CBL & Associates Properties, Inc. — Q2 2017 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2017; filed August 9, 2017. CBL is a REIT focused on malls, outlet and open-air centers, and related properties, primarily in the Southeast and Midwest. It operated 90 consolidated properties and held interests in 17 unconsolidated properties. The combined filing reports CBL and its Operating Partnership, which conducts substantially all the business and holds the debt.
Financial and operating performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $229.2 million | $255.0 million | $467.2 million | $518.0 million |
| Net income | $70.6 million | $73.1 million | $109.1 million | $115.0 million |
| Net income attributable to common shareholders | $30.2 million | $51.7 million | $53.1 million | $80.5 million |
| Diluted EPS | $0.18 | $0.30 | $0.31 | $0.47 |
| Same-center NOI | $172.4 million | $174.8 million | $342.1 million | $345.7 million |
| Adjusted FFO per diluted share | $0.50 | $0.59 | $1.02 | $1.15 |
Revenue fell about 10% in both the quarter and first half. Management attributed the decline to asset-sale dilution, lower occupancy and tenant sales, retailer bankruptcies, and the challenging retail environment. Same-center NOI declined 1.3% in Q2 and 1.0% year to date; lower revenues were partly offset by lower property expenses. Stabilized mall same-center sales per square foot fell 2.4% to $373; total portfolio occupancy was 91.6%, down from 92.6%, while same-center mall occupancy was 90.6%, down from 92.0%. Same-center stabilized mall base rent increased to $33.00 per square foot from $32.41.
Operating income was $22.3 million in Q2 versus $52.1 million and $99.4 million for the first half versus $115.9 million. Q2 included $43.2 million of impairment charges and $82.5 million of depreciation and amortization. Reported earnings also reflected significant property-sale and debt-extinguishment gains, so net income should be considered alongside recurring operating measures.
Cash flow, debt, and liquidity
- First-half operating cash flow was $205.3 million, versus $214.2 million; investing activities provided $11.7 million, versus $28.4 million; financing activities used $206.3 million, versus $258.3 million.
- Cash and cash equivalents were $29.6 million at June 30, up from $19.0 million at year-end. First-half dividends paid to common and preferred shareholders totaled approximately $113.0 million.
- Consolidated mortgage and other debt, net, was $4.249 billion, down from $4.465 billion at year-end. Gross consolidated debt was $4.266 billion, with a weighted-average rate of 4.71%; $1.081 billion was variable-rate debt. CBL itself had no direct indebtedness; the Operating Partnership or its subsidiaries were borrowers.
- The company reported compliance with debt covenants at June 30. Key reported ratios included debt to total asset value of 50% against a maximum of 60%, and EBITDA to fixed charges of 2.4x against a minimum of 1.5x. Unsecured credit facilities had $181.1 million outstanding against $1.1 billion total capacity; covenant limits constrained borrowing below the nominal unused capacity.
- Consolidated scheduled principal payments included $566.9 million in 2017. Subsequent extensions and modifications addressed several unsecured loans, including extending a $350 million term loan to October 2018 and modifying the $400 million term loan. A covenant change subsequently reduced the stated borrowing headroom under the modified test: the filing estimates the capacity shortfall versus total facility capacity at $196.9 million, compared with $33.5 million under the prior covenant.
Material changes, outlook, and risks
- CBL sold two malls and an outlet center during Q2 for an aggregate gross price of $183.5 million and recorded a $79.5 million gain on real estate sales. First-half property-sale gains totaled $85.5 million. Foreclosures of Midland Mall and Chesterfield Mall extinguished $172.0 million of non-recourse debt and generated $33.0 million of gains; early debt repayment fees partly offset these gains.
- First-half impairment charges were $46.5 million, including a $43.0 million write-down of Acadiana Mall. The mall had declining sales and cash flows, and an anchor tenant had announced a planned closure. A $5.8 million loss on investment was recorded in connection with the planned sale of CBL’s 25% River Ridge Mall interest for $9.0 million.
- Management said Q2 results were in line with expectations given the adverse retail climate. It continued to focus on leasing replacement space, diversifying tenants, redeveloping acquired Sears and Macy’s locations, and strengthening the balance sheet. The Outlet Shoppes at Laredo opened in April 2017.
- Wausau Center’s $17.7 million non-recourse loan was in default and the mall was in receivership; management expected to return the property to the lender after foreclosure. CBL also had a preliminary agreement to modify and extend Acadiana Mall’s matured $124.2 million loan. Remaining refinancing needs, retail demand, tenant closures, occupancy, interest rates, and access to capital are material risks.
- Management stated that operating cash flows, financing sources, facility availability, and asset-sale proceeds were expected to provide adequate liquidity for the foreseeable future, but this is subject to refinancing and operating conditions. No earnings guidance was provided in the supplied filing text.
- Ordinary-course litigation was not expected to have a material adverse effect. Environmental losses were considered reasonably possible but management believed maximum exposure would not be material. The Operating Partnership had $412,000 of recorded liabilities for certain joint-venture debt guarantees; a separate York Town Center lease-performance guarantee had a maximum obligation of $14.0 million at quarter-end.
Important facts for investors to verify
- Whether mall occupancy, tenant sales, leasing spreads, and same-center NOI stabilize or continue to decline amid retailer bankruptcies and store closures.
- Progress and final terms for refinancing Acadiana Mall and other 2017 maturities, and the practical borrowing capacity after the revised covenants.
- Wausau Center foreclosure status and any further property transfers, debt gains, impairment charges, or cash impacts.
- How much reported earnings and FFO depend on property sales, debt-extinguishment gains, impairments, and other unusual items versus recurring operations.
- Execution, leasing, costs, and returns on Sears/Macy’s redevelopments and other projects, alongside the company’s ability to fund capital needs and distributions.