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 June 30, 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 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 Identification
incorporation or organization) 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 __
The number of shares outstanding of each of the registrant's classes of common
stock, as of August 9, 2002 : Common Stock, par value $.01 per share, 29,718,120
shares.
1
CBL & Associates Properties, Inc.
INDEX
PAGE NUMBER
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL INFORMATION 3
CONSOLIDATED BALANCE SHEETS - AS OF 4
JUNE 30, 2002 AND DECEMBER 31, 2001
CONSOLIDATED STATEMENTS OF OPERATIONS 5
- FOR THE THREE MONTHS AND THE
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
FOR THE SIX MONTHS ENDED JUNE 30, 2002
AND 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2: MANAGEMENT'S DISCUSSION AND 14
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PART II OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS 28
ITEM 2: CHANGES IN SECURITIES 28
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 28
ITEM 4: SUBMISSION OF MATTERS TO HAVE 28
A VOTE OF SECURITY HOLDERS
ITEM 5: OTHER INFORMATION 28
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 28
SIGNATURE 29
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
periods ended June 30, 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
(in thousands, except share data)
(Unaudited)
June 30, December 31,
2002 2001
-------------- --------------
ASSETS
Real estate assets:
Land.............................................................. $ 545,674 $ 520,334
Buildings and improvements........................................ 3,060,498 2,961,185
-------------- --------------
3,606,172 3,481,519
Less: accumulated depreciation.................................. (385,256) (346,940)
-------------- --------------
3,220,916 3,134,579
Developments in progress.......................................... 78,392 67,043
-------------- --------------
Net investment in real estate assets............................ 3,299,308 3,201,622
Cash and cash equivalents........................................... 21,287 10,137
Cash in escrow...................................................... 12,845 --
Receivables:
Tenant, net of allowance for doubtful accounts of $2,876 in
2002 and $2,865 in 2001........................................ 37,647 38,353
Other............................................................. 3,323 2,833
Mortgage notes receivable........................................... 14,306 10,634
Investment in unconsolidated affiliates............................. 104,669 77,673
Other assets........................................................ 39,276 31,599
-------------- --------------
$ 3,532,661 $ 3,372,851
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage and other notes payable.................................... $ 2,208,884 $ 2,315,955
Accounts payable and accrued liabilities............................ 91,554 103,707
-------------- --------------
Total liabilities................................................. 2,300,438 2,419,662
-------------- --------------
Minority interest................................................... 489,497 431,101
-------------- --------------
Commitments and contingencies (Note 2)..............................
Shareholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized:
9.0% Series A Cumulative Redeemable Preferred Stock,
2,675,000 and 2,875,000 shares outstanding in 2002 and
2001, respectively ........................................ 27 29
8.75% Series B Cumulative Redeemable Preferred Stock,
2,000,000 shares outstanding in 2002 and none in 2001 ..... 20 --
Common stock, $.01 par value, 95,000,000 shares authorized,
29,684,611 and 25,616,917 shares issued and outstanding
in 2002 and 2001, respectively.................................. 297 256
Additional paid - in capital...................................... 754,204 556,383
Accumulated other comprehensive loss.............................. (4,176) (6,784)
Accumulated deficit............................................... (7,646) (27,796)
-------------- --------------
Total shareholders' equity...................................... 742,726 522,088
-------------- --------------
$ 3,532,661 $ 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 Six Months Ended
June 30, June 30,
------------------------ --------------------------
2002 2001 2002 2001
------------ ------------ ------------ -----------
REVENUES:
Rentals:
Minimum rents..................................... $ 95,413 $ 88,080 $ 186,393 $ 164,951
Percentage rents.................................. 1,798 822 8,515 5,060
Other rents....................................... 1,697 1,454 3,756 2,936
Tenant reimbursements................................ 43,821 40,814 82,527 76,947
Management, development and leasing fees............. 2,456 1,581 3,754 2,308
Interest and other................................... 1,252 1,205 3,185 2,203
------------ ------------ ------------ -----------
Total revenues..................................... 146,437 133,956 288,130 254,405
------------ ------------ ------------ -----------
EXPENSES:
Property operating................................... 27,213 22,849 49,581 41,986
Depreciation and amortization........................ 23,730 22,108 46,296 41,750
Real estate taxes.................................... 11,316 10,704 22,891 20,168
Maintenance and repairs.............................. 8,922 7,637 17,521 15,146
General and administrative........................... 5,466 4,761 11,207 9,624
Interest............................................. 34,050 40,720 70,838 76,858
Other................................................ 57 -- 57 4
------------ ------------ ------------ -----------
Total expenses..................................... 110,754 108,779 218,391 205,536
------------ ------------ ------------ -----------
Income from operations............................... 35,683 25,177 69,739 48,869
Gain on sales of real estate assets.................. 1,790 554 2,205 4,612
Equity in earnings of unconsolidated affiliates...... 2,015 1,350 4,102 2,973
Minority interest in earnings:
Operating partnership.............................. (16,335) (11,641) (32,532) (23,728)
Shopping center properties......................... (1,214) (459) (2,125) (992)
------------ ------------ ------------ -----------
Income before discontinued operations
and extraordinary item........................ 21,939 14,981 41,389 31,734
Operating income of discontinued operations.......... 59 464 332 508
Gain on disposal of discontinued operations.......... 163 -- 1,406 --
Extraordinary loss on extinguishment of debt......... (1,240) (1,702) (3,205) (1,702)
------------ ------------ ------------ -----------
Net income........................................... 20,921 13,743 39,922 30,540
Preferred dividends.................................. (2,010) (1,617) (3,627) (3,234)
------------ ------------ ------------ -----------
Net income available to common shareholders.......... $ 18,911 $ 12,126 $ 36,295 $ 27,306
============ ============ ============ ===========
Basic per share data:
Income before discontinued operations and
extraordinary item, net of preferred
dividends..................................... $ 0.69 $ 0.53 $ 1.36 $ 1.13
Discontinued operations and
extraordinary item............................ (0.04) (0.05) (0.05) (0.05)
------------ ------------ ------------ -----------
Net income available to common shareholders...... $ 0.65 $ 0.48 $ 1.31 $ 1.08
============ ============ ============ ===========
Weighted average common shares outstanding....... 29,084 25,312 27,728 25,222
Diluted per share data:
Income before discontinued operations and
extraordinary items, net of preferred
dividends..................................... $ 0.66 $ 0.52 $ 1.32 $ 1.11
Discontinued operations and
extraordinary item............................ (0.03) (0.05) (0.05) (0.05)
------------ ------------ ------------ -----------
Net income available to common shareholders...... $ 0.63 $ 0.47 $ 1.27 $ 1.06
============ ============ ============ ===========
Weighted average common and potential dilutive
common shares outstanding........................ 29,943 25,762 28,541 25,633
<FN>
The accompanying notes are an integral part of these statements.
</FN>
5
CBL & Associates Properties, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Six Months Ended June 30,
-------------------------
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................... $ 39,922 $ 30,540
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation...................................................... 38,275 34,510
Amortization...................................................... 9,063 8,283
Gain on sales of real estate assets............................... (2,205) (4,612)
Gain on disposal of discontinued operations....................... (1,406) --
Extraordinary loss on extinguishment of debt...................... 3,205 1,702
Issuance of stock under incentive plan............................ 1,926 1,086
Write-off of development projects................................. 57 4
Equity in earnings of unconsolidated affiliates................... (4,102) (2,973)
Minority interest in earnings of consolidated affiliates.......... 34,657 24,725
Distributions to minority investors............................... (32,142) (18,226)
Distributions from unconsolidated affiliates...................... 7,144 7,472
Changes in:
Tenant and other receivables...................................... 1,942 (5,426)
Accounts payable and accrued liabilities.......................... 515 14,928
Other assets...................................................... (3,249) (7,016)
--------- ---------
Net cash provided by operating activities................. 93,602 84,997
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of real estate assets.............................. (53,494) (116,993)
Additions to real estate assets................................. (35,426) (45,286)
Capitalized interest............................................ (1,858) (3,018)
Other capital expenditures...................................... (32,928) (14,061)
Additions to other assets....................................... (1,470) (2,242)
Deposits in escrow.............................................. (12,845) (7,936)
Proceeds from sales of real estate assets....................... 37,932 34,221
Payments received on mortgage notes receivable.................. 1,488 355
Additions to mortgage notes receivable.......................... (5,160) (1,524)
Additional investments in and advances to
unconsolidated affiliates..................................... (2,659) (12,771)
--------- ---------
Net cash used in investing activities..................... (106,420) (169,255)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage and other notes payable.................. 566,270 312,132
Principal payments on mortgage and other notes payable.......... (714,050) (197,325)
Additions to deferred financing costs........................... (5,283) (5,296)
Proceeds from issuance of common stock.......................... 116,400 1,409
Proceeds from issuance of preferred stock....................... 96,394 --
Proceeds from exercise of stock options......................... 4,523 7,677
Redemption of preferred stock................................... (5,000) --
Prepayment penalties on extinguishment of debt.................. (1,875) (1,400)
Dividends paid.................................................. (33,411) (29,481)
--------- ---------
Net cash provided by financing activities................. 23,968 87,716
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS............................. 11,150 3,458
CASH AND CASH EQUIVALENTS, beginning of period...................... 10,137 5,184
--------- ---------
CASH AND CASH EQUIVALENTS, end of period............................ $ 21,287 $ 8,642
========= =========
SUPPLEMENTAL INFORMATION:
Cash paid for interest, net of amounts capitalized................ $ 71,964 $ 71,460
========= =========
Debt assumed in acquisition of property interest.................. $ 40,709 $ 778,968
========= =========
Issuance of minority interest in acquisition of property interests $ 4,487 $ 289,373
========= =========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
6
CBL & Associates Properties, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 1 - Unconsolidated Affiliates
At June 30, 2002, the Company had investments in seven partnerships
representing six malls, three associated centers and two community centers all
of which are reflected using the equity method of accounting.
During the six months ended June 30, 2002, the Company contributed its
partnership interests in two community centers and one associated center to a
joint venture with a third party and retained a 10% interest. The total
consideration of $63.0 million consisted of cash of $46.8 million and the
Company's retained interest. The Company has deferred the gain of $11.0 million
from the transaction due to certain restrictions included in the joint venture
agreement related to the subsequent sale of the properties that demonstrate the
Company's continuing involvement.
During the six months ended June 30, 2002, the Company acquired additional
partnership interests in three existing partnerships representing four malls and
one associated center. The purchase price consisted of $422,088 in cash, the
assumption of $26.6 million of debt and the issuance of 499,730 special common
units of the Operating Partnership with a weighted average fair value of $35.24
per unit. The special common units have a minimum annual distribution rate of
$2.9025. The Company began including one of these partnerships in its
consolidated financial statements since the additional interest acquired
resulted in a controlling interest.
Condensed combined results of operations for the unconsolidated affiliates
are presented as follows (in thousands):
Company's Share
Total For The For The
Six Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Revenues.................................... $ 26,654 $ 26,135 $ 11,351 $ 12,602
---------- ---------- ---------- ----------
Depreciation and amortization............... 3,539 3,894 1,772 1,829
Interest expense............................ 6,707 7,203 2,322 3,469
Other operating expenses.................... 7,399 8,870 3,155 4,331
---------- ---------- ---------- ----------
Net income.................................. $ 9,009 $ 6,168 $ 4,102 $ 2,973
========== ========== ========== ==========
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 position and results of
operations of the Company.
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 Company's financial position and results of
operations.
7
Note 3 - Mortgage and Other Notes Payables
The Company had total mortgage and other notes payable of $2.209 billion at
June 30, 2002.
The Company had credit facilities of $345.3 million, of which $241.3
million was available at June 30, 2002. Outstanding amounts of $104.0 million
had a weighted average interest rate of 5.28% at June 30, 2002. The Company had
additional credit facilities totaling $14.6 million that are used only for
issuances of letters of credit, of which $8.6 million was outstanding at June
30, 2002.
Permanent non-recourse loans totaling $1.807 billion bear interest at fixed
rates, with a weighted average interest rate of 7.14% at June 30, 2002. Term
loans on operating properties totaling $259.6 million bear interest at variable
rates, with a weighted average interest rate of 4.27% at June 30, 2002.
The Company has a total of $85.8 million in commitments under construction
loans, of which $38.4 million was outstanding at June 30, 2002. The construction
loans bear interest at variable rates, with a weighted average interest rate of
4.42% at June 30, 2002.
On June 20, 2002, the Company obtained $407.2 million of non-recourse
mortgage loans for terms of 10 years each that bear interest at 6.51% based on a
25-year amortization schedule. Eight regional malls and one associated center
secure the mortgage loans, which are not cross-defaulted or
cross-collateralized.
Proceeds from the $407.2 million financing were used to pay off
variable-rate debt on seven of the properties and to refinance a maturing loan
on one property that had a fixed interest rate of 6.95%. Excess proceeds of
approximately $58.0 million were used to reduce outstanding borrowings on the
Company's lines of credit and to retire loans on certain operating properties.
Thirteen of the Company's malls and four associated centers are owned by
special purpose subsidiaries of the Company that are included in the
consolidated financial statements. The sole business purpose of the special
purpose subsidiaries, is the ownership and operation of the properties. The
mortgaged malls and related assets owned by these special purpose subsidiaries
are restricted under the loan agreements for the payment of the related mortgage
loans and are not available to pay 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 debt service, operating
expenses and reserve payments are made, are available for distribution to the
Company.
8
Note 4 -Derivative Financial Instruments
The Company uses derivative financial instruments to manage well-defined
interest rate risks and does not use them for trading or speculative purposes.
The Company had the following interest rate swaps in place at June 30, 2002:
Notional Amount Fixed LIBOR Component Expiration Date Fair Value
- --------------- --------------------- --------------- -------------
$ 20,000 4.670% 09/26/2002 $ (161)
20,000 4.670% 09/26/2002 (161)
20,000 4.670% 09/26/2002 (161)
10,000 4.670% 09/26/2002 (80)
10,000 4.670% 09/26/2002 (80)
5,000 4.670% 09/26/2002 (40)
5,000 4.670% 09/26/2002 (40)
80,000 5.830% 08/30/2003 (3,467)
- --------------- -------------
$ 170,000 $ (4,190)
=============== =============
At June 30, 2002, the derivative instruments were recorded at their fair
values as other liabilities of $4.2 million. For the quarter, adjustments of
$0.5 million 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. Within the next
twelve months, the Company estimates that it will reclassify approximately $3.7
million of this balance 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.
Note 5 - Shareholders' Equity
Common Stock
On March 14, 2002, the Company completed a follow-on offering of 3,352,770
shares of its common stock. Net proceeds of approximately $115.0 million were
used to repay outstanding borrowings under the Company's credit facilities.
Preferred Stock
On June 14, 2002, the Company completed an offering of 2,000,000 shares of
its 8.75% Series B Cumulative Redeemable Preferred Stock ("Series B Preferred
Stock"), having a par value of $.01 per share, at $50 per share. The net
proceeds of approximately $96.6 million were used to reduce outstanding balances
under the Company' credit facilities and to retire term loans on several
properties.
The dividends on the Series B Preferred Stock are cumulative and accrue
from the date of issue and are payable quarterly in arrears at a rate of $4.375
per share per annum. The Series B Preferred Stock has no stated maturity, is not
subject to any sinking fund or mandatory redemption, and is not convertible into
any other securities of the Company.
9
The Series B Preferred Stock cannot be redeemed by the Company prior to
June 14, 2007 and after that date, in whole or in part, at any time for a cash
redemption price of $50.00 per share plus accrued and unpaid dividends.
On June 14, 2002, the Company redeemed 200,000 shares of its 9.0% Series A
Cumulative Redeemable Preferred Stock for its face amount of $25.00 per share,
or $5,000,000.
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 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 management's reportable segments is presented as follows (in
thousands):
Associated Community
Three Months Ended June 30, 2002 Malls Centers Centers All Other Total
- -------------------------------------- --------- ---------- --------- --------- ---------
Revenues $ 124,280 $ 4,967 $ 13,398 $ 3,792 $146,437
Property operating expenses (1) (43,562) (875) (3,211) 197 (47,451)
Interest expense (28,048) (948) (2,356) (2,698) (34,050)
Gain on sales of real estate assets -- -- -- 1,790 1,790
--------- ---------- --------- --------- ----------
Segment profit and loss $ 52,670 $ 3,144 $ 7,831 $ 3,081 66,726
========= ========== ========= =========
Depreciation and amortization (23,730)
General and administrative and other (5,523)
Equity in earnings and minority
interest adjustment (15,534)
----------
Income before discontinued operations
and extraordinary item $ 21,939
==========
Capital expenditures (2) $ 121,574 $ 219 $ 6,848 $ 26,498 $155,139
Associated Community
Three Months Ended June 30, 2001 Malls Centers Centers All Other Total
- -------------------------------------- --------- ---------- --------- --------- ---------
Revenues $ 109,615 $ 4,081 $ 17,662 $ 2,598 $ 133,956
Property operating expenses (1) (36,952) (981) (4,082) 825 (41,190)
Interest expense (32,568) (1,119) (3,534) (3,499) (40,720)
Gain on sales of real estate assets -- -- 554 -- 554
--------- ---------- --------- --------- ----------
Segment profit and loss $ 40,095 $ 1,981 $ 10,600 $ (76) 52,600
========= ========== ========= =========
Depreciation and amortization (22,108)
General and administrative and other (4,761)
Equity in earnings and minority
interest adjustment (10,750)
----------
Income before discontinued operations
and extraordinary item $ 14,981
==========
Capital expenditures (2) $ 17,992 $ 626 $ 2,087 $ 13,227 $ 33,932
10
Associated Community
Six Months Ended June 30, 2002 Malls Centers Centers All Other Total
- -------------------------------------- --------- ---------- --------- --------- ---------
Revenues $ 247,411 $ 9,431 $ 28,219 $ 3,069 $ 288,130
Property operating expenses (1) (85,738) (2,202) (7,143) 5,090 (89,993)
Interest expense (57,798) (1,875) (4,855) (6,310) (70,838)
Gain on sales of real estate assets (283) -- 2,361 127 2,205
--------- ---------- --------- --------- ----------
Segment profit and loss $ 103,592 $ 5,354 $ 18,582 $ 1,976 129,504
========= ========== ========= =========
Depreciation and amortization (46,296)
General and administrative and other (11,264)
Equity in earnings and minority
interest adjustment (30,555)
----------
Income before discontinued operations
and extraordinary item $ 41,389
==========
Total assets (2) $2,897,799 $121,899 $397,051 $115,912 $3,532,661
Capital expenditures (2) $ 195,831 $ 6,112 $ 25,958 $ 26,920 $ 254,821
Associated Community
Six Months Ended June 30, 2001 Malls Centers Centers All Other Total
- -------------------------------------- --------- ---------- --------- --------- ----------
Revenues $ 207,743 $ 8,136 $ 34,470 $ 4,056 $ 254,405
Property operating expenses (1) (69,183) (1,913) (7,559) 1,355 (77,300)
Interest expense (61,165) (2,429) (7,237) (6,027) (76,858)
Gain on sales of real estate assets -- -- 3,480 1,132 4,612
--------- ---------- --------- --------- ----------
Segment profit and loss $ 77,395 $ 3,794 $ 23,154 $ 516 104,859
========= ========== ========= =========
Depreciation and amortization (41,750)
General and administrative and other (9,628)
Equity in earnings and minority
interest adjustment (21,747)
----------
Net income before discontinued
operations and extraordinary item $ 31,734
==========
Total assets (2) $2,668,904 $122,783 $489,195 $ 98,948 $3,379,830
Capital expenditures (2) $1,229,819 $ 4,761 $ 49,248 $ 20,537 $1,304,365
<FN>
(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.
</FN>
Note 7 - Comprehensive Income
Comprehensive income consisted of the following components (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- ------------------------------
2002 2001 2002 2001
-------------- ------------- ------------- -------------
Net income $ 20,921 $ 13,743 $ 39,922 $ 30,540
Gain (loss) on current period cash flow hedges 466 420 2,608 (3,741)
-------------- ------------- ------------- -------------
Comprehensive income $ 21,387 $ 14,163 $ 42,530 $ 26,799
============== ============= ============= =============
11
Note 8 - Discontinued Operations
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". SFAS No. 144 supersedes SFAS No. 121 and requires that
long-lived assets that are to be disposed of by sale be measured at the lower of
book value or fair value less costs to sell. SFAS No. 144 retains the
fundamental provisions of SFAS No. 121 for (a) recognition and measurement of
the impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed by sale, but broadens the definition of what
constitutes a discontinued operation and how the results of a discontinued
operation are to be measured and presented.
During 2002, the Company sold four properties for $26.2 million and
recognized a net gain of $1.4 million, in accordance with SFAS No. 144 and is
reported as discontinued operations. Total revenues for the properties were $0.4
million and $0.9 million for the three months ended June 30, 2002 and 2001,
respectively. Total revenues for the properties were $1.1 million and $1.6
million for the six months ended June 30, 2002 and 2001, respectively.
Note 9 - Recent Accounting Pronouncements
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". SFAS No. 145 rescinds SFAS No. 4
and thus the exception to applying Opinion 30 to all gains and losses related to
extinguishments of debt (other than extinguishments of debt to satisfy
sinking-fund requirements). As a result, gains and losses from extinguishments
of debt should be classified as extraordinary items only if they meet the
criteria of Opinion 30. SFAS No. 145 will be effective for fiscal years
beginning after May 15, 2002. Any gain or loss on extinguishment of debt that
was classified as an extraordinary item in prior periods presented that does not
meet the criteria of Opinion 30 will be reclassified. The Company anticipates
that all extraordinary losses in prior periods will be reclassified as an
operating expense upon adoption of SFAS No. 145.
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. As
the Company typically does not engage in significant disposal activities, it is
not expected that the implementation of SFAS No. 146 in 2003 will have a
significant impact on the Company's reported financial results.
Note 10 - Acquisitions
On May 1, 2002, the Company acquired Richland Mall located in Waco, Texas
for a cash purchase price of $43.5 million. On May 31, 2002, the Company
acquired Panama City Mall located in Panama City, Florida for a purchase price
of $45.7 million. The purchase price of Panama City Mall consisted of the
assumption of $40.7 million of nonrecourse mortgage debt, the issuance of
118,695 limited partnership units with a fair value of $37.80 per unit, and
$458,000 in cash closing costs. The limited partnership units issued will
receive a 7.50% ($3.375 per unit) dividend based on a value of $45.00 per unit
until May 2012 or until the common dividend exceeds $3.375 per unit, if earlier.
12
The Company entered into a ground lease for land adjacent to Panama City
Mall that provides the lessor with the option to require the Company to purchase
the land for $4.1 million between August 1, 2003 and February 1, 2004.
Note 11 - Earning Per Share
Basic earnings per share ("EPS") is computed by dividing earnings 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 difference in basic and
diluted EPS is due to the assumed exercise of outstanding stock options and
restricted stock resulting in 859,000 and 450,000 potential dilutive common
shares for the three months ended June 30, 2002 and 2001, respectively, and
813,000 and 411,000 potential dilutive common shares for the six months ended
June 30, 2002 and 2001, respectively.
13
CBL & Associates Properties, Inc.
Item 2: Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
You should read the following discussion and analysis of the financial
condition and results of operations in conjunction with the consolidated
financial statements and notes thereto 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 we believe the expectations reflected in any forward-looking
statements are based on reasonable assumptions, we can give no assurance that
our expectations will be attained, and it is possible that our actual results
may differ materially from those indicated by these forward-looking statements
due to a variety of risks and uncertainties. We direct you to our other filings
with the Securities and Exchange Commission, including without limitation our
Annual Report on Form 10-K and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" incorporated by reference
therein, for a discussion of such risks and uncertainties.
In this report, the terms "we", "us" and "our" refer to CBL & Associates
Properties, Inc and its subsidiaries.
GENERAL BACKGROUND
Our consolidated financial statements and notes thereto reflect the
consolidated financial results of CBL & Associates Limited Partnership (the
"Operating Partnership"), which includes at June 30, 2002, the operations of a
portfolio of properties consisting of forty-eight regional malls, fifteen
associated centers, sixty-three community centers, an office building, joint
venture investments in six regional malls, three associated centers and two
community centers, and income from ten mortgages (the "Properties"). The
Operating Partnership also has one mall, three mall expansions, one associated
center, two community centers and one mall in a joint venture currently under
construction and options to acquire certain shopping center development sites.
Our consolidated financial statements also include the accounts of CBL &
Associates Management, Inc. (the "Management Company").
We classify our 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 Springdale Mall, a redevelopment project in
Mobile, Alabama, Arbor Place Mall in Atlanta (Douglasville), Georgia, which
opened in October 1999, The Lakes Mall in Muskegon, Michigan, which opened in
August 2001, and Parkway Place Mall in Huntsville, Alabama, which was acquired
in December 1998 and is being redeveloped in a joint venture with a third party.
14
RESULTS OF OPERATIONS
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30,
2002 TO THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2001
Three Months Ended June 30,
2002 2001 $ Variance % Variance
-------- -------- ---------- ----------
Total revenues $146,437 $133,956 $12,481 9.3 %
-------- -------- ---------- ----------
Expenses:
Property operating, real estate taxes and 47,451 41,190 6,261 15.2 %
maintenance and repairs
Depreciation and amortization 23,730 22,108 1,622 7.3 %
General and administrative and other 5,523 4,761 762 16.0 %
Interest expense 34,050 40,720 (6,670) (16.4)%
-------- -------- ---------- ----------
Total expenses 110,754 108,779 1,975 1.8 %
-------- -------- ---------- ----------
Income from operations 35,683 25,177 10,506 41.7 %
Gain on sales of real estate assets 1,790 554 1,236 223.1 %
Equity in earnings of unconsolidated affiliates 2,015 1,350 665 49.3 %
Minority interest in earnings:
Operating partnership (16,335) (11,641) (4,694) 40.3 %
Shopping center properties (1,214) (459) (755) 164.5 %
-------- -------- ---------- ----------
Income before discontinued operations and
extraordinary item 21,939 14,981 6,958 46.4 %
Income from discontinued operations 222 464 (242) (52.2)%
Extraordinary loss on extinguishment of debt (1,240) (1,702) 462 (27.1)%
-------- -------- ---------- ----------
Net income 20,921 13,743 7,178 52.2 %
Preferred dividends (2,010) (1,617) (393) 24.3 %
-------- -------- ---------- ----------
Net income available to common shareholders $ 18,911 $ 12,126 $ 6,785 56.0 %
======== ======== ========== ==========
Revenues
Improved operations at existing properties contributed $6.5 million to the
increase in revenues. Other factors contributing to the increase were (i)
revenues of $3.7 million from the four new properties opened or acquired during
the past fifteen months, (ii) revenues of $2.0 million from the property we
acquired an additional interest in during the first quarter of 2002 that is now
consolidated, (iii) lease termination fees of $3.3 million recognized in the
second quarter and (iv) an increase in development and leasing fees of $0.9
million related to new joint venture projects. These increases were offset by
reductions in revenues of $3.9 million related to properties sold within the
past fifteen months. The four new properties and the additional interest we
acquired are:
Opening/
Project Name Location Total GLA Type of Addition Acquisition Date
- ------------------------- -------------------------- ----------- ----------------------- -----------------
The Lakes Mall Muskegon, Michigan 553,000 New Development August 2001
CBL Center Chattanooga, Tennessee 128,000 New Development January 2002
Richland Mall Waco, Texas 725,000 Acquisition May 2002
Panama City Mall Panama City, Florida 607,000 Acquisition May 2002
Columbia Mall Columbia, South Carolina 1,113,000 Acquisition of February 2002
additional 31% interest
Expenses
Property operating expenses (including real estate taxes and maintenance
and repairs) and depreciation and amortization expense for the existing
properties increased by $6.0 million as a result of increases in costs such as
insurance, real estate taxes and payroll. The increase is also due to additional
15
expenses of $2.6 million from the four new properties opened or acquired during
the past fifteen months and additional expenses of $1.3 million from the
property we acquired an additional interest in during the first quarter of 2002
that is now consolidated. Depreciation and amortization expense also increased
as a result of the ongoing capital expenditures we have made during the past
fifteen months. These increases were offset by reductions in expenses of $2.1
million related to properties sold within the past fifteen months.
The decrease in interest expense was due to reductions of debt with net
proceeds of $115.0 million from our March 2002 common stock offering and net
proceeds of $96.6 million from our June 2002 preferred stock offering as well as
a lower weighted average interest rate on our total debt as compared to the
prior year period.
Gain On Sales Of Real Estate Assets
The net gain on sales of $1.8 million in the second quarter of 2002 was
primarily from gains on two outparcel sales offset by a loss on one outparcel
sale.
Equity In Earnings Of Unconsolidated Affiliates
The increase in equity in earnings of unconsolidated affiliates resulted
from our acquiring additional partnership interests in East Towne Mall, West
Towne Mall and West Town Crossing in Madison, Wisconsin, and Kentucky Oaks in
Paducah, Kentucky. Additionally, during the first quarter of 2002, we
contributed 90% of our partnership interests in Pemberton Plaza, an associated
center in Vicksburg, Mississippi, and Massard Crossing and Willowbrook Plaza,
community centers located in Ft. Smith, Arkansas and Houston, Texas,
respectively, to a joint venture, which is accounted for on the equity method of
accounting. The additional interest acquired contributed $0.4 million to the
increase. During the first quarter of 2002, we began to include Columbia Mall in
Columbia, South Carolina, in our consolidated financial statements after we
acquired an additional controlling interest in the partnership, which accounted
for $0.1 million of the increase as the partnership incurred a loss in the prior
year period.
Discontinued Operations
During the second quarter of 2002, we sold two community centers and the
office building that was formerly our corporate headquarters and recognized a
net gain on the disposal of discontinued operations of $163,000. One community
center and the office building were sold for a gain and one community center was
sold at a loss. Operating income from discontinued operations was $59,000 and
$464,000 for the second quarter of 2002 and 2001, respectively. The decline is a
result of the prior year period including a full three months of operation while
the current year period includes the result of operations through the date each
property was sold.
Extraordinary Loss
We recognized an extraordinary loss of $1.2 million during the quarter
related to the write-off of unamortized deferred financing costs associated with
certain debt obligations that were retired before their scheduled maturity
dates.
16
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002
TO THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001
Three Months Ended June 30,
2002 2001 $ Variance % Variance
-------- -------- ---------- ----------
Total revenues $288,130 $254,405 $33,725 13.3%
-------- -------- ---------- ----------
Expenses:
Property operating, real estate taxes and
maintenance and repairs 89,993 77,300 12,693 16.4 %
Depreciation and amortization 46,296 41,750 4,546 10.9 %
General and administrative and other 11,264 9,628 1,636 17.0 %
Interest expense 70,838 76,858 (6,020) (7.8)%
-------- -------- ---------- ----------
Total expenses 218,391 205,536 12,855 6.3 %
-------- -------- ---------- ----------
Income from operations 69,739 48,869 20,870 42.7 %
Gain on sales of real estate assets 2,205 4,612 (2,407) (52.2)%
Equity in earnings of unconsolidated affiliates 4,102 2,973 1,129 38.0 %
Minority interest in earnings:
Operating partnership (32,532) (23,728) (8,804) 37.1 %
Shopping center properties (2,125) (992) (1,133) 114.2 %
-------- -------- ---------- ----------
Income before discontinued operations and 41,389 31,734 9,655 30.4 %
extraordinary item
Income from discontinued operations 1,738 508 1,230 242.1 %
Extraordinary loss on extinguishment of debt (3,205) (1,702) (1,503) 88.3 %
-------- -------- ---------- ----------
Net income 39,922 30,540 9,382 30.7 %
Preferred dividends (3,627) (3,234) (393) 12.2 %
-------- -------- ---------- ----------
Net income available to common shareholders $ 36,295 $ 27,306 $ 8,989 32.9 %
======== ======== ========== ==========
Revenues
Improved operations at existing properties, including one additional month
for the properties acquired from The Richard E. Jacobs Group (Jacobs) as they
were acquired on January 31, 2001, contributed $24.2 million to the increase in
revenues. Other factors contributing to the increase were (i) revenues of $5.7
million from the six new properties opened or acquired during the past eighteen
months, (ii) revenues of $4.4 million from the property we acquired an
additional interest in during the first quarter of 2002 that is now
consolidated, (iii) additional lease termination fees of $4.1 million recognized
in 2002 and (iv) an increase in management, development and leasing fees of $1.5
million related to new joint venture projects. These increases were offset by
reductions in revenues of $6.1 million related to properties sold within the
past eighteen months. The six new centers and the additional interest we
acquired are:
Opening/
Project Name Location Total GLA Type of Addition Acquisition Date
- ------------------------- -------------------------- ----------- ----------------------- -----------------
Willowbrook Plaza Houston, Texas 388,000 Acquisition February 2001
Creekwood Crossing Bradenton, Florida 404,000 New Development April 2001
The Lakes Mall Muskegon, Michigan 553,000 New Development August 2001
CBL Center Chattanooga, Tennessee 128,000 New Development January 2002
Richland Mall Waco, Texas 725,000 Acquisition May 2002
Panama City Mall Panama City, Florida 607,000 Acquisition May 2002
Columbia Mall Columbia, South Carolina 1,113,000 Acquisition of February 2002
additional 31% interest
17
Expenses
Property operating expenses (including real estate taxes and maintenance
and repairs) and depreciation and amortization expense for the existing
properties increased by $12.9 million as a result of increases in costs such as
insurance, real estate taxes and payroll. The increase from existing properties
is also attributable to one additional month for the properties acquired from
Jacobs as they were acquired on January 31, 2001. The increase is also due to
expenses of $3.9 million from the four new properties opened or acquired during
the past eighteen months and expenses of $2.6 million from the property we
acquired an additional interest in during the first quarter of 2002 that is now
consolidated. Depreciation and amortization expense also increased as a result
of the ongoing capital expenditures we have made during the past eighteen
months. These increases were offset by reductions of $2.2 million related to
properties sold within the past eighteen months.
The decrease in interest expense was due to reductions of debt with net
proceeds of $115.0 million from our March 2002 common stock offering and net
proceeds of $96.6 million from our June 2002 preferred stock offering as well as
a lower weighted average interest rate on our total debt as compared to the
prior year period.
Gain On Sales Of Real Estate Assets
The net gain on sales of $2.2 million in 2002 was primarily from gains on
five outparcel sales offset by losses on two outparcel sales and one department
store building.
Equity In Earnings Of Unconsolidated Affiliates
The increase in equity in earnings of unconsolidated affiliates resulted
from our acquiring additional partnership interests in East Towne Mall, West
Towne Mall and West Town Crossing in Madison, Wisconsin, and Kentucky Oaks in
Paducah, Kentucky. Additionally, during the first quarter of 2002, we
contributed our partnership interests in Pemberton Plaza, an associated center
in Vicksburg, Mississippi, and Massard Crossing and Willowbrook Plaza, community
centers located in Ft. Smith, Arkansas and Houston, Texas, respectively, to a
joint venture, and retained a 10% interest that is accounted for on the equity
method of accounting. The additional interests acquired contributed $1.0 million
to the increase over the prior year period. During the first quarter of 2002, we
began to include Columbia Mall in Columbia, South Carolina, in our consolidated
financial statements after we acquired an additional controlling interest in the
partnership that owns that property, which offset the increase by over the prior
year period by only $24,000.
Discontinued Operations
During the first six months of 2002, we sold three community centers and an
office building that was formerly our corporate headquarters and recognized a
net gain on the disposal of discontinued operations of $1.4 million. Two
community centers and the office building were sold for a gain and one community
center was sold at a loss. Operating income from discontinued operations was
$0.3 million and $0.5 million for the six months ended June 30, 2002 and 2001,
respectively. The decline results from the prior year period including a full
six months of operations while the current period only includes the results of
operations through the date each property was sold.
18
Extraordinary Loss
We recognized an extraordinary loss of $3.2 million during 2002 related to
the prepayment penalties we incurred and the write-off of unamortized deferred
financing costs associated with certain debt obligations we retired before their
scheduled maturity dates.
PERFORMANCE MEASUREMENTS
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.
Including our share of total revenues from unconsolidated affiliates, malls
represented 86.0% of total revenues; revenues from associated centers
represented 2.9%; revenues from community centers represented 10.1%; and
revenues from mortgages and the office buildings represented 1.0% for the six
months ended June 30, 2002. Accordingly, revenues and results of operations are
disproportionately impacted by the malls' achievements.
Mall shop sales, for those tenants reporting sales, declined by 1.0% and
mall occupancy increased by 0.5%. Total portfolio occupancy declined by 0.5% as
a result of the occupancies for community centers and associated centers
declining. Average base rents for our total portfolio improved, including
average base rents for rollover and replacement leases.
Operational highlights for the three months and six months ended June 30,
2002 as compared to June 30, 2001 are as follows:
Sales
Mall shop sales, for those tenants who have reported, in the fifty
Stabilized Malls in our portfolio decreased by 1.0% on a comparable per square
foot basis.
Six Months Ended June 30,
-------------------------
2002 2001
-------- --------
Sales per square foot $127.39 $128.63
Total sales volume in the mall portfolio, including Non-Stabilized Malls,
but excluding Parkway Place, decreased 4.1% to $1.226 billion for the six months
ended June 30, 2002 from $1.278 billion for the six months ended June 30, 2001.
Occupancy costs as a percentage of sales for the six months ended June 30,
2002 and 2001 for the Stabilized Malls were 14.1% and 13.5%, respectively. The
increase in occupancy costs is the result of declining mall shop sales and
increases in tenant reimbursements.
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.
19
Occupancy
Occupancy for our entire owned portfolio was as follows:
At June 30,
-------------------------
2002 2001
-------- --------
Total Portfolio Occupancy 91.1% 91.6%
Total Mall Portfolio 89.4% 88.9%
Stabilized Malls (50) 89.7% 89.0%
Non-Stabilized Malls (4) 84.5% 87.9%
Associated Centers 95.9% 96.4%
Community Centers 94.3% 96.4%
Occupancy for the community centers declined because of the vacancies of
Home Place at Kingston Overlook in Knoxville, Tennessee and Quality Stores at
Sattler Square in Big Rapids, Michigan resulting from the bankruptcy of those
companies. We have re-leased the space at Sattler Square to two tenants, which
are expected to open by year-end.
Average Base Rent
Average base rents for our portfolio categories were as follows:
At June 30,
-------------------------
2002 2001
-------- -------
Malls $23.15 $22.46
Associated centers 9.78 9.49
Community centers 9.65 9.48
Lease Rollovers
We achieved the following results from rollover and replacement leasing for
the six months ended June 30, 2002 compared to the base and percentage rent
previously paid for spaces previously occupied:
Per Square Per Square
Foot Rent Foot Rent Percentage
Prior Lease (1) New Lease (2) Increase(Decrease)
--------------- ------------- ------------------
Stabilized malls $24.14 $24.67 2.2%
Associated centers 11.37 12.34 8.5%
Community centers 12.64 12.92 1.9%
<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>
20
CASH FLOWS
Cash flows provided by operating activities increased $8.6 million due to
improved operations, including our owning the properties acquired from Jacobs
for the entire six month period as compared to five months in the prior year
period.
Cash flows used in investing activities decreased $62.8 million due to less
acquisition activity as compared to the prior year period when we acquired
twenty-five new properties. This was partially offset by increased capital
expenditures in the current period, which are primarily related to remodeling
and renovating the Jacobs properties to improve their competitive position in
their respective market places.
Cash provided by financing activities decreased $63.7 million as a result
of our retiring a larger amount of debt during the current period and the
increase in dividends paid. Additionally, we received less proceeds from the
exercise of stock options during the current period as compared to the prior
period and we redeemed shares of our 9.0% Series A Cumulative Redeemable
Preferred Stock.
LIQUIDITY AND CAPITAL RESOURCES
The principal uses of our liquidity and capital resources have historically
been for property development, expansion and renovation programs, acquisitions
and debt repayment. In order to maintain our qualification as a real estate
investment trust for federal income tax purposes, we are required to distribute
to our shareholders at least 90% of our taxable income, computed without regard
to net capital gains or the dividends-paid deduction.
Our current capital structure includes property specific mortgages, which
are generally non-recourse, construction and term loans, revolving lines of
credit, common stock, preferred stock and a minority interest in the Operating
Partnership.
We anticipate that the combination of our equity and debt sources will, for
the foreseeable future, provide adequate liquidity to enable us to continue our
capital programs substantially as in the past and make distributions to our
shareholders in accordance with the requirements applicable to real estate
investment trusts.
Our policy is to maintain a conservative debt to total market
capitalization ratio in order to enhance our access to the broadest range of
capital markets, both public and private. Based on our share of total
consolidated and unconsolidated debt and the market value of equity described
above, our debt to total market capitalization (debt plus market value equity)
ratio was 49.2% at June 30, 2002.
Equity
As a publicly traded company, we have access to capital through both the
public equity and debt markets. We have an effective shelf registration
statement authorizing us to publicly issue shares of our preferred stock, common
stock and warrants to purchase shares of our common stock with an aggregate
public offering price of up to $350 million, of which approximately $62.3
million remains after our preferred stock offering on June 14, 2002.
21
As of June 30, 2002, the minority interest in the Operating Partnership
includes the 16.3% ownership interest in the Operating Partnership held by our
executive and senior officers that may be exchanged for approximately 8.9
million shares of common stock. Additionally, executive officers and directors
own approximately 2.1 million shares of our outstanding common stock, for a
combined total interest in the Operating Partnership of approximately 20.2%.
Limited partnership interests issued to fund the acquisition of interests
in properties from Jacobs in January 2001 and February 2002 may be exchanged for
approximately 12.0 million shares of common stock, which represents a 22.0%
interest in the Operating Partnership. Other party interests may be exchanged
for approximately 3.9 million shares of common stock, which represents a 7.1%
interest in the Operating Partnership.
Assuming the exchange of all limited partnership interests in the Operating
Partnership for common stock, there would be approximately 54.4 million shares
of common stock outstanding with a market value of approximately $2.202 billion
at June 30, 2002 (based on the closing price of $40.50 per share on June 28,
2002). Our total market equity is $2.369 billion, which includes 2.7 million
shares of Series A preferred stock (based on a liquidation preference of $25.00
per share) and 2.0 million shares of Series B preferred stock (based on a
liquidation preference of $50.00 per share). Our executive and senior officers'
ownership interests had a market value of approximately $444.3 million at June
28, 2002.
Debt
As of June 30, 2002, total outstanding debt recorded on the balance sheet
was $2.209 billion. Our share of mortgage debt on our consolidated properties,
adjusted for minority investors' interests in five properties, was $2.182
billion and our pro rata share of mortgage debt on nine unconsolidated
properties was $110.3 million for total debt obligations of $2.292 billion with
a weighted average interest rate of 6.70%.
As of June 30, 2002, we had $47.4 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.
We have credit facilities totaling $345.3 million, of which $241.3 million
was available to us at June 30, 2002. Outstanding amounts of $104.0 million had
a weighted average interest rate of 5.28% at June 30, 2002.
Our share of total fixed rate non-recourse debt as of June 30, 2002 was
$1.875 billion with a weighted average interest rate of 7.19% as compared to
7.64% on $1.603 billion of debt as of June 30, 2001.
Our share of variable rate debt as of June 30, 2002 was $417.9 million with
a weighted average interest rate of 4.50% as compared to 5.79% on $781.8 million
as of June 30, 2001. Through the execution of interest rate swap agreements, we
have fixed the interest rates on $170.0 million of debt on operating properties
at a weighted average interest rate of 6.29%. Our remaining variable rate debt
of $247.9 million, which has a weighted average interest rate of 3.28%, includes
$102.0 million of debt associated with projects currently under construction and
$145.9 million associated with operating properties. We were not charged any
fees for our swap agreements.
22
During the six months ended June 30, 2002, we closed four variable rate
loans to be used for construction and acquisition purposes totaling $85.4
million of which $20.7 million was outstanding at June 30, 2002.
During the second quarter, we closed a total of $407.2 million in
non-recourse mortgage loans for nine properties with a weighted average interest
rate of 6.51%. These loans replaced variable-rate debt on seven of the
properties and refinanced a maturing loan on one property that had a fixed
interest rate of 6.95%, included in the total debt referred to above. Excess
proceeds of $58.0 million were used to reduce outstanding borrowings under our
credit facilities and to retire loans on certain operating properties.
We expect to refinance the majority of our mortgage notes payable maturing
over the next five years with replacement loans.
DEVELOPMENT, EXPANSIONS, ACQUISITIONS AND DISPOSITIONS
We expect that we will continue to have access to the capital resources
necessary to expand and develop our business. Future development and acquisition
activities will be undertaken as suitable opportunities arise. We do not expect
to pursue these activities unless adequate sources of financing are available
and a satisfactory budget with targeted returns on investment has been
internally approved.
We intend to fund our major development, expansion and acquisition
activities with our traditional sources of construction and permanent debt
financing as well as from other debt and equity financings, including public
financings and our credit facilities, in a manner consistent with our intention
to operate with a conservative debt to total market capitalization ratio.
Acquisitions
On May 1, 2002, we acquired Richland Mall for a cash purchase price of
$43.5 million. Richland Mall is located in Waco, Texas and has five anchor
stores.
On May 31, 2002, we acquired Panama City Mall for a purchase price of $45.7
million. Panama City Mall is located in Panama City, Florida and is anchored by
four department stores. The purchase price consisted of our assumption of $40.7
million of non-recourse mortgage debt, the issuance of 118,695 limited
partnership units with a fair value of $37.80 per unit and $458,000 in cash
closing costs. The limited partnership units issued will receive an annual
dividend of 7.50% ($3.375 per unit) based on a value of $45.00 per unit until
May 2012 or until the common dividend exceeds $3.375 per unit, if earlier.
The Company entered into a ground lease for land adjacent to Panama City
Mall that provides the lessor with the option to require the Company to purchase
the land for $4.1 million between August 1, 2003 and February 1, 2004.
23
Developments and Expansions
Our development projects that are under construction and scheduled to open
during 2002 are:
- - Parkway Place in Huntsville, Alabama, which is a 631,000 square-foot
mall redevelopment anchored by Parisian and Dillard's,
- - Parkdale Crossing in Beaumont, Texas, which is an 87,000 square-foot
associated center,
- - Galyan's, which is an 80,000 square-foot expansion to Meridian Mall
in Lansing, Michigan,
- - Tweeters, which is a 17,000 square-foot expansion to Westgate Mall
in Spartanburg, South Carolina, and
- - David's Bridal, which is a 10,000 square-foot expansion to Springdale
Mall in Mobile, Alabama.
During the quarter, we began construction on Waterford Commons in
Waterford, Connecticut, which is a 326,000 square-foot community center and
Cobblestone Village, which is a 305,000 square-foot community center in St.
Augustine, Florida that are both scheduled to open in 2003.
Subsequent to the end of the quarter, we began construction on the 1.5
million square-foot The Mall of South Carolina in Myrtle Beach, South Carolina,
which is a 50% joint venture with a third party that is scheduled to open in
2004. We also began construction of The Shoppes at Hamilton Place, which is a
130,000 square-foot associated center that is scheduled to open in 2003 adjacent
to Hamilton Place Mall in Chattanooga, Tennessee.
We have entered into a number of option agreements for the development of
future regional malls and community centers. Except for the projects discussed
under Acquisitions and Developments and Expansions above, we do not currently
have any other material capital commitments.
At June 30, 2002, we did not have any standby purchase agreements or
co-development agreement obligations.
Dispositions
During the quarter, we sold two community centers and the office building
that was formerly our corporate headquarters for an aggregate sales price of
$23.2 million, resulting in a net gain of $163,000. One community center and the
office building were sold for a gain and one community center was sold at a
loss.
During the six months ended June 30, 2002, we sold four properties for an
aggregate sales price of $26.2 million, resulting in a net gain of $1.4 million.
Two community centers and the office building that was formerly our corporate
headquarters were sold for a gain and one community center was sold at a loss.
24
In addition, we sold five outparcels for gains and two outparcels and a
department store building for losses. We recognized a net gain from these sales
of $1.8 million and $2.2 million for the three and six month periods,
respectively.
OTHER CAPITAL EXPENDITURES
We prepare an annual capital expenditure budget for each property that is
intended to provide for all necessary recurring and non-recurring capital
improvements. We believe that our annual operating reserve for maintenance and
recurring capital improvements and reimbursements from tenants will provide the
necessary funding for such requirements. This reserve will be sufficient to
cover (i) tenant finish costs associated with the renewing or replacing current
tenant leases as their leases expire and (ii) capital expenditures that will not
be reimbursed by tenants.
Including our share of unconsolidated affiliates, we spent $10.0 million
for revenue generating capital expenditures, or tenant allowances, during the
first six months of 2002. Revenue generating capital expenditures generate
increased rents from these tenants over the terms of their leases. Revenue
neutral capital expenditures, a majority of which are recovered from the
tenants, were $6.7 million for the first six months of 2002. Revenue enhancing
capital expenditures, or remodeling and renovation costs, were $24.2 million, a
portion of which is recovered from tenants.
OTHER
We believe 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. We have not been
notified by any governmental authority, and are not otherwise aware, of any
material noncompliance, liability or claim relating to hazardous or toxic
substances in connection with any of our present or former properties.
Therefore, we have not recorded any material liability in connection with
environmental matters in our financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
As described in Note 9 to the unaudited consolidated financial statements,
the FASB has issued certain statements, which are effective for the subsequent
year.
IMPACT OF INFLATION
In the last three years, inflation has not had a significant impact on us
because of the relatively low inflation rate. Substantially all tenant leases
do, however, contain provisions designed to protect us from the impact of
inflation. These provisions include clauses enabling us to receive percentage
rentals 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 us 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 our exposure to increases in costs
and operating expenses resulting from inflation.
25
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 judgment or complex estimation processes.
We believe that our most significant accounting policies that require the
most judgment are those regarding our accounting for the development of real
estate projects. We believe the following accounting policies within this
process fit the definition described above. We capitalize 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, we capitalize all
direct costs incurred to construct the project, including interest and real
estate taxes. Additionally, 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 assets, whichever
is shorter.
Ordinary repairs and maintenance ware expensed as incurred. Major
replacements and improvements are capitalized and depreciated over their
estimated useful lives.
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 partnerships and joint
ventures. Adjustments for FFO from unconsolidated partnerships and joint
ventures will be calculated on the same basis. We define FFO available for
distribution to common shareholders as defined above by NAREIT less preferred
dividends.
We believe the 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, but also
by our capital structure and the capital structure of the Operating Partnership.
Accordingly, we expect 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, is not necessarily
indicative of cash available to fund all cash flow needs and should not be
considered as an alternative to net income (loss) for purposes of evaluating our
operating performance or to cash flow as a measure of liquidity.
We compute FFO in accordance with the NAREIT recommendation concerning
finance costs and non-real estate depreciation. We exclude gains or losses on
outparcel sales, even though NAREIT permits their inclusion when calculating
FFO. Gains on outparcel sales in the second quarter of 2002 were $1.8 million,
26
or $0.03 per diluted, fully converted share. There were no gains or losses on
sales of outparcels in the second quarter of 2001. In the six months ended June
30, 2002, gains on outparcel sales would have added $2.2 million, or $0.04 per
diluted, fully converted share, as compared to $1.1 million, or $0.02 per
diluted, fully converted share, in 2001.
For the three months ended June 30, 2002, FFO increased by $11.6 million,
or 24.7%, to $58.8 million as compared to $47.2 million for the same period in
2001. For the six months ended June 30, 2002, FFO increased by $25.9 million, or
28.8%, to $115.9 million as compared to $89.9 million for the same period in
2001. The increases in FFO for both periods are primarily attributable to
reduced interest expense and the results of operations of the additional
properties opened or acquired offset by properties we disposed of, as previously
discussed. Additional lease termination fees of $3.3 million and $4.1 million
for the three and six months ended June 30, 2002, respectively, also contributed
to the increase.
Our calculation of FFO follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ---------------------------
2002 2001 2002 2001
-------------- -------------- ------------ -------------
Income from operations $ 35,683 $ 25,177 $ 69,739 $ 48,869
ADD:
Depreciation and amortization from consolidated
properties 23,730 22,108 46,296 41,750
Income from operations of unconsolidated
affiliates 2,015 1,350 4,102 2,973
Depreciation and amortization from
unconsolidated affiliates 848 1,106 1,772 1,829
Operating income of discontinued operations 59 464 332 508
Depreciation and amortization from discontinued
operations 130 44 295 347
LESS:
Preferred dividends (2,010) (1,617) (3,627) (3,234)
Minority investors' share of income from
operations in eleven properties (1,214) (459) (2,125) (992)
Minority investors share of depreciation and
amortization in eleven properties (302) (338) (694) (614)
Depreciation and amortization of non-real estate
assets and finance costs (116) (660) (227) (1,487)
-------------- -------------- ------------ -------------
TOTAL FUNDS FROM OPERATIONS $ 58,823 $ 47,175 $ 115,863 $ 89,949
============== ============== ============ =============
DILUTED WEIGHTED AVERAGE SHARES
AND POTENTIAL DILUTIVE COMMON
SHARES WITH OPERATING
PARTNERSHIP UNITS FULLY
CONVERTED 54,966 50,248 53,399 47,951
27
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
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 July 25, 2002 conference call
with analysts and investors regarding earnings (Item 9) was
filed on July 25, 2002.
28
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 and
Principal Accounting Officer)
Date: August 14, 2002
29
EXHIBIT INDEX
Exhibit No.
-------
99.1 Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
30
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CBL & ASSOCIATES PROPERTIES,
INC. (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Charles B. Lebovitz, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Charles B. Lebovitz
- ------------------------------------
Charles B. Lebovitz, Chief Executive Officer
August 13, 2002
- ------------------------------------
Date
31
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CBL & ASSOCIATES PROPERTIES,
INC. (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, John N. Foy, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ John N. Foy
- ------------------------------------
John N. Foy, Vice Chairman of the Board,
Chief Financial Officer and Treasurer
August 13, 2002
- ------------------------------------
Date
32