CBL & Associates Properties, Inc. — 2010 Q3 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. Unaudited consolidated financial statements; dollar amounts below are in millions unless stated otherwise. CBL is a REIT focused on regional malls, open-air and community centers, and office properties, primarily in the southeastern and midwestern United States.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $265.8 | $262.5 | $793.5 | $799.3 |
| Income from operations | $98.5 | $95.7 | $268.2 | $284.4 |
| Net income attributable to CBL | $17.9 | $16.6 | $36.0 | $37.3 |
| Net income attributable to common shareholders | $9.6 | $11.1 | $13.3 | $21.0 |
| EPS attributable to common shareholders | $0.07 | $0.08 | $0.10 | $0.22 |
| Operating cash flow | — | — | $289.8 | $297.8 |
| FFO of Operating Partnership | $89.5 | $94.2 | $251.7 | $279.0 |
- Q3 operating margin was approximately 37.1%, compared with 36.5% a year earlier, based on reported revenue and operating income.
- At September 30, cash and cash equivalents were $56.7; consolidated mortgage and other indebtedness was $5.425 billion, down from $5.616 billion at December 31, 2009. CBL’s pro rata consolidated and unconsolidated debt was $5.987 billion, with a 4.93% weighted-average interest rate and 3.5-year weighted-average remaining term.
- Approximately 30.0% of CBL’s pro rata debt was variable-rate. A 0.5 percentage-point rate increase was estimated to reduce annual cash flow and earnings by about $4.6 million.
- Secured credit facilities had $1.19 billion total capacity and $744.0 million outstanding; the filing reports approximately $438.7 million available on lines of credit. CBL was in compliance with debt covenants.
- For the nine months, investing cash use was $64.4 million and financing cash use was $216.8 million. Cash from operations declined $8.0 million year over year. Cash interest paid, net of capitalized amounts, was $212.3 million.
Material changes versus the prior comparable period
- Q3 revenue increased 1.3%, while nine-month revenue declined 0.7%. Nine-month comparable-property rental revenue and tenant reimbursements weakened, partly offset by revenue from newer properties.
- Common-shareholder earnings declined in Q3 despite higher operating income, reflecting higher preferred dividends and lower gains on property sales, among other items. For the nine months, common earnings also reflected the $25.4 million noncash impairment of Oak Hollow Mall.
- Nine-month FFO of the Operating Partnership fell 9.8%; excluding the impairment charge, it decreased 0.6% to $277.2 million. FFO is a non-GAAP measure and is not a substitute for operating cash flow.
- Portfolio occupancy improved: total portfolio occupancy was 91.0% versus 89.2%; stabilized mall occupancy was 91.6% versus 90.3%. Mall sales per square foot for the nine months rose 2.7% year over year.
- Leasing rates remained pressured: Q3 comparable new and renewal small-shop leases had an average initial rent decline of 7.7% and an average rent decline of 4.8%. Nine-month average rent declines were 11.2% initially and 8.6% on average.
- CBL raised $123.6 million net from a Series D preferred offering in March. After quarter-end, it raised a further $108.7 million net in an October offering, primarily to reduce credit-facility borrowings and for general corporate purposes. Preferred dividends reduce earnings and cash available to common shareholders.
Outlook, commentary, risks and unusual items
- Management said Q3 results were encouraging, citing occupancy gains, more than 1.0 million square feet of operating-portfolio leases signed, and improving retail-sector indicators. It remained optimistic about holiday sales but characterized the retail real estate environment as challenging. No specific full-year earnings or FFO guidance is provided in the filing.
- Management planned to pursue leasing and occupancy improvements, contain costs, and consider converting recourse floating-rate debt into non-recourse fixed-rate property loans. It said available operating cash flow, debt and equity sources, and credit lines should provide adequate liquidity for the foreseeable future.
- Debt refinancing remains a key risk. Of $299.6 million of pro rata debt scheduled to mature during the remainder of 2010, $273.8 million had extensions available at CBL’s option, leaving about $25.8 million to refinance or repay; management reported term sheets or line availability for these maturities. A $209.5 million unsecured term loan was scheduled to mature in November 2010, with extension options.
- The $25.4 million Oak Hollow Mall impairment was recorded in Q2 and was noncash. The filing notes that property impairment estimates depend on uncertain assumptions about leasing, rents, operating costs, and capitalization rates.
- CBL disclosed guarantees on joint-venture and third-party borrowing, including guarantees of up to $50.7 million for West Melbourne and $97.2 million for Port Orange; outstanding balances at quarter-end were $45.6 million and $69.4 million, respectively. It also agreed after quarter-end to guarantee a $48.9 million construction loan for the Oklahoma City outlet-center venture.
- A CBL subsidiary sued a construction company in March 2010 over alleged property damage at a Mississippi development; the contractor denied liability and counterclaimed. Management stated that ordinary-course litigation was not expected to materially affect results or financial position. The filing’s Legal Proceedings item states “None.”
- CBL’s $423.8 million redeemable preferred joint-venture interest carries a preferred distribution rate of 5%, rising to 6% in 2013 and potentially to 9% under specified conditions. Redemption rights and related terms create future funding and distribution exposure.
- Principal risks include high leverage and refinancing needs, interest-rate changes, tenant bankruptcies and store closures, negative leasing spreads, retail competition, property impairments, development costs, joint-venture guarantees, and regional economic concentration.
Important facts for investors to verify
- Near-term maturities, exercise of extension options, refinancing progress, and the stated $438.7 million of line availability.
- Whether occupancy gains translate into positive lease spreads, rent growth, and sustained tenant sales; Q3 and year-to-date comparable leasing spreads remained negative.
- Effects of preferred-stock issuance and distributions on common-shareholder earnings, dividends, and per-share FFO.
- Assumptions and potential further write-downs related to Oak Hollow Mall and other properties, plus the scale and terms of CBL’s guarantees and redeemable joint-venture interests.
- Outcome and potential exposure from the construction-related lawsuit and counterclaim; reconcile the note disclosure with the “None” response under Legal Proceedings.