CBL & ASSOCIATES PROPERTIES INC annual report, FY2012

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CBL & Associates Properties, Inc. — 2012 Form 10-K

Reporting period: Fiscal year ended December 31, 2012. The filing is an annual report, not a standalone fourth-quarter report; quarterly figures are noted where relevant. CBL is a REIT focused primarily on regional malls and other retail properties, operating across 27 states with concentration in the Southeast and Midwest.

Financial performance and operating metrics

  • Revenue: $1.035 billion, down 1.6% from $1.051 billion in 2011. CBL attributed the decline principally to the 2011 deconsolidation of properties contributed to its CBL/T-C joint venture, partly offset by new properties and comparable-property growth.
  • Profit: Income from continuing operations was $193.2 million, up from $161.1 million. Net income attributable to common shareholders was $84.1 million, or $0.54 per diluted share, versus $91.6 million, or $0.62, in 2011. The comparison includes a $45.1 million gain on an investment in 2012; discontinued operations recorded a loss.
  • Cash flow and liquidity: Operating cash flow was $481.5 million, compared with $441.8 million. Investing activities used $246.7 million and financing activities used $212.7 million. Year-end cash was $78.2 million. CBL reported approximately $818.1 million available across credit facilities.
  • Operating measures: Same-center NOI excluding lease termination fees rose 2.0% to $727.3 million. Portfolio occupancy improved to 94.6% from 93.6%; stabilized mall occupancy was 94.5%. Comparable mall-store sales excluding license agreements increased 3.2% to $353 per square foot.
  • FFO: Operating Partnership FFO as adjusted for the investment and debt-extinguishment gains increased 5.8% to $412.8 million; adjusted FFO allocable to Company shareholders was $335.9 million, versus $304.0 million.
  • Margins and interest: Income from operations was $379.2 million, about 36.6% of revenue, versus $358.7 million, about 34.1%, in 2011. Interest expense fell to $244.4 million from $267.1 million; the reported weighted-average rate on pro rata debt declined to 4.86% from 5.04%.
  • Debt: CBL’s pro rata share of consolidated and unconsolidated debt was $5.445 billion, up from $5.267 billion. Variable-rate debt was $1.080 billion. Debt represented 53.8% of total market capitalization, compared with 59.7% a year earlier.
  • Dividends and capital: Common dividends declared were $0.88 per share for 2012, versus $0.84 in 2011. CBL issued $166.6 million net from Series E preferred shares, redeemed Series C preferred shares for $115.9 million, and used remaining proceeds to reduce credit-facility borrowings.

Material changes versus 2011

  • CBL expanded through acquisitions of Dakota Square Mall, interests in two outlet centers, and a 49% interest in Kirkwood Mall; it also acquired the remaining 40% interest in Imperial Valley Mall. Acquisitions and consolidation changes affect year-over-year comparability.
  • CBL sold two malls, four community centers and land parcels for aggregate net proceeds of $77.0 million, generally using proceeds to reduce borrowings. Two office buildings were classified as held for sale at year-end and sold in January 2013.
  • Total impairment losses were $50.9 million, including $26.5 million on properties sold and reported in discontinued operations, $23.3 million on two existing properties and $1.1 million on outparcels. This compared with $58.7 million in 2011, largely associated with Columbia Place.
  • The $45.1 million Imperial Valley gain contributed to reported 2012 earnings. By contrast, 2011 included a $54.3 million gain from the CBL/T-C transaction and a $31.4 million debt-extinguishment gain in discontinued operations.
  • Two major secured credit facilities were converted to unsecured facilities and increased to $1.2 billion in aggregate capacity. CBL also refinanced or retired property loans, while pro rata debt increased overall.

Outlook, risks and unusual items

  • Management outlook: CBL forecast 25–50 basis points of portfolio occupancy improvement in 2013 and mall-store sales growth similar to 2012. Management expected leasing spreads to remain positive and stated that achieving an investment-grade rating could take up to two years.
  • Refinancing: CBL identified $478.7 million of pro rata debt maturities to retire or refinance in 2013 after planned extensions; two loans totaling $77.1 million were retired after year-end. The $228.0 million unsecured term loan was due in April 2013. Liquidity depends on operating cash flow, credit facilities, refinancing and capital markets.
  • Preferred joint-venture interest: CBL anticipated redeeming Westfield’s preferred joint-venture units during 2013. The units had a $423.8 million liquidation value; the distribution rate could rise from 5% to 6% in July 2013 and to 9% under specified circumstances, increasing the cost if redemption conditions are not met.
  • Property and market risks: Results are exposed to tenant bankruptcies and store closures, changing consumer spending and shopping habits, competition including e-commerce, occupancy and rent pressure, property costs, and economic conditions in the Southeast and Midwest. No single tenant exceeded 3.2% of total revenue, but anchors and retail tenant health remain important.
  • Interest-rate and covenant risks: A 0.5 percentage-point rate increase was estimated to raise annual interest expense by approximately $5.3 million. CBL reported compliance with debt covenants at year-end, but its borrowings include cross-default provisions and substantial refinancing needs.
  • Defaults, guarantees and litigation: Columbia Place’s $27.3 million mortgage was in default, with property cash flow insufficient to cover debt service. A third-party development loan for which CBL guaranteed $13.3 million was also in default at year-end; management did not consider the contingent obligation probable. Construction-damage and insurance-coverage litigation remained pending; management did not expect pending litigation to materially affect financial position or results.
  • Environmental and other items: CBL recorded a $3.1 million liability for potential asbestos abatement. The filing identifies environmental, development, joint-venture, REIT-qualification and real-estate-valuation risks. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued an unqualified opinion.

Key investor verification points

  • Reconcile reported earnings with the $45.1 million investment gain, impairment charges and discontinued operations; compare adjusted FFO with GAAP results.
  • Verify the status and terms of 2013 debt refinancing, including the $228.0 million term loan, remaining maturities and post-year-end repayments.
  • Confirm the timing, funding sources and distribution-rate consequences of any redemption of Westfield’s preferred units.
  • Track Columbia Place and the guaranteed third-party loan defaults, as well as the outcomes of the construction and insurance litigation.
  • Assess whether occupancy, leasing spreads, tenant sales and planned developments support management’s 2013 outlook, while considering the portfolio’s regional and retail-sector concentration.