CBL & Associates Properties, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. CBL is a REIT focused on regional malls and other retail and mixed-use properties, operating substantially through CBL & Associates Limited Partnership. Financial amounts below are in millions unless stated otherwise.
Financial results and key metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $206.9 | $224.7 | $641.7 | $691.9 |
| Income (loss) from operations | $43.3 | $50.2 | $100.7 | $149.6 |
| Net income (loss) | $(3.0) | $9.3 | $(33.6) | $118.4 |
| Net income (loss) attributable to common shareholders | $(12.6) | $(2.3) | $(57.9) | $50.8 |
| GAAP diluted EPS | $(0.07) | $(0.01) | $(0.34) | $0.30 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $280.4 | $337.0 |
| FFO, as adjusted, per diluted share | $0.40 | $0.50 | $1.28 | $1.51 |
- Revenue declined 7.9% in Q3 and 7.3% year to date. Management attributed the decline primarily to retailer bankruptcies, store closures, rent concessions and property dispositions.
- Same-center NOI fell 6.1% in Q3 and 6.6% for the nine months. Mall occupancy was 90.5%, down from 91.6% a year earlier; total portfolio occupancy was 92.0%, versus 93.1%.
- The cost recovery ratio declined to 90.9% in Q3 and 90.5% year to date, from 98.3% and 98.8%, respectively. Trailing 12-month stabilized mall sales per square foot increased 0.5% to $378.
- Impairment expense was $14.6 million in Q3 and $84.6 million year to date, versus $24.9 million and $71.4 million in the comparable 2017 periods. Year-to-date 2018 impairments included Janesville Mall, Cary Towne Center and vacant land.
Debt, liquidity and cash flow
- At September 30, consolidated debt, net, was $4.116 billion; CBL reported a $4.669 billion pro rata share including unconsolidated affiliates. Pro rata debt was approximately $4.764 billion at December 31, 2017.
- Cash, cash equivalents and restricted cash totaled $56.1 million, including $20.7 million unrestricted cash. Credit facilities had $201.4 million drawn and $491.4 million additional availability under covenant limits.
- Nine-month operating cash flow decreased $56.5 million to $280.4 million. Investing used $14.3 million and financing used $278.1 million; cash and restricted cash fell $12.0 million.
- Pro rata debt was 22.9% variable-rate. The weighted-average interest rate on pro rata debt was 4.90%; the weighted-average remaining term was 4.2 years. A 0.5 percentage-point rate increase was estimated to raise annual interest expense by approximately $5.2 million.
- Credit ratings were below investment grade and had negative outlooks: Ba1 from Moody’s and BB+ from S&P and Fitch. S&P’s August downgrade increased borrowing spreads and facility fees in September.
- Management was pursuing a refinancing of term loans and credit lines into secured facilities, targeted for January 2019, subject to due diligence and lender approvals. A $350 million term loan due October 2018 was extended to October 2019 after quarter-end.
Material changes, outlook and risks
- The Board reduced the common dividend from an annualized $0.80 to $0.30 per share beginning with the January 2019 payment. Management estimated annual cash preservation of approximately $100 million for redevelopment and debt reduction; future dividends remain subject to Board approval.
- Management reported Q3 results were in line with expectations despite additional store closures. It expected Sears closures to have minimal unbudgeted impact in 2018, but estimated 2019 co-tenancy losses of $7–$10 million; under a Sears liquidation scenario, incremental co-tenancy losses were estimated at $4–$8 million.
- Management expected redevelopment spending of $75–$125 million annually for the next few years. It cited a capital-lite approach and active replacement-tenant efforts for vacated anchors. These are estimates, not earnings guidance.
- Debt and property-specific concerns include the $43.7 million Cary Towne Center loan in default, subject to a forbearance agreement, and the $122.1 million Acadiana Mall loan in default and foreclosure proceedings. Management anticipated Acadiana foreclosure completion in 2019 and was discussing a potential Cary sale.
- Triangle Town Center’s unconsolidated venture recorded an $89.8 million impairment; CBL’s share of the impairment was $1.0 million and its investment was written down to zero. Other risks include continuing retail tenant failures, lower occupancy and rents, refinancing and interest-rate risk, and reliance on asset sales and access to capital.
- Year-to-date 2017 results benefited from $86.9 million of real estate sale gains and a $30.9 million debt-extinguishment gain, compared with $16.0 million of sale gains and no debt-extinguishment gain in 2018. Adoption of accounting standards also produced opening retained-earnings adjustments, including $58.9 million related to real estate transfers and $11.4 million related to intra-entity tax effects.
Important facts for investors to verify
- Whether the planned secured refinancing closes on expected terms and timing, and how collateralization and borrowing costs affect liquidity and financial flexibility.
- Progress on Cary Towne Center and Acadiana Mall defaults, forbearance or foreclosure, and any resulting debt, impairment or operating impacts.
- Actual tenant closures, replacement leasing, occupancy, rent spreads, co-tenancy exposure and realized redevelopment costs versus management estimates.
- Execution of the reduced dividend and whether retained cash supports debt reduction and redevelopment without further asset sales or financing needs.
- Changes in ratings, covenant headroom, available credit-facility capacity and sensitivity to interest rates; reported covenant ratios included debt to asset value of 53% and unsecured NOI to unsecured interest expense of 2.6x.