CBL

Business Context and Reporting Period

Company: CBL & Associates Properties, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007
Business Overview: CBL is a self-managed, self-administered Real Estate Investment Trust (REIT) engaged in the ownership, development, acquisition, leasing, management, and operation of regional shopping malls, open-air centers, and community centers. As of March 31, 2007, the company owned controlling interests in 72 regional malls/open-air centers, 28 associated centers, and four community centers, primarily located in the southeastern and midwestern United States.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased by $5.2 million (2.1%) compared to Q1 2006. This was driven by a $4.0 million increase from comparable properties and $1.8 million from new properties opened since January 2006.
• Profitability Decline: Net income available to common shareholders decreased by $3.2 million (15.6%) to $17.4 million. Diluted EPS fell from $0.32 to $0.26.
• Expense Increases: Property operating expenses rose by $7.0 million, largely due to a $1.5 million increase in bad debt expense and a $1.2 million increase in snow removal costs. Depreciation and amortization increased by $2.3 million due to capital expenditures on renovations and expansions.
• Interest Expense: Interest expense increased by $2.2 million due to additional debt associated with new properties and higher weighted average interest rates on variable-rate debt.
• Debt Refinancing: The company obtained six new ten-year non-recourse loans totaling $417.0 million at fixed rates (avg 5.67%) to retire $92.1 million of maturing debt and reduce credit facility balances. This reduced the proportion of variable-rate debt from 22.6% to 17.6% of total debt.
• Discontinued Operations: The company recognized a loss of $0.3 million from discontinued operations in Q1 2007, compared to income of $2.1 million in Q1 2006, reflecting the true-up of expenses for previously sold properties.

Guidance, Outlook, Risks, and Unusual Items

• Outlook and Capital Strategy: Management anticipates that a combination of equity and debt sources will provide adequate liquidity for capital programs and distributions. The company aims to maintain a conservative debt-to-total-market capitalization ratio (46.8% as of March 31, 2007).
• Development Pipeline: Significant development projects are underway, including mall expansions (e.g., The District at Valley View, Harford Mall) and new community centers (e.g., Alamance Crossing East). Total project costs for properties under development are approximately $408.9 million.
• Internal Control Material Weakness: The company disclosed a material weakness in internal controls over financial reporting related to the accounting and reporting for income taxes. Specifically, the company previously incorrectly recorded realized tax return benefits of excess stock compensation deductions. While remediation steps are underway, the controls were deemed not effective as of the reporting date.
• Risk Factors: Key risks include exposure to regional economic conditions (Southeast and Midwest), rising interest rates, competition from other retail formats (including the Internet), and the potential loss of anchor tenants. The company also faces risks related to environmental liabilities and the ability to maintain REIT status.
• Unusual Items: A loss on extinguishment of debt of $0.2 million was recorded due to prepayment fees on retired loans. The company also recorded a gain on sales of real estate assets of $3.5 million from the sale of six land parcels.

Investor Verification Checklist

• Internal Control Remediation: Verify the progress and timeline for remediation of the material weakness regarding income tax accounting and reporting.
• Variable Rate Debt Exposure: Confirm the current weighted average interest rate on variable-rate debt and the impact of potential interest rate hikes on future cash flows.
• Occupancy Trends: Review occupancy rates for non-stabilized malls (84.7% as of March 31, 2007) and the timeline for lease-up of new properties like High Pointe Commons and Gulf Coast Town Center.
• Cost Recovery Ratio: Monitor the cost recovery ratio, which declined to 98% in Q1 2007 from 104.5% in the prior year, and assess the sustainability of operating expense growth.
• Debt Maturities: Review the schedule for the $93.0 million in debt maturing before March 31, 2008, and the company's refinancing plans.