reflecting the impairment charge. Nine-month net income included a $31.4 million gain on extinguishment of Oak Hollow Mall debt, reported in discontinued operations; Oak Hollow had been sold for $9.0 million gross.
- Portfolio occupancy was 91.3%, up from 91.0% a year earlier. Stabilized mall occupancy was 91.2%, down from 91.6%; non-stabilized mall occupancy improved to 90.5% from 78.0%.
- Comparable stabilized mall sales per square foot increased 3.5% for the first nine months; trailing-twelve-month comparable sales were $329 per square foot, up 3.2%. Q3 leasing spreads were up 8.2% overall, and the company signed approximately 2.0 million square feet of leases, nearly double the prior-year quarter.
- Operating cash flow rose $28.3 million year over year, attributed mainly to higher rental income and lower interest expense. Interest expense declined $6.3 million for the nine-month period, although the company refinanced some credit-line borrowings with mortgages generally carrying higher rates.
- During the first nine months, CBL closed 13 operating-property loans totaling $794.9 million, largely to refinance debt and reduce secured-line borrowings. Subsequent to quarter-end, it retired $133.9 million and $20.8 million property loans using credit lines.
Outlook, risks and unusual items
- Management expected total portfolio occupancy at year-end to be 75–100 basis points above the prior year-end level of 92.4%, based on then-current leasing activity. It cited solid back-to-school results and anticipated similar positive trends during the holiday season. This is not earnings guidance.
- In October 2011, CBL closed a joint venture with TIAA-CREF involving CoolSprings Galleria, West County Center, Oak Park Mall and Pearland Town Center. CBL reported approximately $204.2 million of net proceeds used to repay secured-line borrowings; it retained management and leasing responsibilities.
- Debt maturities and refinancing remain important risks. CBL intended to exercise extension options on unsecured term loans of $209.2 million (November 2011 maturity) and $228.0 million (April 2012 maturity). Management said $414.7 million of pro rata debt was scheduled to mature during the remainder of 2011, with substantial amounts expected to be retired or extended.
- Interest-rate sensitivity: management estimated that a 0.5 percentage-point increase in rates would raise annual cash outflows and interest expense by approximately $6.3 million; a 0.5-point decrease would reduce them by approximately $3.0 million.
- Guarantee exposures include a Lee’s Summit, Missouri loan arrangement in default, with $16.3 million outstanding guaranteed by CBL; management did not accrue a contingent obligation because it did not consider payment probable. CBL also guaranteed $45.5 million of West Melbourne joint-venture loans maturing in November 2011 and $68.3 million of Port Orange joint-venture construction debt maturing in December 2011, subject to available extensions.
- Westfield holds preferred joint-venture units with a $423.8 million carrying value. Distribution rates and redemption terms could increase the cost if specified redemption conditions are not met, including a potential 9% rate under certain circumstances beginning in 2013.
- CBL described construction-related litigation involving its subsidiary, contractors, insurers and Kohl’s; the case was in discovery. Management did not expect pending litigation to materially adversely affect financial position or results, but outcomes remain uncertain.
- Key risks include high leverage, refinancing and capital-market access, interest-rate changes, retail tenant bankruptcies or store closures, consumer weakness, operating-cost recovery, development execution, property impairment, regional concentration and REIT qualification. CBL recorded a $3.0 million liability for potential asbestos abatement.
Important facts for investors to verify
- Whether Columbia Place’s sharply reduced estimated fair value and impairment assumptions are supported by subsequent leasing, occupancy and cash-flow performance.
- Actual execution of the stated debt extensions and refinancing plans, covenant headroom, and the effect of post-quarter-end joint-venture proceeds on debt and liquidity.
- Whether occupancy, leasing spreads and sales trends continued to improve, particularly at stabilized malls and recently opened or redeveloped properties.
- The status and potential financial exposure of the Lee’s Summit default, the West Melbourne and Port Orange loan extensions, and the litigation and insurance claims.
- Common and preferred dividend coverage by sustainable operating cash flow and FFO, while distinguishing FFO from GAAP earnings and cash available for distributions.