Business Context and Reporting Period
CBL & Associates Properties, Inc. is a self-managed, self-administered Real Estate Investment Trust (REIT) engaged in the ownership, development, and operation of regional shopping malls and community centers, primarily in the southeastern and midwestern United States. This Form 10-Q covers the quarterly period ended June 30, 2006.
As of the reporting date, the Company owned controlling interests in 72 regional malls, 27 associated centers, 2 community centers, and 1 office building. The Company also held non-controlling interests in 7 regional malls and 3 associated centers, accounted for using the equity method.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2006 | Six Months Ended June 30, 2005 |
|---|---|---|
| Total Revenues | $482,300 | $417,745 |
| Net Income | $56,825 | $61,438 |
| Net Income Available to Common Shareholders | $41,541 | $46,154 |
| Funds From Operations (FFO) | $185,102 | $171,664 |
| Net Cash Provided by Operating Activities | $192,106 | $171,996 |
| Total Debt (Mortgage and Other Notes Payable) | $4,366,619 | $4,341,055 |
| Cash and Cash Equivalents | $40,068 | $28,838 |
| Weighted Average Shares Outstanding (Basic) | 63,333 | 62,567 |
Dividends: Dividends declared per common share were $0.9150 for the six months ended June 30, 2006, compared to $0.8125 in the prior year period.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased by $64.6 million (15.5%) year-over-year. This was driven by $50.1 million in additional revenues from "New Properties" (acquisitions and developments opened since Jan 1, 2005) and $16.0 million from "Comparable Properties."
- Net Income Decline: Net income decreased by $4.6 million (7.5%). This decline was primarily due to a $28.4 million increase in interest expense (driven by higher debt levels and variable rates) and a decrease in equity earnings from unconsolidated affiliates. These were partially offset by higher operating revenues.
- Discontinued Operations: The Company sold five community centers in May 2006, recognizing a gain of $7.2 million. These operations are classified as discontinued, impacting the comparability of net income.
- FFO Increase: Funds From Operations increased 7.8% to $185.1 million, reflecting the accretion of new properties and improved operations at comparable properties.
- Occupancy: Total portfolio occupancy decreased slightly to 91.4% from 91.9% in the prior year, negatively impacted by vacancies from Casual Corner and Musicland store closures.
Guidance, Outlook, and Risks
Management Commentary and Outlook:
- Refinancing: In July 2006 (post-period), the Company obtained $317 million in new fixed-rate loans to refinance $249.8 million of debt maturing within 12 months, reducing variable-rate exposure.
- Development Pipeline: The Company has significant development activity, including mall expansions, open-air center expansions, and community centers under construction. Projects include The District at Cherryvale, Gulf Coast Town Center Phase III, and Alamance Crossing East.
- Capital Strategy: The Company maintains a conservative debt-to-total-market capitalization ratio (48.2% as of June 30, 2006) to ensure access to capital markets.
Risks and Contingencies:
- Tenant Concentration: The Limited Stores Inc. accounted for approximately 5.0% of total revenues. Bankruptcy or closure of major tenants poses a risk.
- Interest Rate Risk: The Company has significant variable-rate debt ($1.12 billion). A 0.5% increase in rates would decrease annual cash flows by approximately $5.7 million.
- Geographic Concentration: Approximately 51.7% of revenues are derived from properties in the southeastern U.S., and 26.0% from the midwestern U.S.
- Legal Proceedings: The Company is involved in ordinary course litigation, which management does not expect to materially affect financial position.
Investor Verification Checklist
- Debt Maturities: Verify the status of the $381.3 million of debt scheduled to mature before June 30, 2007, and the success of the July 2006 refinancing efforts.
- Re-leasing Progress: Monitor the re-leasing status of vacant space resulting from Casual Corner (147,000 sq ft) and Musicland (114,000 sq ft) closures.
- Variable Rate Exposure: Assess the impact of rising interest rates on the remaining $1.12 billion of variable-rate debt.
- Development Costs: Review capital expenditure budgets for ongoing projects (e.g., Gulf Coast Town Center, Alamance Crossing) to ensure they remain within estimated costs.
- FFO vs. Net Income: Analyze the divergence between Net Income and FFO to understand the impact of depreciation and non-cash items on reported earnings.