Act of 1934 -- Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
--------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended __________to ____________
Commission File No. 1-12494
CBL & ASSOCIATES PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 62-1545718
- ---------------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2030 Hamilton Place Blvd., Suite #500
Chattanooga, Tennessee 37421-6000
- -------------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 855-0001
-------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of Each Class on which Registered
- ------------------- -------------------
Common Stock, $.01 par value per share New York Stock Exchange
9.0% Series A Cumulative Redeemable Preferred New York Stock Exchange
Stock, par value $.01 per share
8.75% Series B Cumulative Redeemable Preferred New York Stock Exchange
Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes_X__ No_____
As of May 12, 2003, there were 29,995,030 shares of common stock, par value
$0.01 per share, outstanding.
1
CBL & Associates Properties, Inc.
INDEX
PAGE NUMBER
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL INFORMATION 3
CONSOLIDATED BALANCE SHEETS - AS OF MARCH 31, 4
2003 AND DECEMBER 31, 2002
CONSOLIDATED STATEMENTS OF OPERATIONS - FOR THE 5
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE 6
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS 14
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE 28
ABOUT MARKET RISK
ITEM 4: CONTROLS AND PROCEDURES 29
PART II OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS 30
ITEM 2: CHANGES IN SECURITIES 30
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 30
ITEM 4: SUBMISSION OF MATTERS TO HAVE A VOTE 30
OF SECURITY HOLDERS
ITEM 5: OTHER INFORMATION 30
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 30
SIGNATURE AND CERTIFICATIONS 31
2
CBL & Associates Properties, Inc.
Item 1: Financial Information
The accompanying financial statements are unaudited; however, they have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and in conjunction with the
rules and regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the disclosures required by accounting principles
generally accepted in the United States for complete financial statements. In
the opinion of management, all adjustments (consisting solely of normal
recurring matters) necessary for a fair presentation of the financial statements
for these interim periods have been included. The results for the interim period
ended March 31, 2003, are not necessarily indicative of the results to be
obtained for the full fiscal year.
These financial statements should be read in conjunction with the CBL &
Associates Properties, Inc. (the "Company"), audited financial statements and
notes thereto included in the CBL & Associates Properties, Inc. Form 10-K for
the year ended December 31, 2002.
3
CBL & Associates Properties, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
March 31, December 31,
2003 2002
----------------------- ---------------------
ASSETS
Real estate assets:
Land.............................................................. $ 568,293 $ 570,818
Buildings and improvements........................................ 3,405,457 3,394,787
----------------------- ---------------------
3,973,750 3,965,605
Less accumulated depreciation................................... (458,638) (434,840)
----------------------- ---------------------
3,515,112 3,530,765
Developments in progress.......................................... 114,256 80,720
----------------------- ---------------------
Net investment in real estate assets............................ 3,629,368 3,611,485
Cash and cash equivalents........................................... 22,989 13,355
Receivables:
Tenant, net of allowance for doubtful accounts of $2,889 in
2003 and $2,861 in 2002........................................ 37,589 37,994
Other............................................................. 6,366 3,692
Mortgage notes receivable........................................... 22,903 23,074
Investment in unconsolidated affiliates............................. 76,195 68,232
Other assets........................................................ 37,729 37,282
----------------------- ---------------------
$ 3,833,139 $ 3,795,114
======================= =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage and other notes payable.................................... $ 2,443,482 $ 2,402,079
Accounts payable and accrued liabilities............................ 100,320 151,332
----------------------- ---------------------
Total liabilities................................................. 2,543,802 2,553,411
----------------------- ---------------------
Minority interest................................................... 523,002 500,513
----------------------- ---------------------
Commitments and contingencies (Note 8)..............................
Shareholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized:
9.0% Series A Cumulative Redeemable Preferred Stock,
2,675,000 shares outstanding in 2003 and 2002.............. 27 27
8.75% Series B Cumulative Redeemable Preferred Stock,
2,000,000 shares outstanding in 2003 and in 2002 .......... 20 20
Common stock, $.01 par value, 95,000,000 shares authorized,
29,886,912 and 29,797,469 shares issued and outstanding
in 2003 and 2002, respectively.................................. 299 298
Additional paid - in capital...................................... 767,194 765,686
Accumulated other comprehensive loss.............................. (1,543) (2,397)
Retained earnings (accumulated deficit)........................... 338 (22,444)
Total shareholders' equity...................................... 766,335 741,190
----------------------- ---------------------
$ 3,833,139 $ 3,795,114
======================= =====================
The accompanying notes are an integral part of these balance sheets.
4
CBL & Associates Properties, Inc.
Consolidated Statements Of Operations
(In thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
----------------------------------------------
2003 2002
----------------------- ---------------------
REVENUES:
Rentals:
Minimum rents..................................... $ 102,988 $ 90,569
Percentage rents.................................. 6,330 6,717
Other rents....................................... 2,029 2,058
Tenant reimbursements................................ 49,956 38,587
Management, development and leasing fees............. 1,319 1,298
Interest and other................................... 3,924 5,688
----------------------- ---------------------
Total revenues..................................... 166,546 144,917
----------------------- ---------------------
EXPENSES:
Property operating................................... 28,272 22,320
Depreciation and amortization........................ 26,312 22,481
Real estate taxes.................................... 13,993 11,527
Maintenance and repairs.............................. 10,557 8,562
General and administrative........................... 6,353 5,741
Interest............................................. 36,956 36,787
Loss on extinguishment of debt....................... -- 1,948
Other................................................ 2,341 3,747
----------------------- ---------------------
Total expenses..................................... 124,784 113,113
----------------------- ---------------------
Income from operations............................... 41,762 31,804
Gain on sales of real estate assets.................. 1,104 415
Equity in earnings of unconsolidated affiliates...... 1,757 2,087
Minority interest in earnings:
Operating partnership.............................. (20,637) (16,197)
Shopping center properties......................... (540) (917)
----------------------- ---------------------
Income before discontinued operations................ 23,446 17,192
Operating income of discontinued operations.......... 87 566
Gain on discontinued operations...................... 2,935 1,243
----------------------- ---------------------
Net income........................................... 26,468 19,001
Preferred dividends.................................. (3,692) (1,617)
----------------------- ---------------------
Net income available to common shareholders.......... $ 22,776 $ 17,384
======================= =====================
Basic per share data:
Income before discontinued operations, net of
preferred dividends.......................... $ 0.66 $ 0.59
Discontinued operations.......................... 0.10 0.07
----------------------- ---------------------
Net income available to common shareholders...... $ 0.76 $ 0.66
======================= =====================
Weighted average common shares outstanding....... 29,726 26,356
Diluted per share data:
Income before discontinued operations, net of
preferred dividends.......................... $ 0.64 $ 0.57
Discontinued operations.......................... 0.10 0.07
----------------------- ---------------------
Net income available to common shareholders...... $ 0.74 $ 0.64
======================= =====================
Weighted average common and potential dilutive
common shares outstanding........................ 30,803 27,121
The accompanying notes are an integral part of these statements.
5
CBL & Associates Properties, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended March 31,
----------------------------------------------
2003 2002
----------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................... $26,468 $19,001
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation...................................................... 20,132 18,717
Amortization...................................................... 7,246 4,612
Gain on sales of real estate assets............................... (1,104) (415)
Gain on discontinued operations................................... (2,935) (1,243)
Loss on extinguishment of debt.................................... -- 1,965
Issuance of stock under incentive plan............................ 1,129 1,150
Amortization of lease origination value........................... (50) --
Write-off of development projects................................. (8) --
Deferred compensation............................................. 89 --
Equity in earnings in excess of distributions from
unconsolidated affiliates....................................... (1,046) --
Minority interest in earnings..................................... 21,177 17,111
Changes in:
Tenant and other receivables...................................... (2,575) 2,025
Other assets...................................................... 1,266 (1,178)
Accounts payable and accrued liabilities.......................... (11,279) (2,804)
----------------------- ---------------------
Net cash provided by operating activities................. 58,510 58,941
======================= =====================
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate assets................................. (22,525) (13,305)
Other capital expenditures...................................... (27,570) (11,629)
Capitalized interest............................................ (1,186) (844)
Additions to other assets....................................... (419) (401)
Proceeds from sales of real estate assets....................... 9,508 22,682
Payments received on mortgage notes receivable.................. 170 2,540
Additions to mortgage notes receivable.......................... -- (3,219)
Distributions in excess of equity in earnings of
unconsolidated affiliates..................................... -- 13,618
Additional investments in and advances to unconsolidated affiliates. (6,917) (12,483)
----------------------- ---------------------
Net cash used in investing activities..................... (48,939) (3,041)
======================= =====================
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage and other notes payable.................. 164,347 120,330
Principal payments on mortgage and other notes payable.......... (122,944) (248,571)
Additions to deferred financing costs........................... (2,399) (341)
Prepayment penalties on extinguishment of debt.................. -- (1,875)
Proceeds from issuance of common stock.......................... 1,011 115,690
Proceeds from exercise of stock options......................... 769 1,367
Distributions to minority investors............................. (17,511) (15,650)
Dividends paid.................................................. (23,210) (15,258)
----------------------- ---------------------
Net cash provided by (used in) financing activities....... 63 (44,308)
----------------------- ---------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS............................. 9,634 11,592
CASH AND CASH EQUIVALENTS, beginning of period...................... 13,355 10,137
----------------------- ---------------------
CASH AND CASH EQUIVALENTS, end of period............................ $22,989 $21,729
======================= =====================
SUPPLEMENTAL INFORMATION:
Cash paid for interest, net of amounts capitalized................ $36,575 $37,223
======================= =====================
The accompanying notes are an integral part of these statements.
6
CBL & Associates Properties, Inc.
Notes to Unaudited Consolidated Financial Statements
(In thousands, except per share data)
Note 1 - Investment In Unconsolidated Affiliates
Condensed combined results of operations for the unconsolidated affiliates
are presented as follows:
Total for the Three Months Company's Share for the
-------------------------------- Three Months
Ended March 31, Ended March 31,
2003 2002 2003 2002
Revenues $10,746 $11,854 $6,175 $5,927
------- ------- ------ ------
Depreciation and amortization 1,597 1,738 896 924
Interest expense 3,012 2,549 1,860 1,271
Other operating expenses 2,542 3,264 1,662 1,645
------- ------- ------ ------
Income from operations $3,595 $4,303 $1,757 $2,087
====== ====== ====== ======
At March 31, 2003, the Company had investments in nine partnerships
representing four malls, two associated centers and two community centers, as
well as one mall under construction, vacant land held for sale or lease and one
development property, all of which are accounted for using the equity method.
Note 2 - Mortgage and Other Notes Payables
Mortgage and other notes payable consisted of the following at March 31,
2003 and December 31, 2002, respectively:
March 31, 2003 December 31, 2002
--------------------------------- -----------------------------
Weighted Weighted
Average Average
Interest Interest
Amount Rate(1) Amount Rate(1)
--------------- --------------- ------------- --------------
Fixed-rate debt:
Non-recourse loans on operating $1,943,722 7.06% $1,867,915 7.16%
properties --------------- -------------
Variable-rate debt:
Recourse term loans on operating 281,057 3.90% 290,954 3.98%
properties
Lines of credit 186,525 2.31% 221,275 2.69%
Construction loans 32,178 2.98% 21,935 3.08%
--------------- -------------
Total variable-rate debt 499,760 3.24% 534,164 3.41%
Total --------------- 6.28% ------------- 6.32%
$2,443,482 $2,402,079
=============== =============
(1) Weighted-average interest rate before amortization of deferred financing costs.
On February 28, 2003, the Company entered into a new secured credit
facility for $255,000. This new credit facility replaced both the Company's
$130,000 secured credit facility and its unsecured facility of $105,275. The new
credit facility bears interest at LIBOR plus 100 basis points, expires in
February 2006, and has a one-year extension, which is at the Company's election.
Six regional malls and three associated centers secure the new credit facility.
The Company's credit facilities total $365,000, of which $178,475 was
available at March 31, 2003. Additionally, the Company had other credit
facilities totaling $14,585 that are used only for issuances of letters of
credit, of which $1,630 was available at March 31, 2003.
7
As of March 31, 2003, the Company had total commitments under construction
loans of $59,573, of which $27,395 was available to be used for completion of
construction and redevelopment projects and replenishment of working capital
previously used for construction. The Company also had $9,056 available in
unfunded construction loans on operating properties that can be used to
replenish working capital previously used for construction.
On February 26, 2003, the Company obtained an $85,000, non-recourse loan
that is secured by Westmoreland Mall and Westmoreland Crossing in Greensburg,
PA. The loan bears interest at 5.05% and has a term of ten years with payments
based on a 25-year amortization schedule.
The weighted average maturities of the Company's consolidated debt was 5.7
years at March 31, 2003 and December 31, 2002.
In May 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections", which rescinds SFAS No. 4. As a
result, gains and losses from extinguishments of debt should be classified as
extraordinary items only if they meet the criteria of Accounting Principles
Board Opinion No. 30 ("APB 30"). SFAS No. 145 was effective for the Company on
January 1, 2003. All losses on extinguishment of debt that were classified as an
extraordinary item in prior periods have been reclassified to an operating
expense in the accompanying consolidated statements of operations.
Fourteen malls, five associated centers and the office building are owned
by special purpose entities that are included in the consolidated financial
statements. The sole business purpose of the special purpose entities is the
ownership and operation of the properties. The mortgaged real estate and other
assets owned by these special purpose entities are restricted under the loan
agreements in that they are not available to settle other debts of the Company.
However, so long as the loans are not under an event of default, as defined in
the loan agreements, the cash flows from these properties, after payments of
debt service, operating expenses and reserves, are available for distribution to
the Company.
Note 3 -Derivative Financial Instruments
The Company uses derivative financial instruments to manage exposure to
interest rate risks inherent in variable-rate debt and does not use them for
trading or speculative purposes. The Company had the following interest rate
swap agreement, which was designated as a cash flow hedge, at March 31, 2003:
Notional Amount Fixed LIBOR Component Expiration Date Fair Value
- -------------------- ------------------------- ------------------- -------------
$ 80,000 5.830% 08/30/2003 $(1,543)
At March 31, 2003, the interest rate swap's fair value was recorded in
accounts payable and accrued liabilities. For the quarter, adjustments of $854
were recorded as adjustments in other comprehensive income. Over time,
unrealized gains and losses held in accumulated other comprehensive loss will be
reclassified to earnings. This reclassification occurs in the same period or
periods that the hedged cash flows affect earnings. Before August 30, 2003, the
Company estimates that it will reclassify the entire balance of $(1,543) to
earnings as interest expense.
The Company is exposed to credit losses if counterparties to the swap
agreements are unable to perform; therefore, the Company continually monitors
the credit standing of the counterparties.
8
Note 4 - Segment Information
The Company measures performance and allocates resources according to
property type, which are determined based on certain criteria such as type of
tenants, capital requirements, economic risks, leasing terms, and short- and
long-term returns on capital. Rental income and tenant reimbursements from
tenant leases provide the majority of revenues from all segments. Information on
the Company's reportable segments is presented as follows:
Associated Community
Three Months Ended March 31, 2003 Malls Centers Centers All Other Total
- -------------------------------------- ------------ ------------ ----------- ------------- -----------
Revenues $ 140,629 $ 5,396 $ 15,207 $ 5,314 $ 166,546
Property operating expenses (1) (47,831) (1,336) (3,857) 202 (52,822)
Interest expense (33,072) (953) (1,941) (990) (36,956)
Other expense -- -- -- (2,341) (2,341)
Gain on sales of real estate assets (5) -- 348 761 1,104
------------ ------------ ----------- ------------- -----------
Segment profit and loss $ 59,721 $ 3,107 $ 9,757 $ 2,946 75,531
============ ============ =========== =============
Depreciation and amortization (26,312)
General and administrative (6,353)
Loss on extinguishment of debt --
Equity in earnings and minority
interest in earnings (19,420)
-----------
Income before discontinued operations $ 23,446
===========
Total assets (2) $3,083,149 $162,130 $412,279 $175,581 $3,833,139
Capital expenditures (2) $ 34,700 $ 1,185 $ 664 $ 17,406 $ 53,935
Associated Community
Three Months Ended March 31, 2002 Malls Centers Centers All Other Total
- -------------------------------------- ------------ ------------ ----------- ------------- -----------
Revenues $ 121,806 $ 4,075 $ 15,898 $ 3,138 $ 144,917
Property operating expenses (1) (41,627) (1,238) (4,340) 4,796 (42,409)
Interest expense (30,203) (913) (2,641) (3,030) (36,787)
Other expense -- -- -- (3,747) (3,747)
Gain on sales of real estate assets (262) -- (1,301) 1,978 415
------------ ------------ ----------- ------------- -----------
Segment profit and loss $ 49,714 $ 1,924 $ 7,616 $ 3,135 62,389
============ ============ =========== =============
Depreciation and amortization (22,481)
General and administrative (5,741)
Loss on extinguishment of debt (1,948)
Equity in earnings and minority
interest in earnings (15,027)
-----------
Income before discontinued operations $ 17,192
===========
Total assets (2) $2,730,895 $128,017 $457,991 $ 83,838 $3,400,741
Capital expenditures (2) $ 80,162 $ 787 $ 4,679 $ 21,064 $ 106,692
(1) Property operating expenses include property operating expenses, real estate
taxes, and maintenance and repairs.
(2) Amounts include investments in unconsolidated affiliates. Developments in
progress are included in the All Other category.
9
Note 5 - Discontinued Operations
On February 28, 2003, the Company sold a community center for $7,760 and
recognized a net gain on discontinued operations of $2,935. Total revenues for
this community center were $116 and $192 for the three months ended March 31,
2003 and 2002, respectively.
Note 6 - Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income
available to common shareholders by the weighted-average number of unrestricted
common shares outstanding for the period. Diluted EPS assumes the issuance of
common stock for all potential dilutive common shares outstanding. The limited
partners' rights to convert their minority interest in the Operating Partnership
into shares of common stock are not dilutive. The following summarizes the
impact of potential dilutive common shares on the denominator used to compute
earnings per share:
Three Months Ended March 31,
--------------------------------
2002 2003
---------------- ---------------
Weighted average shares 29,850 26,455
Effect of nonvested stock awards (124) (99)
---------------- ---------------
Denominator - basic earnings per share 29,726 26,356
Effect of dilutive securities:
Stock options, nonvested stock awards and
deemed shares related to deferred
compensation plans 1,077 765
---------------- ---------------
Denominator - diluted earnings per share 30,803 27,121
================ ===============
Note 7 - Comprehensive Income
Comprehensive income includes all changes in shareholders' equity during
the period, except those resulting from investments by shareholders and
distributions to shareholders. Comprehensive income consisted of the following
components:
Three Months Ended March 31,
--------------------------------
2002 2003
---------------- ---------------
Net income $26,468 $19,001
Gain on current period cash flow hedges 854 2,142
---------------- ---------------
Comprehensive income $27,322 $21,143
================ ===============
Note 8 - Contingencies
The Company is currently involved in certain litigation that arises in the
ordinary course of business. It is management's opinion that the pending
litigation will not materially affect the financial position or results of
operations of the Company.
Based on environmental studies completed to date, management believes any
exposure related to environmental cleanup will not materially affect the
Company's financial position or results of operations.
The Company has guaranteed all of the construction debt related to
Waterford Commons, which is owned in a joint venture with a third party that
owns a minority interest. The total amount of the commitment for this
construction loan is $30,000, of which $10,762 was outstanding at March 31,
2002. The Company will receive a fee from the joint venture in exchange for the
guaranty, which will be recognized as revenue pro rata over the term of the
guaranty to the extent of the third party partner's interest. The guaranty will
expire when the construction loan matures in July 2004. The fee had not been
received as of March 31, 2003.
10
The Company has guaranteed 50% of the debt of Parkway Place L.P., an
unconsolidated affiliate in which the Company owns a 45% interest. The total
amount outstanding at March 31, 2003, was $56,458, of which the Company has
guaranteed $28,229. The guaranty will expire when the related debt matures in
December 2003. The Company did not receive a fee for issuing this guaranty.
Under the terms of the partnership agreement of Mall of South Carolina
L.P., an unconsolidated affiliate in which the Company owns a 50% interest, the
Company will guarantee 100% of the construction debt to be incurred to develop
Coastal Grand. There was no construction debt outstanding at March 31, 2003. The
Company will receive a fee for this guaranty when the guaranty is issued, which
will be recognized as revenue pro rata over the term of the guaranty to the
extent of the third party's interest.
Note 9 - Stock-Based Compensation
Historically, the Company has accounted for stock options using the
intrinsic value method of APB No. 25, "Accounting for Stock Issued to
Employees". Effective January 1, 2003, the Company will record the expense
associated with stock options granted after January 1, 2003, on a prospective
basis in accordance with the fair value and transition provisions of SFAS No.
123, "Accounting for Stock Based Compensation". There were no stock options
granted during the three months ended March 31, 2003.
No stock-based compensation expense related to stock options granted prior
to January 1, 2003, has been reflected in net income since all options granted
had an exercise price equal to the fair value of the Company's common stock on
the date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", to
employee stock options:
Three Months Ended March 31,
----------------------------------
2003 2002
------------- --------------
Net income available to common shareholders, as reported $22,776 $17,384
Compensation expense determined under fair value method (153) (114)
------------- --------------
Pro forma net income available to common shareholders $22,623 $17,270
============= ==============
Earnings per share:
Basic, as reported $ 0.76 $ 0.66
============= ==============
Basic, pro forma $ 0.76 $ 0.66
============= ==============
Diluted, as reported $ 0.74 $ 0.64
============= ==============
Diluted, pro forma $ 0.74 $ 0.64
============= ==============
Note 10 - Recent Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires that the costs
associated with exit or disposal activity be recognized and measured at fair
value when the liability is incurred. The provisions of SFAS No. 146 are
effective for exit or disposal activities initiated after December 31, 2002.
Since the Company typically does not engage in significant disposal activities,
the implementation of SFAS No. 146 in 2003 did not have a significant impact on
the Company's reported financial results.
11
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of SFAS No. 5, 57, and
107, and rescission of FASB Interpretation No. 34." The interpretation
elaborates on the disclosures to be made by a guarantor in its financial
statements. It also requires a guarantor to recognize a liability for the fair
value of the obligation undertaken in issuing the guarantee at the inception of
a guarantee, which is effective for guarantees issued or modified after December
31, 2002. The Company adopted the disclosure provisions of FASB Interpretation
No. 45 in the fourth quarter of 2002. In accordance with the interpretation, the
Company adopted the remaining provisions of FASB Interpretation No. 45 effective
January 1, 2003, which did not have a material effect on the financial position
and results of operations of the Company since the Company did not enter into or
modify any guarantees during the three months ended March 31, 2003.
Note 11 - Reclassifications
Certain reclassifications have been made to prior periods' financial
information to conform to the current period presentation.
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and accompanying notes that are included in this Form 10-Q.
Certain statements made in this section or elsewhere in this report may be
deemed "forward looking statements" within the meaning of the federal securities
laws. Although the Company believes the expectations reflected in any
forward-looking statements are based on reasonable assumptions, the Company can
give no assurance that these expectations will be attained, and it is possible
that actual results may differ materially from those indicated by these
forward-looking statements due to a variety of risks and uncertainties. Such
risks and uncertainties include, without limitation, general industry, economic
and business conditions, interest rate fluctuations, costs of capital and
capital requirements, availability of real estate properties, inability to
consummate acquisition opportunities, competition from other companies and
retail formats, changes in retail rental rates in the Company's markets, shifts
in customer demands, tenant bankruptcies or store closings, changes in vacancy
rates at the Company's properties, changes in operating expenses, changes in
applicable laws, rules and regulations, the ability to obtain suitable equity
and/or debt financing and the continued availability of financing in the amounts
and on the terms necessary to support the Company's future business. The Company
disclaims any obligation to update or revise any forward-looking statements to
reflect actual results or changes in the factors affecting the forward-looking
information.
GENERAL BACKGROUND
CBL & Associates Properties, Inc.'s consolidated financial statements and
accompanying notes reflect the consolidated financial results of CBL &
Associates Limited Partnership (the "Operating Partnership"), which owns
interests in a portfolio of properties consisting of:
|X| 54 regional malls, of which four are accounted for as unconsolidated
affiliates using the equity method,
|X| 20 associated centers, of which two are accounted for as unconsolidated
affiliates using the equity method,
12
|X| 63 community centers, of which two are accounted for as unconsolidated
affiliates using the equity method,
|X| mortgages on 11 properties that are secured by first mortgages or
wrap-around mortgages on the underlying real estate and related
improvements,
|X| one mall, which is owned in a unconsolidated joint venture, one associated
center and three community centers currently under construction, and
|X| options to acquire certain shopping center development sites.
The consolidated financial statements also include the accounts of CBL &
Associates Management, Inc. (the "Management Company"). CBL & Associates
Properties, Inc., the Operating Partnership and the Management Company are
referred to collectively as the "Company".
The Company classifies its regional malls into two categories - malls that
have completed their initial lease-up ("Stabilized Malls") and malls that are in
their initial lease-up phase ("Non-Stabilized Malls"). The Non-Stabilized Mall
category is presently comprised of The Lakes Mall in Muskegon, Michigan, which
opened in August 2001, and Parkway Place Mall in Huntsville, Alabama, which
opened in October 2002.
RESULTS OF OPERATIONS
The following significant transactions impact the comparison of the results
of operations for the three months ended March 31, 2003 to the comparable period
ended March 31, 2002:
|X| The Company has opened or acquired five properties subsequent to the first
quarter of 2002. Therefore, the three months ended March 31, 2003, includes
a full period of operations for these properties while the comparable
period a year ago did not include any operations for them. The properties
opened or acquired are as follows:
Open/Acquisition
Project Name Location Type of Addition Date
--------------------------- ------------------- ------------------- -----------------
Richland Mall Waco, TX Acquisition May 2002
Panama City Mall Panama City, FL Acquisition May 2002
Parkdale Crossing Beaumont, TX New development November 2002
Westmoreland Mall Greensburg, PA Acquisition December 2002
Westmoreland Crossing Greensburg, PA Acquisition December 2002
|X| In December 2002, the Company acquired the remaining ownership interest in
East Towne Mall, West Towne Mall and West Towne Crossing in Madison, WI.
These properties were consolidated during the first quarter of 2003 while
they were accounted for as unconsolidated affiliates in the first quarter
of 2002.
13
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003
TO THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2002
(Dollars in Thousands)
2003 2002 $ Variance % Variance
---------- ---------- ----------- -----------
Total revenues $166,546 $144,917 $21,629 14.9%
---------- ---------- ----------- -----------
Expenses:
Property operating, real estate taxes and
maintenance and repairs 52,822 42,409 10,413 24.6%
Depreciation and amortization 26,312 22,481 3,831 17.0%
General and administrative 6,353 5,741 612 10.7%
Interest expense 36,956 36,787 169 0.5%
Loss on extinguishment of debt -- 1,948 (1,948) (100.0)%
Other 2,341 3,747 (1,406) (37.5)%
---------- ---------- ----------- -----------
Total expenses 124,784 113,113 11,671 10.3%
---------- ---------- ----------- -----------
Income from operations 41,762 31,804 9,958 31.3%
Gain on sales of real estate assets 1,104 415 689 166.0%
Equity in earnings of unconsolidated affiliates 1,757 2,087 (330) (15.8)%
Minority interest in earnings:
Operating partnership (20,637) (16,197) (4,440) 27.4%
Shopping center properties (540) (917) 377 (41.1)%
---------- ---------- ----------- -----------
Income before discontinued operations 23,446 17,192 6,254 36.4%
Income from discontinued operations 3,022 1,809 1,213 67.1%
---------- ---------- ----------- -----------
Net income 26,468 19,001 7,467 39.3%
Preferred dividends (3,692) (1,617) (2,075) 128.3%
---------- ---------- ----------- -----------
Net income available to common shareholders $22,776 $17,384 $5,392 31.0%
========== ========== =========== ===========
Revenues
The $21.6 million increase in revenues resulted from the following
significant factors:
[X] an increase in minimum rents and tenant reimbursements of $13.6
million attributable to the five properties opened or acquired since
the first quarter of 2002 and the three properties that are now
consolidated,
[X] an increase in minimum rents and tenant reimbursements of $12.1
million from the Company's remaining properties. The Company's cost
recovery percentage increased to 94.5% for the first quarter of 2003
compared to 91.0% for the first quarter of 2002,
[X] a reduction in percentage rents of $0.4 million, which resulted from a
decline at the Company's existing properties of $0.8 million due to
the overall decline in total tenant sales volume in the Company's
portfolio, offset by an increase of $0.4 million from the addition of
the properties discussed above, and
[X] a reduction in interest and other revenues of $1.8 million due to a
decrease in interest revenues because of the continued amortization of
mortgage notes receivable and a reduction in the revenues of the
Company's taxable REIT subsidiary.
14
Expenses
The $10.4 million increase in property operating expenses, including real
estate taxes and maintenance and repairs, resulted from:
[X] an increase of $5.8 million attributable to the five properties opened
or acquired since the first quarter of 2002 and the three properties
that are now consolidated and
[X] increases in general operating costs at the Company's remaining
properties.
The increase of $3.8 million in depreciation and amortization expense was
primarily due to:
[X] an increase of $2.3 million attributable to the five properties opened
or acquired since the first quarter of 2002 and the three properties
that are now consolidated and
[X] increases as a result of the ongoing capital expenditures made by the
Company for renovations, expansions, tenant allowances and deferred
maintenance.
General and administrative expenses increased $0.6 million primarily as a
result of additional salaries and benefits related to personnel added to manage
newly opened or acquired properties, as well as salaries and benefits of
existing personnel.
Interest expense increased by only $0.2 million. Although the Company's
outstanding debt increased to $2.44 billion as of March 31, 2003 compared to
$2.19 billion as of March 31, 2002, the Company's weighted average interest rate
declined to 6.28% as of March 31, 2003 compared to 7.37% as of March 31, 2002.
Additionally, the March 31, 2002, debt balance reflects a reduction from the
retirement of $114.7 million of debt from the proceeds of the Company's
follow-on offering of common stock in March 2002.
The Company did not recognize any loss on extinguishment of debt during the
first quarter of 2003 as it did not repay any debt prior to its scheduled
maturity. The loss on extinguishment of debt in the first quarter of 2002
consisted of prepayment penalties of $1.9 million and the write-off of $0.1
million of unamortized deferred financing costs.
Other expense decreased due to a reduction in operating expenses of the
Company's taxable REIT subsidiary.
Gain on Sales of Real Estate Assets
The gain on sales of $1.1 million in the first quarter of 2003 was
primarily from gains on sales of three outparcels. The gain on sales of $0.4
million in the first quarter of 2002 resulted from gains on sales of three
outparcels offset by losses on two outparcels.
Equity in Earnings of Unconsolidated Affiliates
The decrease in equity in earnings of unconsolidated affiliates of $0.3
million was due to a reduction of $0.8 million related to the three properties
above that are now consolidated, offset by improvements in the operations of the
remaining unconsolidated affiliates.
15
Discontinued Operations
The Company sold Capital Crossing, a community center in Raleigh, NC,
during the first quarter of 2003. Discontinued operations includes income from
discontinued operations of $0.1 million and $0.6 million for the quarters ended
March 31, 2003 and 2002, respectively. Discontinued operations also includes
gain on discontinued operations of $2.9 million and $1.2 million for the
quarters ended March 31, 2003 and 2002, respectively.
PERFORMANCE MEASUREMENTS
The shopping center business is, to some extent, seasonal in nature with
tenants achieving the highest levels of sales during the fourth quarter because
of the holiday season. The malls earn most of their "temporary" rents (rents
from short-term tenants), during the holiday period. Thus, occupancy levels and
revenue production are generally the highest in the fourth quarter of each year.
Results of operations realized in any one quarter may not be indicative of the
results likely to be experienced over the course of the fiscal year.
The Company's consolidated revenues were derived from the Company's
property types as follows for the three months ended March 31, 2003:
Malls 84.9%
Associated centers 2.6%
Community centers 9.1%
Mortgages, office building and other 3.4%
Sales and Occupancy Costs
For those tenants who occupy 10,000 square feet or less and have reported
sales, mall shop sales in the 52 Stabilized Malls decreased by 3.0% on a
comparable per square foot basis to $62.17 per square foot for the three months
ended March 31, 2003 from $64.11 per square foot for the three months ended
March 31, 2002.
Total sales volume in the mall portfolio, including Non-Stabilized Malls,
decreased 1.5% to $660.2 million for the three months ended March 31, 2003 from
$670.5 million for the three months ended March 31, 2002.
Sales were negatively impacted by severe winter weather, the effects of the
war in Iraq and the fact that the Easter holiday fell in the second quarter of
2003, whereas it fell in the first quarter of 2002.
Occupancy costs as a percentage of sales for the Stabilized Malls for the
three months ended March 31, 2003 and 2002, were 14.9% and 14.3%, respectively.
Occupancy costs as a percentage of sales are generally higher in the first three
quarters of the year as compared to the fourth quarter due to the seasonality of
retail sales.
16
Occupancy
Occupancy for the Company's portfolio was as follows:
At March 31,
---------------------------------
2003 2002
----------------- ---------------
Total portfolio occupancy 91.6% 91.9%
Total mall portfolio 90.6% 90.1%
Stabilized Malls (52) 91.0% 90.3%
Non-Stabilized Malls (2) 78.2% 87.3%
Associated centers 90.9% 96.2%
Community centers 94.3% 96.0%
Occupancy for the associated centers declined due to the acquisition of
Westmoreland Crossing in Greensburg, PA, in December 2002, which has a 68,000
square foot former Ames store that is vacant. Occupancy for the community
centers declined because Springdale in Mobile, AL, was moved from the
Non-Stabilized Mall category to the community center category since this
property was converted from a mall to a power center by adding big box tenants
over the past few years.
Average Base Rents
Average base rents per square foot for the portfolio were as follows:
At March 31,
---------------------------------
Percentage
2003 2002 Increase
----------------- --------------- -----------
Stabilized Malls $23.70 $23.10 2.6%
Non-Stabilized Malls 26.55 21.24 25.0%
Associated centers 10.01 9.65 3.7%
Community centers 9.85 9.59 2.7%
Leasing Results
The Company achieved the following results from renewal and new leasing for
the three months ended March 31, 2003, compared to the base rent at the end of
the lease term for spaces previously occupied:
Base Rent Base Rent
Per Square Per Square
Foot Foot Percentage
Prior Lease New Lease (1) Increase
-------------- -------------- ------------
Stabilized malls $21.42 $25.13 17.3%
Associated centers 14.46 15.77 9.1%
Community centers 12.15 13.76 13.3%
(1) Average base rent over the term of the lease.
17
CASH FLOWS
Cash provided by operating activities decreased $0.4 million due to larger
reduction in accounts payable and accrued liabilities in the first quarter of
2003 as compared to the same period in 2002. Additionally, tenant and other
receivables increased during the first quarter of 2003 compared to a reduction
in tenant and other receivables during the same period in 2002. These decreases
were offset by the additional operations of the five properties opened or
acquired since the first quarter of 2002 and the three properties that are now
consolidated.
Cash used in investing activities increased $45.9 million due to increases
in additions to real estate assets and other capital expenditures and a
reduction in distributions in excess of earnings of unconsolidated affiliates.
There was also a decrease in the amount of proceeds received on sales of real
estate assets due to fewer transactions in the current year period as compared
to the prior year period.
Cash provided by financing activities was $0.1 million in 2003 as compared
to cash used in financing activities of $44.3 million in 2002. The change was
due to a significant decrease in the amount of loan repayments, a significant
decrease in proceeds from issuances of common stock, an increase in borrowings,
an increase in distributions to minority investors and an increase in the amount
of dividends paid.
LIQUIDITY AND CAPITAL RESOURCES
The principal uses of the Company's liquidity and capital resources have
historically been for property development, expansions, renovations,
acquisitions, debt repayment and distributions to shareholders. In order to
maintain its qualification as a real estate investment trust for federal income
tax purposes, the Company is required to distribute at least 90% of its taxable
income, computed without regard to net capital gains or the dividends-paid
deduction, to its shareholders.
The Company's current capital structure includes:
|X| property specific mortgages, which are generally non-recourse,
construction loans, term loans, and revolving lines of credit, which
are recourse to the Company,
|X| common stock and preferred stock,
|X| joint venture investments and
|X| a minority interest in the Operating Partnership.
The Company anticipates that the combination of its equity and debt sources
will, for the foreseeable future, provide adequate liquidity to continue its
capital programs substantially as in the past and make distributions to its
shareholders in accordance with the requirements applicable to real estate
investment trusts.
The Company's policy is to maintain a conservative debt-to-total-market
capitalization ratio in order to enhance its access to the broadest range of
capital markets, both public and private. Based on the Company's share of total
consolidated and unconsolidated debt and the market value of equity described
below, the Company's debt-to-total-market capitalization (debt plus market value
equity) ratio was 50.7% at March 31, 2003.
Equity
As a publicly traded company, the Company has access to capital through
both the public equity and debt markets. The Company has an effective shelf
registration statement authorizing it to publicly issue shares of its preferred
stock, common stock and warrants to purchase shares of common stock with an
aggregate public offering amount of up to $350 million, of which approximately
$62.3 million remains available at March 31, 2003.
18
The Company filed a new shelf registration statement with the Securities
and Exchange Commission, that authorizes the Company to publicly issue shares of
preferred stock and common stock, preferred and common stock represented by
depository shares and warrants to purchase shares of common stock up to $562.0
million, which includes the $62.3 million that is available under the previously
filed shelf registration statement discussed above.
As of March 31, 2003, the minority interest in the Operating Partnership
includes the 15.9% ownership interest in the Operating Partnership held by the
Company's executive and senior officers that may be exchanged for approximately
8.8 million shares of common stock. Additionally, executive and senior officers
and directors own approximately 2.2 million shares of the Company's outstanding
common stock, for a combined total interest in the Operating Partnership of
approximately 19.7%.
Limited partnership interests issued to acquire the Richard E. Jacobs
Group's interest in a portfolio of properties in January 2001 and March 2002,
may be exchanged for approximately 12.0 million shares of common stock, which
represents a 21.5% interest in the Operating Partnership. Other third-party
interests may be exchanged for approximately 5.0 million shares of common stock,
which represents an 9.0% interest in the Operating Partnership.
Assuming the exchange of all limited partnership interests in the Operating
Partnership for common stock, there would be approximately 55.6 million shares
of common stock outstanding with a market value of approximately $2.26 billion
at March 31, 2003 (based on the closing price of $40.59 per share on March 31,
2003). The Company's total market equity is $2.42 billion, which includes 2.675
million shares of Series A preferred stock ($66.9 million based on a liquidation
preference of $25.00 per share) and 2.0 million shares of Series B preferred
stock ($100.0 million based on a liquidation preference of $50.00 per share).
The Company's executive and senior officers' and directors' ownership interests
had a market value of approximately $443.5 million at March 31, 2003.
Debt
The Company's share of mortgage debt on consolidated properties, adjusted
for minority investors' interests in consolidated properties, and its pro rata
share of mortgage debt on unconsolidated properties, consisted of the following
at March 31, 2003 (in thousands):
Minority
Company's Share Investors' Company's Weighted
of Share of Total Average
Consolidated Unconsolidated Consolidated Share Interest
Debt Debt Debt of Debt Rate(1)
------------- ---------------- ------------ ------------ ---------
Fixed-rate debt:
Non-recourse loans on operating properties $1,943,722 $38,033 $(19,992) $1,961,763 7.09%
--------------- ---------------- ----------- -------------
Variable-rate debt:
Recourse term loans on operating properties 281,057 28,229 -- 309,286 3.81%
Lines of credit 186,525 -- -- 186,525 2.31%
Construction loans 32,178 -- -- 32,178 2.98%
--------------- ---------------- ----------- -------------
Total variable-rate debt 499,760 28,229 -- 527,989 3.23%
--------------- ---------------- ----------- -------------
Total $2,443,482 $66,262 $(19,992) $2,489,752 6.27%
=============== ================ =========== =============
(1) Weighted-average interest rate before amortization of deferred financing costs.
On February 28, 2003, the Company entered into a new secured credit
facility for $255.0 million. This new credit facility replaced both the
Company's $130.0 million secured credit facility and its unsecured facility of
$105.3 million. The new credit facility bears interest at LIBOR plus 100 basis
points, expires in February 2006, and has a one-year extension, which is at the
Company's election. Six regional malls and three associated centers secure the
new credit facility.
19
The Company's credit facilities total $365.0 million, of which $178.5
million was available at March 31, 2003. Additionally, the Company had other
credit facilities totaling $14.6 million that are used only for issuances of
letters of credit, of which $1.6 million was available at March 31, 2003.
On February 26, 2003, the Company obtained an $85.0 million, non-recourse
loan that is secured by Westmoreland Mall and Westmoreland Crossing in
Greensburg, PA. The loan bears interest at 5.05% and has a term of ten years
with a 25-year amortization schedule.
As of March 31, 2003, total commitments under construction loans were $59.6
million, of which $27.4 million was available to be used for completion of
construction and redevelopment projects and replenishment of working capital
previously used for construction. The Company also had $9.1 million available in
unfunded construction loans on operating properties that can be used to
replenish working capital previously used for construction.
The Company has fixed the interest rate on $80.0 million of an operating
property's debt at a rate of 6.95% using an interest rate swap agreement that
expires in August 2003. The Company did not incur any fees for the swap
agreement.
The Company expects to refinance the majority of its mortgage notes payable
maturing over the next five years with replacement loans. Taking into
consideration extension options that are available to the Company, there are no
debt maturities through December 31, 2003, other than normal principal
amortization.
DEVELOPMENTS, EXPANSIONS, ACQUISITIONS AND DISPOSITIONS
The Company expects to continue to have access to the capital resources
necessary to expand and develop its business. Future development and acquisition
activities will be undertaken as suitable opportunities arise. The Company does
not expect to pursue these opportunities unless adequate sources of financing
are available and a satisfactory budget with targeted returns on investment has
been approved internally.
The Company intends to fund major development, expansion and acquisition
activities with traditional sources of construction and permanent debt financing
as well as other debt and equity financings, including public financings and the
lines of credit, in a manner consistent with its intention to operate with a
conservative debt-to-total-market capitalization ratio.
20
Developments and Expansions
The following development projects are currently under construction:
Projected
Property Location GLA Opening Date
- ------------------------------------ ----------------------------- ------------ -------------------------
MALL
Coastal Grand
(50/50 Joint Venture)* Myrtle Beach, SC 1,500,000 March 2004
ASSOCIATED CENTER
The Shoppes at Hamilton Place Chattanooga, TN 110,000 May 2003
COMMUNITY CENTERS
Cobblestone Village St. Augustine, FL 261,000 May 2003
Waterford Commons
(75/25 Joint Venture)** Waterford, CT 353,900 September 2003
Wilkes-Barre Township Marketplace Wilkes-Barre Township, PA 308,000 May 2004
* Joint venture development. Initial phase will be 1,000,000 million square feet.
** The Company will own at least 75% of the joint venture.
The following renovation projects are currently under construction:
Projected
Property Location Completion Date
- ---------------------- ------------------------ ----------------
Parkdale Mall Beaumont, TX August 2003
Jefferson Mall Louisville, KY October 2003
Eastgate Mall Cincinnati, OH November 2003
East Towne Mall Madison, WI November 2003
West Towne Mall Madison, WI November 2003
St. Clair Square Fairview Heights, IL November 2003
The Company has entered into a number of option agreements for the
development of future regional malls and community centers. Except for the
projects discussed under Developments and Expansions above and Acquisitions
below, the Company does not have any other material capital commitments.
Acquisitions
On May 1, 2003, the Company acquired Sunrise Mall, a 740,000 square foot
regional mall, and Sunrise Commons, a 225,000 square foot associated center, in
Brownsville, TX, for a total purchase price of $80.7 million. The total purchase
price consisted of $40.7 million in cash and the assumption of a non-recourse
loan of $40.0 million that bears interest at 300 basis points over LIBOR, with a
minimum rate of 4.90% and a maximum rate of 5.50%.
Dispositions
On February 28,, 2003, the Company sold Capital Crossing, a community
center in Raleigh, NC, for $7.8 million and recognized a net gain on
discontinued operations of $2.9 million.
In addition, the Company sold three outparcels and recognized gains of $1.1
million during the three months ended March 31, 2003.
21
OTHER CAPITAL EXPENDITURES
The Company prepares an annual capital expenditure budget for each property
that is intended to provide for all necessary recurring and non-recurring
capital improvements. The Company believes that its operating cash flows will
provide the necessary funding for such capital improvements. These cash flows
will be sufficient to cover tenant finish costs associated with tenant leases
and capital expenditures necessary for the enhancement and maintenance of the
properties.
Including its share of unconsolidated affiliates' capital expenditures and
excluding minority investors' share of capital expenditures, the Company spent
$8.8 million during the first three months of 2003 for tenant allowances, which
generate increased rents from tenants over the terms of their leases. Deferred
maintenance expenditures, a majority of which are recovered from tenants, were
$7.0 million for the first three months of 2003. Renovation expenditures, which
include some deferred maintenance items, were $11.9 million for the three months
ended March 31, 2003, a portion of which is recovered from tenants. Deferred
maintenance expenditures and renovation expenditures included $1.2 million for
the resurfacing and the improved lighting of parking lots and $0.9 million for
roof repairs and replacements.
Deferred maintenance expenditures are billed to tenants as common area
maintenance expense, and most are recovered over a 5- to 15-year period.
Renovation expenditures are primarily for remodeling and upgrades of malls, of
which approximately 30% is recovered from tenants over a 5- to 15-year period.
OTHER
The Company believes the Properties are in compliance, in all material
respects, with federal, state and local ordinances and regulations regarding the
handling, discharge and emission of hazardous or toxic substances. The Company
has not been notified by any governmental authority, and is not otherwise aware,
of any material noncompliance, liability or claim relating to hazardous or toxic
substances in connection with any of its present or former properties.
Therefore, the Company has not recorded any material liability in connection
with environmental matters.
ACCOUNTING FOR STOCK OPTIONS
Historically, the Company has accounted for stock options using the
intrinsic value method of APB No. 25, "Accounting for Stock Issued to
Employees". Effective January 1, 2003, the Company will begin recording the
22
expense associated with stock options granted after January 1, 2003, on a
prospective basis in accordance with the fair value and transition provisions of
Statement of Financial Accountings Standards No. 123, "Accounting for
Stock-Based Compensation." There were no stock options granted during the three
months ended March 31, 2003.
RECENT ACCOUNTING PRONOUNCEMENTS
As described in Note 10 to the unaudited consolidated financial statements,
the FASB has issued certain statements that were effective for the first quarter
of 2003.
IMPACT OF INFLATION
In the last three years, inflation has not had a significant impact on the
Company because of the relatively low inflation rate. Substantially all tenant
leases do, however, contain provisions designed to protect the Company from the
impact of inflation. These provisions include clauses enabling the Company to
receive percentage rent based on tenant's gross sales, which generally increase
as prices rise, and/or escalation clauses, which generally increase rental rates
during the terms of the leases. In addition, many of the leases are for terms of
less than ten years, which may enable the Company to replace existing leases
with new leases at higher base and/or percentage rents if rents of the existing
leases are below the then existing market rate. Most of the leases require
tenants to pay their share of operating expenses, including common area
maintenance, real estate taxes and insurance, thereby reducing the Company's
exposure to increases in costs and operating expenses resulting from inflation.
FUNDS FROM OPERATIONS
Funds from Operations ("FFO") is defined by the National Association of
Real Estate Investments Trusts ("NAREIT") as net income (computed in accordance
with accounting principals generally accepted in the United States) excluding
gains or losses on sales of operating properties, plus depreciation and
amortization, and after adjustments for unconsolidated affiliates and joint
ventures. Adjustments for FFO from unconsolidated affiliates and joint ventures
are calculated on the same basis. The Company defines FFO available for
distribution to common shareholders as defined above by NAREIT less preferred
dividends. The Company computes FFO in accordance with the NAREIT recommendation
concerning finance costs and non-real estate depreciation. Beginning with the
first quarter of 2003, the Company includes gains on sales of outparcels in FFO
to comply with the Securities and Exchange Commissions rules related to
disclosure of non-GAAP financial measures. FFO for the first quarter of 2002 has
been restated to include gains on sales of outparcels.
The Company believes that FFO provides an additional indicator of the
financial performance of the Properties. The use of FFO as an indicator of
financial performance is influenced not only by the operations of the Properties
and interest rates, but also by the capital structures of the Company and the
Operating Partnership. Accordingly, FFO will be one of the significant factors
considered by the Board of Directors in determining the amount of cash
distributions the Operating Partnership will make to its partners, including the
REIT.
FFO does not represent cash flow from operations as defined by accounting
principals generally accepted in the United States, is not necessarily
indicative of cash available to fund all cash flow needs and should not be
considered as an alternative to net income for purposes of evaluating the
Company's operating performance or to cash flow as a measure of liquidity.
For the three months ended March 31, 2003, FFO increased by $11.8 million,
or 21.3%, to $67.3 million as compared to $55.5 million for the same period in
2002. The increase in FFO is primarily attributable to reduced interest expense,
the results of operations of the properties added to the portfolio and increases
in base rents and tenant reimbursements at the existing properties. These
increases were offset by reductions related to operating properties that were
23
sold or contributed to a joint venture. Lease termination fees were $0.4 million
in the first quarter of 2003 as compared to $0.9 million in the first quarter of
2002. Gains on sales of outparcels were $1.1 million in the first quarter of
2003 compared to $0.4 million in the first quarter of 2002.
The Company's calculation of FFO is as follows (in thousands):
Three Months Ended
March 31,
-------------------------------
2003 2002
--------------- --------------
Consolidated net income available to common shareholders $ 22,776 $ 17,384
Depreciation and amortization from consolidated properties 26,312 22,481
Depreciation and amortization from unconsolidated affiliates 896 924
Depreciation and amortization from discontinued operations 10 250
Minority interest in earnings of operating partnership 20,637 16,197
Minority investors' share of depreciation and amortization in
shopping center properties (266) (392)
Gain on discontinued operations (2,935) (1,243)
Depreciation and amortization of non-real estate assets (133) (111)
--------------- --------------
FUNDS FROM OPERATIONS $ 67,297 $ 55,490
=============== ==============
DILUTED WEIGHTED AVERAGE SHARES AND POTENTIAL DILUTIVE COMMON
SHARES WITH OPERATING PARTNERSHIP UNITS FULLY CONVERTED 56,486 51,813
Item 3: Quantitative and Qualitative
Disclosure About Market Risk
The Company has exposure to interest rate risk on its debt obligations and
interest rate instruments. Based on the Company's share of consolidated and
unconsolidated variable rate debt in place at March 31, 2003, excluding debt
fixed using an interest rate swap agreement, a 0.5% increase or decrease in
interest rates on this variable rate debt would decrease or increase annual cash
flows by approximately $2.2 million and, after the effect of capitalized
interest, annual earnings by approximately $2.0 million.
Item 4: Controls and Procedures
Within the 90 days prior to the filing date of this quarterly report, an
evaluation was performed under the supervision of the Company's Chief Executive
Officer and Chief Financial Officer and with the participation of the Company's
management, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective.
No significant changes have been made in the Company's internal controls or in
other factors that could significantly affect these internal controls subsequent
to the date of the evaluation.
24
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings
None
ITEM 2: Changes in Securities
None
ITEM 3: Defaults Upon Senior Securities
None
ITEM 4: Submission of Matter to a Vote of Security Holders
None
ITEM 5: Other Information
The Company presents its total share of consolidated and
unconsolidated debt because the Company believes that this amount provides
investors a clear understanding of the Company's total debt obligations.
ITEM 6: Exhibits and Reports on Form 8-K
A. Exhibits
10.1 Sixth Amended and Restated Credit Agreement by and among the
Operating Partnership, CBL & Associates Properties, Inc.,
Wachovia Bank, National Association, Commerzbank AG, New York and
Grand Cayman branches, U.S. Bank National Association and Wells
Fargo Bank, National Association as contractual representative of
the lenders to the extent and in the manner provided in Article
XII, see page 29.
99.1 Certification pursuant to 18 U.S.C Section 1350 by the Chief
Executive Officer, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, see page 131.
99.2 Certification pursuant to 18 U.S.C. Section 1350 by the Chief
Financial Officer as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, see page 132.
B. Reports on Form 8-K
The following items were reported:
The outline from the Company's April 24, 2003 conference call with
analysts and investors regarding earnings, the Company's earnings
release and the Company's supplemental information package (Items 9
and 12) were furnished on April 24, 2003.
25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CBL & ASSOCIATES PROPERTIES, INC.
/s/ John N. Foy
---------------------------------------------------------------
Vice Chairman of the Board, Chief Financial Officer and
Treasurer
(Authorized Officer of the Registrant,
Principal Financial Officer)
Date: May 15, 2003
26
CERTIFICATIONS
I, Charles B. Lebovitz, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of CBL &
Associates Properties, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Charles B. Lebovitz
------------------------------------
Charles B. Lebovitz, Chief Executive Officer
27
I, John N. Foy, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of CBL &
Associates Properties, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ John N. Foy
-----------------------------------
John N. Foy, Chief Financial Officer
28
Exhibit 10.1
SIXTH AMENDED AND RESTATED CREDIT AGREEMENT
Dated as of February 28, 2003
by and among
CBL & Associates Limited Partnership,
as Borrower,
CBL & Associates Properties, Inc.,
as Parent, solely for the limited
purposes set forth in Section 13.20.,
The financial institutions party hereto
and their assignees under Section 13.5.,
as Lenders
WACHOVIA BANK, NATIONAL ASSOCIATION
and
COMMERZBANK AG, NEW YORK AND GRAND CAYMAN BRANCHES,
each as Documentation Agent,
U.S. BANK NATIONAL ASSOCIATION,
as Syndication Agent,
and
WELLS FARGO Bank, National Association,
as Administrative Agent
29
TABLE OF CONTENTS
Article I. Definitions...........................................................................1
Section 1.1. Definitions...............................................................1
Section 1.2. General; References to San Francisco Time.................................19
Article II. Credit Facility......................................................................19
Section 2.1. Revolving Advances........................................................19
Section 2.2. Letters of Credit.........................................................20
Section 2.3. Swingline Loans...........................................................23
Section 2.4. Rates and Payment of Interest on Advances.................................25
Section 2.5. Number of Interest Periods................................................26
Section 2.6. Repayment of Advances.....................................................26
Section 2.7. Prepayments...............................................................26
Section 2.8. Late Charges..............................................................26
Section 2.9. Provisions Applicable to LIBOR Advances; Limitation on Base
Rate Advances...........................................................27
Section 2.10. Notes....................................................................28
Section 2.11. Increase in Commitments..................................................28
Section 2.12. Voluntary Reductions of the Commitment...................................29
Section 2.13. Extension of Termination Date............................................29
Section 2.14. Expiration or Maturity Date of Letters of Credit Past Termination Date...29
Section 2.15. Amount Limitations.......................................................30
Article III. Payments, Fees and Other General Provisions.........................................30
Section 3.1. Payments..................................................................30
Section 3.2. Pro Rata Treatment........................................................30
Section 3.3. Sharing of Payments, Etc..................................................31
Section 3.4. Several Obligations.......................................................31
Section 3.5. Fees......................................................................31
Section 3.6. Computations..............................................................32
Section 3.7. Usury.....................................................................32
Section 3.8. Defaulting Lenders........................................................33
Section 3.9. Taxes.....................................................................33
Article IV. Collateral Properties...............................................................35
Section 4.1. Eligibility of Properties.................................................35
Section 4.2. Release of Properties.....................................................36
Section 4.3. Frequency of Appraisals...................................................37
Section 4.4. Frequency of Calculations of Borrowing Base...............................37
Article V. Yield Protection, Etc.................................................................38
Section 5.1. Additional Costs; Capital Adequacy........................................38
Section 5.2. Suspension of LIBOR Advances..............................................39
Section 5.3. Illegality................................................................39
30
Section 5.4. Compensation..............................................................40
Section 5.5. Treatment of Affected Advances............................................40
Section 5.6. Affected Lenders..........................................................41
Section 5.7. Change of Lending Office..................................................41
Section 5.8. Assumptions Concerning Funding of LIBOR Advances..........................41
Article VI. Conditions Precedent.................................................................42
Section 6.1. Initial Conditions Precedent..............................................42
Section 6.2. Conditions Precedent to All Advances and Letters of Credit................44
Section 6.3. Conditions Precedent to a Property Becoming a Collateral Property.........44
Article VII. Representations and Warranties......................................................47
Section 7.1. Representations and Warranties............................................47
Section 7.2. Survival of Representations and Warranties, Etc...........................51
Article VIII. Affirmative Covenants..............................................................51
Section 8.1. Preservation of Existence and Similar Matters.............................51
Section 8.2. Compliance with Applicable Law............................................51
Section 8.3. Maintenance of Property...................................................51
Section 8.4. Insurance.................................................................51
Section 8.5. Payment of Taxes and Claims...............................................52
Section 8.6. Books and Records; Inspections............................................52
Section 8.7. Use of Proceeds...........................................................52
Section 8.8. Environmental Matters.....................................................52
Section 8.9. Further Assurances........................................................53
Section 8.10. REIT Status..............................................................53
Section 8.11. Exchange Listing.........................................................53
Section 8.12. Major Property-Level Agreements; Major Leases; SNDAs.....................53
Section 8.13. Single Asset Entities....................................................54
Article IX. Information..........................................................................54
Section 9.1. Quarterly Financial Statements............................................54
Section 9.2. Year-End Statements.......................................................54
Section 9.3. Compliance Certificate....................................................55
Section 9.4. Other Information.........................................................55
Article X. Negative Covenants....................................................................56
Section 10.1. Financial Covenants......................................................56
Section 10.2. Negative Pledge..........................................................58
Section 10.3. Restrictions on Intercompany Transfers...................................58
Section 10.4. Merger, Consolidation, Sales of Assets and Other Arrangements............58
Section 10.5. Acquisitions.............................................................59
Section 10.6. Plans....................................................................59
Section 10.7. Fiscal Year..............................................................59
Section 10.8. Modifications of Organizational Documents................................59
Section 10.9. Major Construction.......................................................59
31
Section 10.10. Transactions with Affiliates............................................60
Article XI. Default..............................................................................60
Section 11.1. Events of Default........................................................60
Section 11.2. Remedies Upon Event of Default...........................................64
Section 11.3. Remedies Upon Default....................................................65
Section 11.4. Curing Defaults Under Collateral Documents...............................65
Section 11.5. Permitted Deficiency.....................................................65
Section 11.6. Marshaling; Payments Set Aside...........................................66
Section 11.7. Allocation of Proceeds...................................................66
Section 11.8. Performance by Agent.....................................................67
Section 11.9. Rights Cumulative........................................................67
Article XII. The Agent...........................................................................67
Section 12.1. Authorization and Action.................................................67
Section 12.2. Agent's Reliance, Etc....................................................68
Section 12.3. Notice of Defaults.......................................................69
Section 12.4. Wells Fargo as Lender....................................................69
Section 12.5. Approvals of Lenders.....................................................69
Section 12.6. Lender Credit Decision, Etc..............................................70
Section 12.7. Indemnification of Agent.................................................70
Section 12.8. Collateral Matters; Protective Advances..................................71
Section 12.9. Post-Foreclosure Plans...................................................72
Section 12.10. Successor Agent.........................................................73
Section 12.11. Titled Agents...........................................................73
Article XIII. Miscellaneous......................................................................73
Section 13.1. Notices..................................................................73
Section 13.2. Expenses.................................................................74
Section 13.3. Setoff...................................................................75
Section 13.4. Litigation; Jurisdiction; Other Matters; Waivers.........................75
Section 13.5. Successors and Assigns...................................................76
Section 13.6. Amendments and Waivers...................................................77
Section 13.7. Nonliability of Agent and Lenders........................................79
Section 13.8. Confidentiality..........................................................79
Section 13.9. Indemnification..........................................................79
Section 13.10. Termination; Survival...................................................81
Section 13.11. Severability of Provisions..............................................81
Section 13.12. GOVERNING LAW...........................................................81
Section 13.13. Counterparts............................................................81
Section 13.14. Obligations with Respect to Loan Parties................................81
Section 13.15. Independence of Covenants...............................................81
Section 13.16. Entire Agreement........................................................82
Section 13.17. Construction; Conflict of Terms.........................................82
Section 13.18. AMENDMENT, RESTATEMENT AND CONSOLIDATION; NO NOVATION...................82
32
Section 13.19. Limitation of Liability of Borrower's General Partner...................82
Section 13.20. Limited Nature of Parent's Obligations..................................83
Section 13.21. Limitation of Liability of Borrower's Directors, Officers, Etc..........83
Section 13.22. Replacement of Notes....................................................83
SCHEDULE 1.1.(A) Existing Debt Agreements
SCHEDULE 4.1. Initial Collateral Properties
SCHEDULE 7.1.(b) Ownership of Loan Parties
SCHEDULE 7.1.(f) Litigation
SCHEDULE 7.1.(s) Single Asset Entity Exceptions
EXHIBIT A Form of Assignment and Assumption Agreement
EXHIBIT B Form of Borrowing Base Certificate
EXHIBIT C Form of Environmental Indemnity Agreement
EXHIBIT D Form of Guaranty
EXHIBIT E Form of Notice of Borrowing
EXHIBIT F Form of Notice of Continuation
EXHIBIT G Form of Notice of Conversion
EXHIBIT H Form of Notice of Swingline Borrowing
EXHIBIT I Form of Revolving Note
EXHIBIT J Form of Security Deed
EXHIBIT K Form of Swingline Note
EXHIBIT L Form of Opinion of Counsel
EXHIBIT M Form of Closing Certificate and Affidavit
EXHIBIT N Form of Compliance Certificate
33
THIS SIXTH AMENDED AND RESTATED CREDIT AGREEMENT dated as of February 28,
2003 by and among CBL & Associates Limited Partnership, a limited partnership
organized under the laws of the State of Delaware (the "Borrower"), CBL &
Associates Properties, Inc., a corporation organized under the laws of the State
of Delaware (the "Parent"), joining in the execution of this Agreement solely
for the limited purposes set forth in Section 13.20., each of the financial