Securities Exchange 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, 2002
--------------------
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 Number 1-12494
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CBL & Associates Properties, Inc.
- ----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 62-1545718
- ------------------------------------------ ----------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
CBL Center, 2030 Hamilton Place Boulevard, Chattanooga, TN 37421
- ------------------------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (423) 855-0001
-----------------------
- ----------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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
--- ----
The number of shares outstanding of each of the registrants classes of common
stock, as of May 9, 2002 : Common Stock, par value $.01 per share, 29,154,664
shares.
1
CBL & Associates Properties, Inc.
INDEX
PART I FINANCIAL INFORMATION PAGE NUMBER
ITEM 1: FINANCIAL INFORMATION 3
CONSOLIDATED BALANCE SHEETS - AS OF MARCH 31,
2002 AND DECEMBER 31, 2001 4
CONSOLIDATED STATEMENTS OF OPERATIONS - FOR
THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
THREE MONTHS ENDED MARCH 31, 2002 AND 2001 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
PART II OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS 20
ITEM 2: CHANGES IN SECURITIES 20
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 20
ITEM 4: SUBMISSION OF MATTERS TO HAVE
A VOTE OF SECURITY HOLDERS 20
ITEM 5: OTHER INFORMATION 20
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURE 21
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, 2002 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") December 31, 2001 audited financial
statements and notes thereto included in the CBL & Associates Properties, Inc.
Form 10-K for the year ended December 31, 2001.
3
CBL & Associates Properties, Inc.
Consolidated Balance Sheets
(Dollars in thousands)
(UNAUDITED)
March 31, December 31,
2002 2001
-------------- --------------
ASSETS
REAL ESTATE ASSETS:
Land $519,205 $520,334
Buildings and improvements 3,001,689 2,961,185
-------------- --------------
3,520,894 3,481,519
Less: Accumulated depreciation (366,334) (346,940)
-------------- --------------
3,154,560 3,134,579
Developments in progress 37,029 67,043
-------------- --------------
Net investment in real estate assets 3,191,589 3,201,622
CASH, RESTRICTED CASH AND CASH EQUIVALENTS 21,729 10,137
RECEIVABLES:
Tenant, net of allowance for doubtful accounts of $2,854
in 2002 and 2001 35,057 38,353
Other.. 4,103 2,833
MORTGAGE NOTES RECEIVABLE 11,312 10,634
INVESTMENT IN UNCONSOLIDATED AFFILIATES 103,954 77,673
OTHER ASSETS 32,997 31,599
-------------- --------------
$3,400,741 $3,372,851
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
MORTGAGE AND OTHER NOTES PAYABLE $2,191,043 $2,315,955
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 81,611 103,707
-------------- --------------
Total liabilities 2,272,654 2,419,662
COMMITMENTS AND CONTINGENCIES (Note 2)
MINORITY INTEREST 492,372 431,101
-------------- --------------
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares authorized,
2,875,000 outstanding in 2002 and 2001 29 29
Common stock, $.01 par value, 95,000,000 shares authorized,
29,085,039 and 25,616,917 shares issued and outstanding
in 2002 and 2001, respectively 291 256
Additional paid - in capital 650,451 556,383
Other comprehensive loss (4,642) (6,784)
Accumulated deficit (10,414) (27,796)
-------------- --------------
Total shareholders' equity 635,715 522,088
-------------- --------------
$3,400,741 $3,372,851
============== ==============
<FN>
The accompanying notes are an integral part of these balance sheets.
</FN>
4
CBL & Associates Properties, Inc.
Consolidated Statements Of Operations
(In thousands, except per share data)
(UNAUDITED)
Three Months Ended
March 31,
---------------------------------
2002 2001
---------------- ----------------
REVENUES:
Minimum rent $ 91,525 $ 77,402
Percentage rent 6,717 4,238
Other rent 2,061 1,482
Tenant reimbursements 38,801 36,228
Management, leasing and development fees 1,298 727
Interest and other 1,933 998
---------------- ----------------
Total revenues 142,335 121,075
EXPENSES:
Property operating 22,433 19,203
Depreciation and amortization 23,329 19,910
Real estate taxes 11,648 9,537
Maintenance and repairs 8,637 7,567
General and administrative 5,741 4,863
Interest. 36,250 36,278
Other -- 4
---------------- ----------------
Total expenses 108,038 97,362
---------------- ----------------
INCOME FROM OPERATIONS 34,297 23,713
GAIN ON SALES OF REAL ESTATE ASSETS 415 4,058
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES 2,087 1,623
MINORITY INTEREST IN EARNINGS:
Operating partnership (16,197) (12,087)
Shopping center properties (914) (536)
---------------- ----------------
Income before extraordinary item and discontinued operations 19,688 16,771
---------------- ----------------
Operating income of discontinued operations 35 26
Gain on disposal of discontinued operations 1,243 --
Extraordinary loss on early extinguishment of debt (1,965) --
---------------- ----------------
NET INCOME 19,001 16,797
PREFERRED DIVIDENDS (1,617) (1,617)
---------------- ----------------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 17,384 $15,180
================ ================
BASIC PER SHARE DATA:
Income before extraordinary item and discontinued operations $ 0.69 $ 0.60
================ ================
Extraordinary item and discontinued operations $ (0.03) $ --
---------------- ----------------
Net income $ 0.66 $ 0.60
================ ================
Weighted average common shares outstanding 26,356 25,132
DILUTED PER SHARE DATA:
Income before extraordinary item and discontinued operations $ 0.67 $ 0.60
================ ================
Extraordinary item and discontinued operations $ (0.03) $ --
---------------- ----------------
Net income $ 0.64 $ 0.60
================ ================
Weighted average shares and potential dilutive common shares outstanding 27,121 25,503
<FN>
The accompanying notes are an integral part of these statements.
</FN>
5
CBL & Associates Properties, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(UNAUDITED)
Three Months
Ended March 31,
-----------------------------
2002 2001
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 19,001 $16,797
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest in earnings 17,111 12,623
Depreciation 18,717 16,065
Amortization 4,612 4,243
Gain on disposal of discontinued operations (1,243) -
Gain on sales of real estate assets (414) (4,058)
Extraordinary loss on early extinguishment of debt 1,965 -
Equity in earnings of unconsolidated affiliates (2,087) (1,623)
Distributions from unconsolidated affiliates 15,705 5,189
Issuance of stock under incentive plan 1,150 997
Write-off of development projects - 4
Distributions to minority investors (15,650) (6,031)
Changes in assets and liabilities
Tenant and other receivables 2,025 (4,266)
Other assets (1,179) (3,136)
Accounts payable and accrued liabilities (2,804) 14,106
-------------- --------------
Net cash provided by operating activities 56,909 50,910
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction of real estate assets and land acquisition (13,305) (21,778)
Acquisitions of real estate assets - (114,702)
Capitalized interest (844) (1,470)
Other capital expenditures (11,629) (5,522)
Proceeds from sales of real estate assets 22,682 11,183
Cash in escrow - (5,794)
Additions to notes receivable (3,219) (2,436)
Payments received on notes receivable 2,540 512
Additions to other assets (403) (1,374)
Advances and investments in unconsolidated affiliates (12,483) (12,555)
-------------- --------------
Net cash used in investing activities (16,660) (153,936)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage and other notes payable 120,330 140,782
Principal payments on mortgage and other notes payable (248,571) (17,636)
Additions to deferred financing costs (341) (3,414)
Dividends paid (15,258) (14,402)
Proceeds from issuance of common stock 115,690 1,710
Proceeds from exercise of stock options 1,367 3,262
-------------- --------------
Net cash provided by financing activities (28,658) 110,302
-------------- --------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 11,592 7,276
CASH AND CASH EQUIVALENTS, beginning of period 10,137 5,184
-------------- --------------
CASH AND CASH EQUIVALENTS, end of period $21,729 $12,460
============== ==============
Cash paid for interest, net of amounts capitalized $37,223 $32,364
============== ==============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
6
CBL & Associates Properties, Inc.
Notes to Consolidated Financial Statements
Note 1 - Unconsolidated Affiliates
At March 31, 2002, the Company had investments in seven partnerships for
eleven properties, all of which are reflected using the equity method of
accounting. During the quarter the Company discontinued the equity method of
accounting for a partnership after acquiring a controlling interest in the
partnership. In February 2002 the Company entered into a joint venture after
contibuting one associated center and two community center properties to the
venture and taking back a 10% interest. Condensed combined results of operations
for the unconsolidated affiliates are presented as follows (in thousands):
Total for the Three Months Company's Share for Three
Ended March 31, Months Ended March 31,
------------------------------- -------------------------------
2002 2001 2002 2001
--------------- -------------- -------------- --------------
Revenues $ 11,854 $ 12,482 $ 5,927 $ 6,034
--------------- -------------- -------------- --------------
Depreciation and Amortization 1,738 1,510 924 729
Interest expense 2,549 3,383 1,271 1,632
Other operating expenses 3,264 4,468 1,645 2,155
--------------- -------------- -------------- --------------
Income before gain on sale 4,303 3,121 2,087 1,518
Gain on sale - 222 - 105
--------------- -------------- -------------- --------------
Net income $ 4,303 $ 3,343 $ 2,087 $ 1,623
=============== ============== ============== ==============
NOTE 2 - CONTINGENCIES
The Company is currently involved in certain litigation arising in the
ordinary course of business. In the opinion of management, the pending
litigation will not materially affect the financial statements of the Company.
Additionally, based on environmental studies completed to date on the real
estate properties, management believes any exposure related to environmental
cleanup will not be significant to the financial position and results of
operations of the Company.
NOTE 3 - CREDIT AGREEMENTS
The Company has credit facilities of $373.9 million of which $141.5 million
is available at March 31, 2002. Outstanding amounts under the credit facilities
bear interest at a weighted average interest rate of 4.89% at March 31, 2002.
The Company's variable rate debt as of March 31, 2002 was $786.4 million with a
weighted average interest rate of 4.13% as compared to 6.60% on $720.9 million
of variable rate debt as of March 31, 2001. Through the execution of interest
rate swap agreements, the Company has fixed the interest rates on $220.0 million
of variable rate debt on operating properties at a
7
weighted average interest rate of 6.39%. The Company's remaining variable rate
debt of $566.4 million includes $37.0 million of debt subject to variable rates
on construction properties and $529.4 million of debt subject to variable rates
on operating properties. There were no fees charged to the Company related to
the swap agreements.
NOTE 4 - SIGNIFICANT ACCOUNTING POLICIES: DERIVATIVE/FINANCIAL INSTRUMENTS
In the normal course of business, the Company uses a variety of derivative
financial instruments to manage, or hedge, interest rate risk. The Company
requires that hedging derivative instruments be effective in reducing the
interest rate risk exposure that they are designated to hedge. This
effectiveness is essential for qualifying for hedge accounting. Some derivative
instruments are associated with the hedge of an anticipated transaction. In
those cases, hedge effectiveness criteria also require that it be probable that
the underlying transaction occurs. Instruments that meet these hedging criteria
are formally designated as hedges at the inception of the derivative contract.
When the terms of an underlying transaction are modified, or when the underlying
hedged item ceases to exist, all changes in the fair value of the instrument are
marked-to-market with changes in value included in net income each period until
the instrument matures or is assigned or terminated early. Any derivative
instrument used for risk management that does not meet the hedging criteria is
marked-to-market each period.
To determine the fair values of derivative instruments, the Company uses a
variety of methods and assumptions that are based on market conditions and risks
existing at each balance sheet date. For the majority of financial instruments
including most derivatives, long-term investments and long-term debt, standard
market conventions and techniques such as discounted cash flow analysis, option
pricing models, replacement cost, and termination cost are used to determine
fair value. All methods of assessing fair value result in a general
approximation of value, and such value may never actually be realized.
NOTE 5 - FINANCIAL INSTRUMENTS: DERIVATIVES AND HEDGING
In the normal course of business, the Company is exposed to the effect of
interest rate changes. The Company limits these risks by following established
risk management policies and procedures including the use of derivatives. For
interest rate exposures, derivatives are used primarily to manage the cost of
borrowing obligations.
The company does not use derivatives for trading or speculative purposes.
Further, the Company has a policy of only entering into contracts with major
financial institutions based upon their credit ratings and other factors. The
Company continues to monitor this counterparty credit exposure on an ongoing
basis. When viewed in conjunction with the underlying and offsetting exposure
that the derivatives are designed to hedge, the Company has not sustained a
material loss from those instruments nor does it anticipate any material adverse
effect on its net income or financial position in the future from the use of
derivatives.
To manage interest rate risk, the Company may employ options, forwards,
interest rate swaps, caps and floors or a combination thereof depending on the
underlying exposure. The Company undertakes a variety of borrowings: from lines
of credit, to medium- and long-term financings. To reduce overall interest cost,
the Company uses interest rate instruments,( typically interest rate swaps and
caps), to convert a portion of its variable rate debt to fixed rate debt, or
even a portion of its fixed-rate debt to variable rate. Interest rate
differentials that arise under these swap contracts are recognized in interest
expense over the life of the contracts.
8
The Company employs forwards, swaps or purchased options to hedge
qualifying anticipated transactions. Gains and losses are deferred and
recognized in net income in the same period that the underlying transaction
occurs, expires or is otherwise terminated.
The following table summarizes the notional values, fair values and other
characteristics of the Company's derivative financial instruments. The notional
value at March 31, 2002 provides an indication of the extent of the Company's
involvement in these instruments at that time, but does not represent exposure
to credit, interest rate or market risks.
The Company's interest rate swap agreements in place at March 31, 2002 are
as follows (in thousands):
Notional Amount Fixed LIBOR Component Expiration Date Fair Value
- ------------------ ------------------------- -------------------- -------------
$10,000 5.737% 06/01/2002 $102
5,000 5.737% 06/01/2002 51
5,000 5.737% 06/01/2002 51
10,000 5.737% 06/01/2002 102
20,000 5.737% 06/01/2002 203
20,000 4.670% 09/26/2002 267
20,000 4.670% 09/26/2002 267
20,000 4.670% 09/26/2002 267
10,000 4.670% 09/26/2002 134
10,000 4.670% 09/26/2002 134
5,000 4.670% 09/26/2002 66
5,000 4.670% 09/26/2002 66
80,000 5.830% 08/30/2003 2,945
- ------------------ -------------
$220,000 $4,655
On March 31, 2002, the derivative instruments were reported at their fair
value as Other Liabilities of $4.7 million. For the quarter, adjustments of $2.1
million were recorded as adjustments in Other Comprehensive Income.
All of the Company's hedges are designated as cash flow hedges. Cash Flow
hedges protect against the variability in future cash outflows on current or
forecasted debt. Interest rate swaps that convert variable payments to fixed
payments and interest rate caps are cash flow hedges. The changes in the fair
value of these hedges are reported on the balance sheet with a corresponding
adjustment to either Accumulated Other Comprehensive Income or in
earnings--depending on the hedging relationship. Over time, unrealized gains and
losses held in Accumulated Other Comprehensive Income will be reclassified to
earnings. This reclassification occurs in the same period or periods that the
hedged cash flows affect earnings. As of March 31, 2002, the balance in
Accumulated Other Comprehensive Income relating to derivatives was $4.6 million.
Within the next twelve months, the Company estimates that it will reclassify
approximately $3.8mm of this balance to earnings as interest expense.
The Company hedges its exposure to the variability in future cash flows for
forecasted transactions over a maximum period of 12 months. During the
forecasted period, unrealized gains and losses in the hedging instrument will be
reported in Accumulated Other Comprehensive Income. Once the hedged transaction
takes place, the hedge gains and losses will be reported in earnings during the
same period in which the hedged item is recognized in earnings.
9
NOTE 6 - SEGMENT INFORMATION
Management of the Company measures performance and allocates resources
according to property type, which are determined based on differences such as
nature of tenants, capital requirements, economic risks and leasing terms.
Rental income and tenant reimbursements of certain operating expenses under the
terms of tenant leases provide the majority of revenues from all segments.
Information on management's reportable segments is presented as follows (in
thousands):
Associated Community
Three Months Ended March 31, 2002 Malls Centers Centers All Other Total
- -------------------------------------- ------------- -------------- --------------- ----------------- --------------
Revenues $ 123,131 $ 4,463 $ 15,211 $ (470) $ 142,335
Property operating expenses (1) (40,346) (1,328) (4,038) 2,994 (42,718)
Interest expense (32,741) (927) (2,543) (39) (36,250)
Gain on sales of real estate assets -- -- -- 415 415
------------- -------------- --------------- ----------------- --------------
Segment profit and loss $ 50,044 $ 2,208 $ 8,630 $ 2,900 63,782
============= ============== =============== =================
Depreciation and amortization (23,329)
General and administrative and other (5,741)
Equity in earnings and minority
interest adjustment (15,024)
--------------
Net income before extraordinary
items and discontinued operations $ 19,688
==============
Total assets (2) $2,734,468 $126,614 $501,350 $38,309 $3,400,741
Capital expenditures (2) $ 44,719 $ (527) $ 2,149 $25,529 $ 71,870
Associated Community
Three Months Ended March 31, 2001 Malls Centers Centers All Other Total
- -------------------------------------- ------------- -------------- --------------- ----------------- --------------
Revenues $ 98,127 $ 5,055 $ 17,351 $ 542 $ 121,075
Property operating expenses (1) (32,232) (931) (3,674) 530 (36,307)
Interest expense (28,597) (1,311) (3,843) (2,527) (36,278)
Gain on sales of real estate assets -- -- 2,919 1,139 4,058
------------- -------------- --------------- ----------------- --------------
Segment profit and loss $ 37,298 $ 2,813 $ 12,753 $ (316) 52,548
============= ============== =============== =================
Depreciation and amortization (19,910)
General and administrative and other (4,867)
Equity in earnings and minority
interest adjustment (11,000)
--------------
Net income before extraordinary
items and discontinued operations $ 16,771
==============
Total assets (2) $2,102,868 $105,378 $425,658 $751,818 $3,385,722
Capital expenditures (2) $1,211,827 $ 2,969 $ 41,733 $ 11,259 $1,267,788
<FN>
(1) Property operating includes property operating, real estate taxes, and maintenance and repairs.
(2) Developments in progress are included in the All Other category.
</FN>
10
CBL & Associates Properties, Inc.
Item 2: Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
The following discussion and analysis of the financial condition and
results of operations should be read in conjunction with CBL & Associates
Properties, Inc. Consolidated Financial Statements and Notes thereto.
Information included herein contains "forward-looking statements" within
the meaning of the federal securities laws. Such statements are inherently
subject to risks and uncertainties, many of which cannot be predicted with
accuracy and some of which might not even be anticipated. Future events and
actual results, financial and otherwise, may differ materially from the events
and results discussed in the forward-looking statements. We direct you to the
Company's other filings with the Securities and Exchange Commission, including
without limitation the Company's Annual Report on Form 10-K and the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" incorporated by reference therein, for a discussion of such risks
and uncertainties.
GENERAL BACKGROUND
CBL & Associates Properties, Inc. (the "Company") Consolidated Financial
Statements and Notes thereto reflect the consolidated financial results of CBL &
Associates Limited Partnership (the "Operating Partnership") which includes at
March 31, 2002, the operations of a portfolio of properties consisting of
forty-six regional malls, sixteen associated centers, sixty-five community
centers, two office buildings, joint venture investments in six regional malls,
three associated centers and two community centers, and income from nine
mortgages (the "Properties"). The Operating Partnership also has one mall and
three mall expansions, one associated center and one community center currently
under construction and holds options to acquire certain shopping center
development sites. The consolidated financial statements also include the
accounts of CBL & Associates Management, Inc. (the "Management Company").
The Company classifies its regional malls into two categories - malls which
have completed their initial lease-up ("Stabilized Malls") and malls which are
in their initial lease-up phase ("New Malls"). The New Mall category is
presently comprised of the redevelopment project Springdale Mall in Mobile,
Alabama, Arbor Place Mall in Atlanta (Douglasville), Georgia which opened in
October 1999, Parkway Place Mall in Huntsville, Alabama which was acquired in
December 1998 and is being redeveloped and The Lakes Mall in Muskegon, Michigan
which opened in August 2002.
On March 15, 2002, the Company completed an offering of 3,352,770 shares of
its common stock to the public at a price of $34.55 per share. After
underwriter's discount of $0.25 per share the net proceeds of $115 million were
used to repay floating rate debt incurred in the acquisition and development
programs.
Subsequent to the end of the quarter the Company acquired Richland Mall in
Waco, Texas for $43.3 million. The acquisition was funded from the Company's
credit facilities.
RESULTS OF OPERATIONS
Operational highlights for the three months ended March 31, 2002 as
compared to March 31, 2001 are as follows:
11
SALES
Mall shop sales, for those tenants who have reported, in the
forty-eight Stabilized Malls in the Company's portfolio decreased by
1.1% on a comparable per square foot basis.
Three Months Ended March 31,
--------------------------------
2002 2001
--------------- ----------------
Sales per square foot $64.08 $64.82
Totalsales volume in the mall portfolio, including New Malls,
decreased by 2.9% to $612.3 million for the three months ended March
31, 2002 from $630.4 million for the three months ended March 31,
2001.
Occupancy costs as a percentage of sales for the three months ended
March 31, 2002 and 2001 for the Stabilized Malls were 14.3% and 14.3%,
respectively. Occupancy costs were 11.3%, 11.9% and 11.5% for the
years ended December 31, 2001, 2000, and 1999, 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.
OCCUPANCY
Occupancy for the Company's overall portfolio was as follows:
At March 31,
-------------------------
2002 2001
------------- -----------
Core Portfolio:
Stabilized malls 92.9% 91.3%
New malls 87.3 90.1
Associated centers 95.9 95.6
Community centers 96.0 97.9
Total core portfolio occupancy 93.8 94.2
Newly-Acquired Portfolio:
Malls (21) 87.1 87.6
Associated centers (2) 97.5 100.0
Total Combined Occupancy: 91.9 92.3
Total Mall Portfolio 90.1 89.6
AVERAGE BASE RENT
Average base rents for the Company's three portfolio categories
were as follows:
At March 31,
-------------------------
2002 2001
------------- -----------
Malls $23.00 $22.01
Associated centers 9.65 9.51
Community centers 9.59 9.03
12
LEASE ROLLOVERS
On spaces previously occupied, the Company achieved the following
results from rollover leasing for the three months ended March
31, 2002 compared to the base and percentage rent previously
paid:
Per Square Per Square Percentage
Foot Rent Foot Rent Increase/
Prior Lease (1) New Lease (2) (Decrease)
--------------- ------------- ----------
Malls $24.66 $23.95 (2.9)%
Associated centers 17.13 19.75 15.3%
Community centers 9.66 10.25 6.1%
<FN>
(1) - Rental achieved for spaces previously occupied at the
end of the lease including percentage rent.
(2) - Average base rent over the term of the lease.
</FN>
For the three months ended March 31, 2002, malls represented 85.3% of the
Company's share of total revenues from all Properties including unconsolidated
Properties; revenues from associated centers represented 3.0% and revenues from
community centers and other represented 11.7%. Accordingly, revenues and results
of operations are disproportionately impacted by the malls' achievements.
The shopping center business is somewhat seasonal in nature with tenant
sales achieving the highest levels 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.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2002 TO
THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001
Total revenues for the three months ended March 31, 2002 increased by $21.3
million, or 17.6%, to $142.3 million as compared to $121.1 million in 2001.
Minimum rents increased by $14.1 million, or 18.2%, to $91.5 million as compared
to $77.4 million in 2001, and tenant reimbursements increased by $2.6 million,
or 7.1%, to $38.8 million in 2002 as compared to $36.2 million in 2001.
Percentage rents increased by $2.5 million, or 58.5%, to $6.7 million as
compared to $4.2 million in 2001.
Management, leasing and development fees increased by $0.6 million, or
78.5%, to $1.3 million as compared to $0.7 million in 2001. This increase is
primarily due to increases in fees earned in managed Properties that the Company
has a joint venture interest in.
Approximately $15.4 million of the increase in revenues resulted from a
full quarter of operations and $3.5 million of percentage rents for the first
quarter of 2002 at nineteen consolidated centers which were acquired on January
31, 2001 compared to two months of operations from these nineteen centers for
the first quarter of 2001. Also included is one property formerly accounted for
under the equity method of accounting in which the Company acquired a
controlling interest during the first quarter of 2002.
13
Approximately $3.3 million of the increase in revenues resulted operations
at one new Property opened or acquired in the last fifteen months and a full
quarter of operations in 2002 from one property formerly accounted for under the
equity method of accounting in which the Company acquired all of the remaining
interests during the first quarter of 2001.
Opening/
Project Name Location Total GLA Type of Addition Acquisition Date
- ------------------------------ ----------------------------- --------------- ------------------------- ------------------
The Lakes Mall Muskegon, Michigan 553,000 New Development August 2001
Acquisition of 50%
Madison Square Mall Huntsville, Alabama 934,000 interest January 2001
Property operating expenses, including real estate taxes and maintenance
and repairs increased in the first quarter of 2002 by $6.4 million or 17.6% to
$42.7 million as compared to $36.3 million in the first quarter of 2001. This
increase is primarily attributable to the twenty-one new centers referred to
above.
Depreciation and amortization increased in the first quarter of 2002 by
$3.4 million or 17.2% to $23.3 million as compared to $19.9 million in the first
quarter of 2001. This increase is primarily due to the addition of the
twenty-one new centers referred to above and depreciation on the Company's
capital investment in the Properties
Interest expense was $36.3 million in the first quarter of 2002 and 2001.
The same interest expense in both periods was due to refinancing of higher rate
long term debt in 2001 and 2002 with lower rate floating debt and lower interest
rates on the Company's floating rate debt. The effect on interest expense from
the Company's repayment of debt with proceeds from the $115 million stock
offering was minimal in the first quarter of 2002.
The gain on sales of real estate assets decreased in the first quarter of
2002 by $3.7 million, to $0.4 million as compared to $4.1 million in 2001. The
majority of gain on sales in the first quarter of 2002 was from the sale of
outparcels at two existing centers. During the first quarter of 2002 the Company
sold a department store to Dillards at Asheville Mall in Asheville, North
Carolina for total proceeds of $6.0 million. There was no gain on the sale.
Equity in earnings of unconsolidated affiliates increased in the first
quarter of 2002 by $0.5 million to $2.1 million in the first quarter of 2002 as
compared to $1.6 million in the first quarter of 2001. This increase was the
result of acquiring additional interests in three malls and one associated
center in three partnerships, and also by contributing three Properties to a
joint venture all accounted for under the equity method of accounting. The
Properties in which the Company acquired additional interests are; East Towne
Mall, West Towne Mall and West Towne Crossing in Madison Wisconsin; and Kentucky
Oaks Mall in Paducah, Kentucky. During the quarter, the Company contributed
three Properties to a joint venture and retained a 10% interest. The three
Properties contributed were an associated center Pemberton Plaza in Vicksburg,
Mississippi and two community centers Massard Crossing in Ft. Smith, Arkansas
and Willowbrook Plaza in Houston, Texas. During the quarter, the Company
acquired a controlling interest in Columbia Mall in Columbia, South Carolina and
discontinued the equity method of accounting for this Property
During the first quarter of 2002 the Company sold one Property; Rhett at
Remount Plaza in Charleston, South Carolina and reported a gain on disposal of
discontinued operations of $1.2 million. The operating income from discontinued
operations was $35,000 and $26,000 for the first quarter of 2002 and 2001,
respectively.
14
LIQUIDITY AND CAPITAL RESOURCES
The principal uses of the Company's liquidity and capital resources have
historically been for property development, expansion and renovation programs,
acquisitions and debt repayment. To maintain its qualification as a real estate
investment trust under the Internal Revenue Code of 1986, as amended (the
"Code"), the Company is required to distribute to its shareholders at least 90%
of its "Real Estate Investment Trust Taxable Income" as defined in the Code.
As of March 31, 2002, the Company had $30.5 million available in unfunded
construction and redevelopment loans to be used for completion of the
construction and redevelopment projects and replenishment of working capital
previously used for construction. Additionally, as of March 31, 2002, the
Company had obtained credit facilities totaling $373.9 million of which $141.5
million was available. Of the $141.5 million available under the Company's
credit facilities $57.9 million is reserved for capital requirements in the
portfolio acquired on January 31, 2001. As a publicly traded company, the
Company has access to capital through both the public equity and debt markets.
The Company has filed a Shelf Registration authorizing shares of the Company's
preferred stock and common stock and warrants to purchase shares of the
Company's common stock with an aggregate public offering price of up to $350
million with $162.2 million remaining after the Company's preferred stock
offering on June 30, 1998 and common stock offering on March 14, 2002. The
Company anticipates that the combination of these sources will, for the
foreseeable future, provide adequate liquidity to enable it to continue its
capital programs substantially as in the past and make distributions to its
shareholders in accordance with the Code's requirements applicable to real
estate investment trusts.
Management expects to refinance the majority of the mortgage notes payable
maturing over the next five years with replacement loans.
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. The Company's current capital
structure includes property specific mortgages, which are generally
non-recourse, revolving lines of credit, common stock, preferred stock and a
minority interest in the Operating Partnership. The minority interest in the
Operating Partnership represents the 16.4% ownership in the Operating
Partnership held by the Company's current executive and senior officers which
may be exchanged for approximately 8.9 million shares of common stock.
Additionally, Company executive officers and directors own approximately 2.1
million shares of the outstanding common stock of the Company, for a combined
total interest in the Operating Partnership of approximately 20.2%. During the
quarter the Company issued 499,730 special common units ("SCUs") of the
Operating Partnership to acquire additional interests in 5 Properties. These
SCUs issued in March 2002 together with the SCUs issued to acquire property
interests in January 2001 represent a 24.3% interest in the Operating
Partnership. Third party ownership interests may be exchanged for approximately
2.9 million shares of common stock which represents a 5.4% interest in the
Operating Partnership. Assuming the exchange of all limited partnership
interests in the Operating Partnership for common stock, there would be
outstanding approximately 54.1 million shares of common stock with a market
value of approximately $1.912 billion at March 31, 2002 (based on the closing
price of $35.35 per share on March 31, 2002). The Company's total market equity
is $1.986 billion, which includes 2.9 million shares of preferred stock at their
closing price of $25.50 per share on March 31, 2002. Company executive and
senior officers' ownership interests had a market value of approximately $387.3
million at March 31, 2002.
Mortgage debt consists of debt on certain consolidated Properties as well
as on eleven Properties in which the Company owns a non-controlling interest and
which are accounted for under the equity method of accounting. At March 31,
2002, the Company's share of funded mortgage debt on its consolidated Properties
adjusted for minority investors' interests in five Properties was $2.164 billion
and its pro rata share of mortgage debt on unconsolidated Properties (accounted
for under the equity method) was $105.4 million for total debt obligations of
$2.269 billion with a weighted average interest rate of 6.31%.
15
The Company's total conventional fixed rate debt as of March 31, 2002 was
$1.483 billion with a weighted average interest rate of 7.47% as compared to
7.80% as of March 31, 2001 on $1.671 billion.
The Company's variable rate debt as of March 31, 2002 was $786.4 million
with a weighted average interest rate of 4.14% as compared to 6.60% as of March
31, 2001 on $721 million. Through the execution of swap agreements, the Company
has fixed the interest rates on $220 million of debt on operating Properties at
a weighted average interest rate of 6.39%. Of the Company's remaining variable
rate debt of $566.4 million interest on $37.0 million of variable rate debt is
capitalized to projects currently under construction leaving $529.4 million of
variable rate debt exposure on operating Properties as of March 31, 2002. There
were no fees charged to the Company related to its swap agreements. The
Company's interest rate risk policy is discussed in Notes 4 and 5 of the "Notes
to Consolidated Financial Statements" of this report.
In February 2002 the Company closed a new $90.0 million long-term permanent
loan on Cary Towne Center in Cary, North Carolina. The proceeds were used to
retire the existing debt of $62.5 million, fund prepayment fees of $1.9 million,
fund loan fees of $0.3 million, retire $21.6 million of debt on Old Hickory Mall
in Jackson, Tennessee and pay down $3.7 million of variable rate debt on the
Company's credit facilities. In March 2002 the Company issued 3.4 million shares
of its common stock and used the net proceeds of $115 million after underwriters
discount to retire floating rate debt incurred in the acquisition and
development programs. In January 2002 a joint venture accounted for under the
equity method of accounting closed a $38.0 million long-term permanent loan on
three properties. The Company's share of the new debt was 10% or $3.8 million.
Based on the debt (including construction projects) and the market value of
equity described above, the Company's debt to total market capitalization (debt
plus market value equity) ratio was 53.3% at March 31, 2002.
DEVELOPMENT, EXPANSIONS, ACQUISITIONS AND DISPOSITIONS
In March 2002, the Company acquired additional interests in four properties
and a controlling interest in one property. The Company issued 499,730 SCUs with
an average value at issuance of 35.24 per SCU, paid cash of $422,000 and assumed
$24.5 million of debt. The Company had acquired a non-controlling interest in
these five properties in January 2001.
Development projects under construction and scheduled to open during 2002
are: Parkway Place in Huntsville, Alabama, a 631,000-square-foot mall
redevelopment anchored by Parisian and Dillard's and which is scheduled to open
in October 2002; Parkdale Crossing in Beaumont Texas an 87,000 square-foot
associated center; Galyan's an 80,0000 square-foot expansion to Meridian Mall in
Lansing, Michigan; Tweeters a 17,000 square-foot expansion to Westgate Mall in
Spartanburg, South Carolina and David's Bridal a 10,000 square-foot expansion to
Springdale Mall in Mobile, Alabama. Subsequent to the end of the quarter the
Company began construction on Waterford Commons in Waterford, Connecticut a
326,000 square-foot community center which is scheduled to open in 2003.
During the first quarter of 2002 the Company sold one Property Rhett at
Remount Plaza in Charleston, South Carolina and reported a gain on disposal of
discontinued operations of $1.2 million. The operating income from discontinued
operations was $35,000 and $26,000 for the first quarter of 2002 and 2001,
respectively. In January 2002, the Company contibuted three Properties to a
joint venture and retained a 10% interest. The three Properties contributed were
an associated center Pemberton Plaza in Vicksburg, Mississippi and two community
centers Massard Crossing in Ft. Smith Arkansas and Willowbrook Plaza in Houston,
Texas. The Company deferred $11.0 million of the gain realized on the
contribution of the properties.
16
Subsequent to the end of the quarter the Company acquired Richland Mall in
Waco, Texas for $43.3 million. The acquisition was funded from the Company's
credit facilities. Richland Mall is a 725,000 square-foot mall and is anchored
by five department stores including Dillard's for Women, Dillard's for Men,
Sears, JCPenney and Beall's
The Company has entered into a number of option agreements for the
development of future regional malls and community centers. Except for these
projects and as further described below, the Company currently has no other
material capital commitments.
It is management's expectation that the Company will continue to have
access to the capital resources necessary to expand and develop its business.
Future development and acquisition activities will be undertaken by the Company
as suitable opportunities arise. Such activities are not expected to be
undertaken unless adequate sources of financing are available and a satisfactory
budget with targeted returns on investment has been internally approved.
The Company will fund its major development, expansion and acquisition
activity with its traditional sources of construction and permanent debt
financing as well as from other debt and equity financings, including public
financings, and its credit facilities in a manner consistent with its intention
to operate with a conservative debt to total market capitalization ratio.
OTHER CAPITAL EXPENDITURES
Management prepares an annual capital expenditure budget for each property,
which is intended to provide for all necessary recurring and non-recurring
capital improvements. Management believes that its annual operating reserves for
maintenance and recurring capital improvements and reimbursements from tenants
will provide the necessary funding for such requirements. The Company intends to
distribute approximately 50% - 90% of its funds from operations with the
remaining 10% - 50% to be held as a reserve for capital expenditures and
continued growth opportunities. The Company believes that these reserves will be
sufficient to cover tenant finish costs associated with the renewal or
replacement of current tenant leases as their leases expire and capital
expenditures which will not be reimbursed by tenants.
Major tenant finish costs for currently vacant space are expected to be
funded with working capital, operating reserves or from revolving lines of
credit.
For the first quarter of 2002, revenue generating capital expenditures or
"tenant allowances" for improvements were $4.2 million. These capital
expenditures generate increased rents from certain tenants over the term of
their leases. Revenue neutral capital expenditures, which are recovered from the
tenants, were $0.9 million for the first quarter of 2002. Revenue enhancing
capital expenditures or "remodeling costs" were $10.0 million in the first
quarter.
The Company believes that the Properties are in compliance in all material
respects with all 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. The
Company has not recorded in its financial statements any material liability in
connection with environmental matters.
17
CASH FLOWS
Cash flows provided by operating activities for the first quarter of 2002,
increased by $6.0 million, or 11.8%, to $56.9 million from $56.0 million in
2001. This increase was primarily due to the twenty -five centers opened or
acquired during the last fifteen months and improved operations in the existing
centers. Cash flows used in investing activities for the first quarter of 2002,
decreased by $137.3 million, to $16.7 million compared to $153.9 million in
2001. This decrease was due primarily to the decrease in acquisitions in the
first quarter of 2002 compared to the greater number of acquisitions in the same
period last year. Cash flows provided by financing activities for the first
quarter of 2002 decreased by $81.6 million, to $28.7 million compared to $110.3
million in 2001 primarily due to decreased borrowings in 2002 compared to
borrowings in 2001 for the acquisition program and an increase proceeds from
common stock issuance in 2002 compared to 2001.
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. Such provisions include clauses enabling the Company to
receive percentage rentals based on a 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 rentals if
rents of the existing leases are below the then-existing market rate. Most of
the leases require the 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.
CRITICAL ACCOUNTING POLICIES
In December 2001, the Securities and Exchange Commission requested that all
registrants list their most "critical accounting policies" in their Management's
Discussion and Analysis section of their annual and quarterly reports. The SEC
indicated that a "critical accounting policy" is one, which is both important to
the portrayal of a company's financial condition and results and requires
significant judgement or complex estimation processes. Management believes that
the Company's accounting policies that are the most significant and that require
the most judgement are within its accounting for the development of real estate
projects. Management believes that the following accounting policies within this
process fit the definition described above. The Company capitalizes
predevelopment costs paid to third parties incurred on a project. All previously
capitalized predevelopment costs are expensed when it is no longer probable that
the project will be completed. Once development of a project commences, the
Company capitalizes all direct costs incurred to construct the project,
including interest and real estate taxes. In addition, certain general and
administrative expenses are allocated to the projects and capitalized based on
the personnel assigned to development, and the investment in the project
relative to all development projects. Once a project is completed and placed in
service, it is depreciated over its estimated useful life. Buildings and
improvements are depreciated generally over 40 years and leasehold improvements
are amortized over the lives of the applicable leases or the estimated useful
life of the asset, whichever is shorter.
FUNDS FROM OPERATIONS
Management believes that Funds from Operations ("FFO") provides an
additional indicator of the financial performance of the Properties. FFO is
defined by the Company as net income (loss) before depreciation of real estate
assets, gains or losses on sales of real estate and gains or losses on
investments in marketable securities. FFO also includes the Company's share of
FFO in unconsolidated Properties, the Company's share of FFO from operating
income of discontinued operations and excludes the share of FFO attributable to
the minority interest in consolidated Properties. The Company computes FFO in
accordance with the National Association of Real Estate Investments Trusts
("NAREIT") recommendation concerning finance costs and non-real estate
depreciation. The Company however excludes gains or losses on outparcel sales
even though NAREIT permits the inclusion of such gains or losses when
calculating FFO. Gains or losses on outparcel sales would have added $0.4
million to the Company's FFO in the first quarter of 2002 and $1.1 million in
2001.
The use of FFO as an indicator of financial performance is influenced not
only by the operations of the Properties, but also by the capital structure of
the Operating Partnership and the Company. Accordingly, management expects that
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 and 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 as an alternative to cash
flow as a measure of liquidity.
18
For the three months ended March 31, 2002, FFO increased by $14.3 million,
or 33.4%, to $57.0 million as compared to $42.8 million for the same period in
2001. The increase in FFO was primarily attributable to the opening or
acquisition of twenty-one properties during the last fifteen months.
The Company's calculation of FFO is as follows: (dollars in thousands)
Three Months Ended
March 31,
-----------------------------
2002 2001
-------------- --------------
Income from operations $34,297 $23,713
ADD:
Depreciation & amortization from consolidated properties 23,329 19,910
Income from operations of unconsolidated affiliates 2,087 1.623
Depreciation & amortization from unconsolidated affiliates 924 723
Operating income of discontinued operations 35 26
Depreciation and amortization from discontinued operations - 35
SUBTRACT:
Minority investors' share of income from operations in eleven properties (913) (536)
Minority investors share of depreciation and amortization in eleven properties (392) (276)
Depreciation and amortization of non-real estate assets and finance costs (709) (827)
Preferred dividends (1,617) (1,617)
-------------- --------------
TOTAL FUNDS FROM OPERATIONS $57,041 $42,774
============== ==============
DILUTED WEIGHTED AVERAGE SHARES AND POTENTIAL
DILUTIVE COMMON SHARES WITH OPERATING
PARTNERSHIP UNITS FULLY CONVERTED 51,813 45,629
19
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
The Company held its Annual Meeting of Shareholders on May 2,
2002. At the meeting, shareholders re-elected as directors
Charles B. Lebovitz (17,435,718 votes for and 4,950,764 votes
against or withheld), Gary M. Bryenton (20,752,157 votes for and
1,634,325 votes against or withheld), Claude M. Ballard
(20,812,473 votes for and 1,574,009 votes against or withheld)
and Leo Fields (20,817,937 votes for and 1,568,545 votes against
or withheld), to three-year terms expiring in 2005. Other
continuing directors of the Company are John N. Foy, Martin J.
Cleary and William Poorvu whose terms expire in 2003 and Stephen
D. Lebovitz, and Winston W. Walker whose terms expire in 2004 .
At the meeting the shareholders also voted on the Board of
Directors proposal to increase the shares in the Company's Stock
Incentive Plan from 2.8 million to 4.0 million shares
(13,062,770 shares for and 9,323,710 against or withheld)
ITEM 5: Other Information
None
ITEM 6: Exhibits and Reports on Form 8-K
A. Exhibits
None
B. Reports on Form 8-K
The following items were reported:
The outline from the Company's February 7, 2002 conference
call with analysts and investors regarding earnings (Item 5)
was filed on February 7, 2002.
Information relating to an offering of 3,352,770 shares of
the Company's Common Stock (Item 5 - other events) was filed
on March 15, 2002
The outline from the Company's April 25, 2002 conference call
with analysts and investors regarding earnings (Item 9) was
filed on April 25, 2002.
The Company reported on the replacement of Arthur Andersen LLP
with Deloitte & Touche LLP to audit the Company's financial
statements for the fiscal year ending December 31, 2002.
(Item 4 - Changes in Registrant's Certifying Accountant) was
Filed on May 13, 2002
20
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
----------------------------------------------------------
John N. Foy
Vice Chairman of the Board, Chief Financial Officer and
Treasurer
(Authorized Officer of the Registrant,
Principal Financial Officer and
Principal Accounting Officer)
Date: May 14, 2002
21
EXHIBIT INDEX
Exhibit No.
None
22