CBL & Associates Properties, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This annual filing covers CBL & Associates Properties, Inc. and its Operating Partnership; it is not a stand-alone fourth-quarter report. CBL is a REIT that owns, leases, manages and redevelops malls and other retail, mixed-use and office properties, primarily in the southeastern and midwestern United States. At year-end, it held interests in 105 properties, including 90 consolidated properties.
Financial performance and position
| Metric | 2017 | 2016 | Change / context |
|---|---|---|---|
| Total revenue | $927.3 million | $1,028.3 million | Down 9.8% |
| Income from operations | $232.6 million | $253.6 million | Down 8.3% |
| Net income | $159.0 million | $195.5 million | Down 18.7% |
| Net income attributable to common shareholders | $76.0 million; $0.44 diluted EPS | $128.0 million; $0.75 diluted EPS | Lower earnings and sales/impairment effects |
| FFO, as adjusted | $413.7 million; $2.08 per diluted share | $480.8 million; $2.41 per diluted share | Down 13.9% in total and 13.7% per share; non-GAAP |
| Same-center NOI | $672.2 million | $692.3 million | Down 2.9%; non-GAAP |
| Cash from operating activities | $430.4 million | $468.6 million | Down $38.2 million |
| Cash, cash equivalents and restricted cash | $68.2 million | $65.1 million | Includes $32.6 million unrestricted cash at year-end |
| Net investment in real estate | $5.16 billion | $5.52 billion | Total assets were $5.70 billion, down from $6.10 billion |
| Debt, net, on consolidated balance sheet | $4.23 billion | $4.47 billion | Company pro rata share of consolidated and unconsolidated debt was approximately $4.74 billion |
Revenue and NOI were pressured by tenant bankruptcies and closures, rent reductions, lower percentage rents and property dispositions. Stabilized mall same-center sales per square foot fell 1.8% to $372. Total portfolio occupancy declined to 93.2% from 94.8%; same-center mall occupancy was 92.2% versus 94.0%. Comparable small-shop leasing spreads in stabilized malls were negative 5.4%, reflecting positive 9.0% spreads on new leases but negative 8.7% on renewals.
Material changes and unusual items
- CBL sold three malls and two office buildings for gross proceeds of approximately $189.8 million and net proceeds of $112.1 million, principally used to reduce credit-facility borrowings. It also conveyed three malls to lenders in satisfaction of non-recourse debt, recording a $39.8 million debt-extinguishment gain.
- Real estate impairment charges were $71.4 million, primarily relating to Acadiana Mall and Hickory Point Mall. Acadiana’s $122.4 million loan was in default at year-end; the property subsequently entered receivership, with foreclosure expected in 2018. Management was also discussing modification of Hickory Point’s loan.
- Net income included $93.8 million in gains on real estate sales and a $6.2 million loss on the sale of the River Ridge Mall investment. The prior-year period included significant gains from unconsolidated-affiliate property sales, contributing to lower 2017 equity-method earnings.
- CBL acquired Sears and Macy’s locations for $79.8 million for future redevelopment. It retired more than $350 million of mortgage loans, at its share, adding seven properties to the unencumbered pool. At year-end, approximately 59% of consolidated NOI was generated by unencumbered properties.
- The Operating Partnership issued an additional $225 million of 5.95% notes due 2026, and modified and extended unsecured term loans. Its pro rata share of variable-rate debt was approximately $1.15 billion, or 24.2% of pro rata debt.
Liquidity, capital and outlook
- At December 31, 2017, $93.8 million was outstanding on $1.1 billion of unsecured credit facilities; reported availability was approximately $576.5 million, subject to covenant limits. Actual covenant ratios were within stated thresholds, including debt to total asset value of 50% against a limit below 60%, and EBITDA to fixed charges of 2.4x against a minimum of 1.5x.
- Management reported $737.8 million of pro rata debt maturities scheduled for 2018 before available extensions; it estimated $288.6 million would require repayment or refinancing after giving effect to extensions then available. Subsequent to year-end, CBL retired the $37.3 million Kirkwood Mall loan and certain joint-venture loans were extended. The filing identifies refinancing and continued capital-market access as significant risks.
- CBL reduced its common dividend in the fourth quarter of 2017 to an annualized rate of $0.80 per share, from the prior quarterly rate of $0.265. The board retains discretion over future dividends; preferred dividends continued at their stated rates.
- Management said more than $24 million of gross annual rent loss from 2017 closures and rent reductions was expected to affect the portfolio. Backfill leasing was expected to begin contributing in late 2018 and 2019. The company emphasized anchor-space redevelopment and a broader mix of restaurants, entertainment, fitness, hotels, apartments, self-storage and medical uses. No specific consolidated earnings or FFO guidance is provided in the filing.
- Projects under development included the Shoppes at Eagle Point, expected to open in fall 2018, and several mall redevelopments with expected 2018 openings. CBL projected $9.6 million of renovation investment for 2018.
- Moody’s downgraded the Operating Partnership’s unsecured debt rating from Baa3 to Ba1 in February 2018, after year-end; the filing said this did not change current borrowing rates. A further S&P downgrade could raise spreads on facilities and term loans.
Key risks and contingencies
- Retail tenant distress, store closures, department-store weakness and competition from online and alternative retail formats may reduce occupancy, rents, tenant reimbursements and property values. The filing notes negative renewal spreads and a concentration of 2018 mall-store lease expirations representing 15.7% of annualized gross rent.
- High leverage and refinancing exposure: pro rata debt was approximately 73.1% of market capitalization at year-end, a ratio affected by the decline in CBL’s share price. Variable rates, weaker credit ratings, covenant compliance and debt maturities could constrain liquidity and distributions.
- CBL’s ability to pay dividends depends substantially on Operating Partnership distributions, which may be limited by debt agreements and financial conditions. The common dividend reduction reflects management’s stated priorities of liquidity, debt reduction and reinvestment.
- Joint-venture guarantees include guarantees of certain affiliate debt and a York Town Center lease-performance obligation with a maximum year-end exposure of $13.2 million. The company also reported $17.0 million of outstanding performance bonds. Ordinary-course litigation was not expected to have a material adverse effect; environmental exposure was considered reasonably possible but not expected to be material.
- Other risks include impairment-estimate uncertainty, property illiquidity, geographic concentration, interest-rate changes, environmental liabilities, cyber incidents, and maintaining REIT qualification. The filing reports $3.1 million recorded for potential asbestos abatement.
Most important facts for investors to verify
- Progress on refinancing or repaying 2018 maturities, including the remaining term-loan reduction and property-level loans, and the status of Acadiana Mall and Hickory Point Mall.
- Whether occupancy, tenant sales, collections and same-center NOI stabilize, and whether the anticipated rent backfill offsets the disclosed annual rent losses.
- Liquidity available after covenant restrictions, debt repayments and capital spending; the sensitivity of interest expense to variable rates and any further credit-rating changes.
- Execution, cost and leasing performance of anchor redevelopments and other development projects, including whether projected opening dates and yields are achieved.
- The sustainability of the reduced common dividend and the coverage of common and preferred distributions by recurring cash generation and FFO; FFO is non-GAAP and is not equivalent to operating cash flow.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting as of December 31, 2017.