Exhibit 99.1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
Or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 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 No.)
incorporate or organization)
2030 Hamilton Place Blvd, Suite 500 37421
Chattanooga, TN (Zip Code)
(Address of principal executive office)
Registrant's telephone number, including area code:(423) 855-0001
Securities registered pursuant to Section
12(b) of the Act:
Title of each Class Name of each exchange on which registered
- ------------------------------------ -----------------------------------------
Common Stock, $0.01 par value New York Stock Exchange
8.75% Series B Cumulative Redeemable
Preferred Stock, $0.01 par value New York Stock Exchange
7.75% Series C Cumulative Redeemable
Preferred Stock, $0.01 par value New York Stock Exchange
7.375% Series D Cumulative Redeemable
Preferred Stock, $0.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 periods that the registrant was
required to file such report(s)) and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No |_|
The aggregate market value of the 56,746,062 shares of common stock held by
non-affiliates of the registrant as of June 30, 2004 was $1,560,576,705, based
on the closing price of $27.50 per share on the New York Stock Exchange on June
30, 2004. (For this computation, the registrant has excluded the market value of
all shares of its common stock reported as beneficially owned by executive
officers and directors of the registrant; such exclusion shall not be deemed to
constitute an admission that any such person is an "affiliate" of the
registrant.) As of March 7, 2005, there were 62,798,056 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for the annual shareholders meeting
to be held on May 9, 2005, are incorporated by reference into Part III.
6
Part I.
ITEM 1. BUSINESS
Background
CBL & Associates Properties, Inc. (the "CBL") was organized on July 13,
1993, as a Delaware corporation, to acquire substantially all of the real estate
properties owned by CBL & Associates, Inc., and its affiliates ("CBL's
Predecessor"), which was formed by Charles B. Lebovitz in 1978. On November 3,
1993, CBL completed an initial public offering (the "Offering") of 30,800,000
shares of its common stock. Simultaneous with the completion of the Offering,
CBL's Predecessor transferred substantially all of its interests in its real
estate properties to CBL & Associates Limited Partnership (the "Operating
Partnership") in exchange for common units of limited partnership interest in
the Operating Partnership. CBL's Predecessor also acquired an additional
interest in the Operating Partnership for a cash payment. The interests in the
Operating Partnership contain certain conversion rights that are more fully
described in Note 9 to the consolidated financial statements. The terms "we",
"us", "our" and the "Company" refer to CBL & Associates Properties, Inc. and its
subsidiaries.
Recent Developments
On January 5, 2004, we closed the second phase of our joint venture
transaction with Galileo America, Inc. ("Galileo America REIT") when we sold our
interests in six community centers for $92.4 million, which consisted of $62.7
million in cash, the retirement of $26.0 million of debt on one of the community
centers, the joint venture's assumption of $2.8 million of debt and closing
costs of $0.9 million.
We sold a community center expansion to the joint venture during September
2004 for $3.4 million in cash.
In October 2004, we sold our interests in a community center to the joint
venture for $17.9 million, which consisted of $2.9 million in cash, the joint
venture's assumption of $10.5 million of debt and a limited partnership interest
in Galileo America REIT. The community center was originally scheduled to be
included in the third phase of the transaction that closed in January 2005.
We closed the third and final phase of the Galileo joint venture
transaction on January 5, 2005, when we sold our interest in two power centers,
one community center and one community center expansion for $58.6 million, which
consisted of $42.6 million in cash, the joint venture's assumption of $12.1
million of debt and $3.6 million representing our interest in the joint venture.
On March 12, 2004, we acquired Honey Creek Mall in Terre Haute, IN for a
purchase price, including transaction costs, of $83.1 million, which consisted
of $50.1 million in cash and the assumption of $33.0 million of non-recourse
debt that bears interest at a stated rate of 6.95% and matures in May 2009.
On March 12, 2004, we acquired Volusia Mall in Daytona Beach, FL for a
purchase price, including transaction costs, of $118.5 million, which consisted
of $63.7 million in cash and the assumption of $54.8 million of non-recourse
debt that bears interest at a stated rate of 6.70% and matures in March 2009.
On April 8, 2004, we acquired Greenbrier Mall in Chesapeake, VA for a cash
purchase price, including transaction costs, of $107.5 million. The purchase
price was partially financed with a new recourse term loan of $92.7 million that
bears interest at LIBOR plus 100 basis points, matures in April 2006 and has
three one-year extension options that are at our election.
On April 21, 2004, we acquired Fashion Square, a community center in Orange
Park, FL for a cash purchase price, including transaction costs, of $4.0
million.
On May 20, 2004, we acquired Chapel Hill Mall and its associated center,
Chapel Hill Suburban, in Akron, OH for a cash purchase price of $78.3 million,
including transaction costs. The purchase price was partially financed with a
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new recourse term loan of $66.5 million that bears interest at LIBOR plus 100
basis points, matures in May 2006 and has three one-year extension options that
are at our election.
On June 22, 2004, we acquired Park Plaza Mall in Little Rock, AR for a
purchase price, including transaction costs, of $77.5 million, which consisted
of $36.2 million in cash and the assumption of $41.3 million of non-recourse
debt that bears interest at a stated rate of 8.69% and matures in May 2010.
On July 28, 2004, we acquired Monroeville Mall, and its associated center,
the Annex, in the eastern Pittsburgh suburb of Monroeville, PA, for a total
purchase price, including transaction costs, of $231.6 million, which consisted
of $39.5 million in cash, the assumption of $134.0 million of non-recourse debt
that bears interest at a stated rate of 5.73% and matures in January 2013, an
obligation of $12.0 million to pay for the fee interest in the land underlying
the mall and associated center on or before July 28, 2007, and the issuance of
1,560,940 special common units in the Operating Partnership with a fair value of
$46.2 million ($29.605 per special common unit).
In August 2004, we entered into a new $400.0 million unsecured credit
facility, which bears interest at LIBOR plus a margin of 100 to 145 basis points
based on our leverage, as defined in the agreement. The credit facility matures
in August 2006 and has three one-year extension options, which are at our
election. We drew on the credit facility to repay all $102.4 million of
outstanding borrowings under our previous $130.0 million unsecured credit
facility, which had an interest rate of LIBOR plus 1.30% and was scheduled to
mature in September 2004.
On November 22, 2004, we acquired Mall del Norte in Laredo, TX for a cash
purchase price, including transaction costs, of $170.4 million. The purchase
price was partially financed with a new nonrecourse, interest-only term loan of
$113.4 million that bears interest at a stated rate of 5.04% and matures in
December 2011.
On November 22, 2004, we acquired Northpark Mall in Joplin, MO for a
purchase price, including transaction costs, of $79.1 million. The purchase
price consisted of $37.6 million in cash and the assumption of $41.5 million of
non-recourse debt that bears interest at a stated rate of 5.75% and matures in
March 2014.
On December 13, 2004, we issued 7,000,000 depositary shares in a public
offering, each representing one-tenth of a share of 7.375% Series D Cumulative
Redeemable Preferred Stock (the "Series D Preferred Stock") with a liquidation
preference of $250.00 per share ($25.00 per depositary share). The net proceeds
of $169.3 million were used to reduce outstanding borrowings on the Company's
credit facilities.
At our Annual Meeting of Shareholders on May 9, 2005, our shareholders
approved an increase in the authorized shares of the common stock under our
amended and restated certificate of incorporation to 180,000,000 shares from
95,000,000 shares. On May 10, 2005, our Board of Directors approved a
two-for-one stock split of our common stock, which was effected in the form of a
stock dividend. The record date for the stock split was June 1, 2005, and the
distribution date was June 15, 2005. We retained the current par value of $0.01
per share for all shares of common stock. All references to numbers of common
shares and per share data in this annual report on Form 10-K have been adjusted
to reflect the stock split on a retroactive basis.
The Operating Partnership currently has common units and special common
units of limited partner interest outstanding that may be exchanged by their
holders, under certain circumstances, for shares of common stock on a
one-for-one basis. These common units and special common units were also split
on a two-for-one basis so that they continue to be exchangeable on a one-for-one
basis into shares of our common stock. All references to numbers of common units
and special common units and related per unit data in this annual report on Form
10-K have also been adjusted to reflect the stock split on a retroactive basis.
The Company's Business
We are a self-managed, self-administered, fully integrated real estate
investment trust ("REIT"). We own operate, market, manage, lease, expand,
develop, redevelop, acquire and finance regional malls and community shopping
8
centers. Our shopping center properties are located primarily in the Southeast
and Midwest, as well as in select markets in other regions of the United States.
We have elected to be taxed as a REIT for federal income tax purposes. We are
the fourth largest mall REIT in the United States and the largest owner of malls
and shopping centers in the Southeast based on gross leasable area owned.
We conduct substantially all of our business through the Operating
Partnership. We are the 100% owner of two qualified REIT subsidiaries, CBL
Holdings I, Inc. and CBL Holdings II, Inc. CBL Holdings I, Inc. is the sole
general partner of the Operating Partnership. At December 31, 2004, CBL Holdings
I, Inc. owned a 1.6% general partnership interest and CBL Holdings II, Inc.
owned a 53.4% limited partnership interest in the Operating Partnership, for a
combined interest held by us of 55.0%.
As of December 31, 2004, we owned:
|X| interests in a portfolio of operating properties including 69 enclosed
regional malls (the "Malls"), 26 associated centers (the "Associated
Centers"), 60 community centers (the "Community Centers") and our
corporate office building (the "Office Building");
|X| interests in one regional mall, one open-air center, two associated
centers, one associated center expansion, one associated center
redevelopment and three community centers that are currently under
construction (the "Construction Properties"), as well as options to
acquire certain shopping center development sites; and
|X| mortgages on ten properties that are secured by first mortgages or
wrap-around mortgages on the underlying real estate and related
improvements (the "Mortgages").
The Malls, Associated Centers, Community Centers, Construction Properties,
Mortgages and Office Building are collectively referred to as the "Properties"
and individually as a "Property."
We conduct our property management and development activities through CBL &
Associates Management, Inc. (the "Management Company") to comply with certain
technical requirements of the Internal Revenue Code of 1986, as amended.
The Management Company manages all of the Properties except for Governor's
Square and Governor's Plaza in Clarksville, TN and Kentucky Oaks Mall, in
Paducah, KY. A property manager affiliated with the third party managing general
partner performs the property management services for these Properties and
receives a fee for its services. The managing partner of each of these
Properties controls the cash flow distributions, although our approval is
required for certain major decisions.
The majority of our revenues is derived from leases with retail tenants and
generally include minimum rents, percentage rents based on tenants' sales
volumes and reimbursements from tenants for expenditures related to property
operating expenses, real estate taxes, insurance and maintenance and repairs, as
well as certain capital expenditures. We also generate revenues from sales of
peripheral land at the properties and from sales of real estate assets when it
is determined that we can realize the maximum value of the assets. Proceeds from
such sales are generally used to reduce borrowings on our credit facilities.
The following terms used in this annual report on Form 10-K will have the
meanings described below:
|X| GLA - refers to gross leasable area of retail space in square feet,
including anchors and mall tenants
|X| Anchor - refers to a department store or other large retail store
|X| Freestanding - property locations that are not attached to the primary
complex of buildings that comprise the mall shopping center
|X| Outparcel - land used for freestanding developments, such as retail
stores, banks and restaurants, on the periphery of the Properties
9
Geographic Concentration
Our properties are located principally in the southeastern and midwestern
Unites States. Our properties located in the southeastern United States
accounted for approximately 57.0% of our total revenues from all properties for
the year ended December 31, 2004 and currently include 37 Malls, 18 Associated
Centers, 35 Community Centers and one Office Building and. Our properties
located in the midwestern United States accounted for approximately 24.9% of our
total revenues from all properties for the year ended December 31, 2004 and
currently include 18 Malls, three Associated Centers and five Community Centers.
Our results of operations and funds available for distribution to shareholders
therefore will be subject generally to economic conditions in the southeastern
and midwestern United States. We will continue to look for opportunities to
geographically diversify our portfolio in order to minimize dependency on any
particular region; however, the expansion of the portfolio through both
acquisitions and developments is contingent on many factors including consumer
demand, competition and economic conditions.
Significant Markets
The top five markets, in terms of revenues, where the Properties are
located were as follows for the year ended December 31, 2004:
Market Percentage Total of Revenues
-------------------- ----------------------------
Nashville, TN 7.1%
Chattanooga, TN 5.5%
Madison, WI 3.5%
Winston-Salem, NC 3.3%
Charleston, SC 3.1%
Top 25 Tenants
The top 25 tenants based on percentage of our total revenues were as
follows for the year ended December 31, 2004:
Annual Percentage
Number Of Square Gross Of Total
Tenant Stores Feet Rentals(1) Revenues
- ----------------------------------------- --------- ------------ ------------------ ----------
1 Limited Brands, Inc. 213 1,319,862 $42,031,928 5.6%
2 Foot Locker, Inc. 178 691,050 25,969,731 3.4%
3 The Gap, Inc. 92 937,517 21,787,095 2.9%
4 Luxottica Group, S.P.A. (2) 186 332,200 14,906,585 2.0%
5 Abercrombie & Fitch Co. 57 389,717 13,692,044 1.8%
6 Signet Group plc (3) 96 143,848 12,963,332 1.7%
7 American Eagle Outfitters, Inc. 64 334,415 12,873,601 1.7%
8 J.C. Penney Co., Inc. (4) 64 7,039,243 11,805,362 1.6%
9 Zale Corporation 135 131,483 11,775,773 1.6%
10 The Finish Line, Inc. 56 294,736 10,473,046 1.4%
11 The Regis Corporation 176 201,876 9,626,228 1.3%
12 Charming Shoppes, Inc. (5) 54 332,924 9,595,551 1.3%
13 Lerner New York, Inc. 38 310,877 9,405,871 1.2%
14 Trans World Entertainment (6) 52 268,688 8,846,329 1.2%
15 Hallmark Cards, Inc. 75 259,241 8,468,088 1.1%
16 Genesco Inc. (7) 123 156,505 8,447,715 1.1%
17 Pacific Sunwear of California 68 228,070 7,630,131 1.0%
10
Annual Percentage
Number Of Square Gross Of Total
Tenant Stores Feet Rentals(1) Revenues
- ----------------------------------------- --------- ------------ ------------------ ----------
18 Borders Group, Inc. 47 276,554 7,471,343 1.0%
19 The Shoe Show of Rocky Mount, Inc 49 265,199 7,239,772 1.0%
20 Sun Capital Partners, Inc. (8) 57 329,005 6,946,881 0.9%
21 Christopher & Banks, Inc. 56 194,824 6,615,540 0.9%
22 Barnes & Noble, Inc. 50 297,562 6,584,027 0.9%
23 The Buckle, Inc. 39 190,977 6,570,412 0.9%
24 Claire's Stores, Inc. 105 117,898 6,448,645 0.9%
25 Aeropostale, Inc. 49 164,360 6,421,776 0.9%
2,179 15,208,631 $294,596,806 39.3%
<FN>
(1) Includes annual minimum rent and tenant reimbursements based on
amounts in effect at December 31, 2004
(2) Luxottica was previously Lenscrafters & Sunglass Hut. Luxottica
purchased Cole National Corporation, which operates Pearl Vision and
Things Remembered in October 2004.
(3) Signet Group was previously Sterling, Inc. They operate Kay Jewelers,
Marks & Morgan, JB Robinson, Shaw's Jewelers, Osterman's Jewelers,
LeRoy's Jewelers, Jared Jewelers, Belden Jewelers and Rogers Jewelers.
(4) J.C. Penney owns 27 of these stores.
(5) Charming Shoppes, Inc. operates Lane Bryant, Fashion Bug, &
Catherine's.
(6) Trans World Entertainment operates FYE (formerly Camelot Music and
Record Town) & Saturday Matinee.
(7) Genesco Inc. operates Journey's, Jarman, & Underground Station.
Genesco purchased Hat World, which operates Hat World, Lids, Hat Zone,
and Cap Factory, as of April 2, 2004.
(8) Sun Capital Partners, Inc. operates Sam Goody, Suncoast Motion
Pictures, Musicland, Life Uniform, Anchor Blue, Mervyn's, Bruegger's
Bagels, Wick's Furniture, and the Mattress Firm.
</FN>
Our Growth Strategy
Our objective is to achieve growth in funds from operations by maximizing
cash flows through a variety of methods that are discussed below.
Leasing, Management and Marketing
Our objective is to maximize cash flows from our existing Properties
through:
|X| aggressive leasing that seeks to increase occupancy,
|X| originating and renewing leases at higher base rents per square foot
compared to the previous lease, |X| merchandising, marketing and
promotional activities and
|X| aggressively controlling operating costs and tenant occupancy costs.
11
Expansions and Renovations
We can create additional revenue by expanding a Property through the
addition of department stores, mall stores and large format retailers. An
expansion also protects the Property's competitive position within its market.
As shown below, we completed six expansions during 2004 and will expand seven
Properties in 2005:
Property Location GLA Opening Date
- ----------------------------------------- ---------------------------- ---------------- -----------------------
Completed in 2004:
Arbor Place Mall (Rich's-Macy's) Douglasville, GA 140,000 September 2004
East Towne Mall Madison, WI 139,000 November 2004
West Towne Mall Madison, WI 94,000 November 2004
The Lakes Mall (Dick's Sporting Goods) Muskegon, MI 45,000 November 2004
Garden City Plaza Expansion Garden City, KS 26,500 March 2004
Coastal Way Spring Hill, FL 20,500 September 2004
465,000
Scheduled for 2005:
Citadel Mall Charleston, SC 45,000 August 2005
Stroud Mall Stroudsburg, PA 4,500 August 2005
Fayette Mall Lexington, KY 144,000 October 2005
Burnsville Center Burnsville, MN 3,000 November 2005
CoolSprings Crossing Nashville, TN 10,000 March 2005
The District at Monroeville Mall Monroeville, PA 75,000 April 2005
Fashion Square Orange Park, FL 18,000 July 2005
299,500
Renovations usually include renovating existing facades, uniform signage,
new entrances and floor coverings, updating interior decor, resurfacing parking
lots and improving the lighting of interiors and parking lots. Renovations can
result in attracting new retailers, increased rental rates and occupancy levels
and in maintaining the Property's market dominance. As shown below, we renovated
three Properties during 2004 and will renovate two Properties during 2005.
Property Location
--------------------------- ---------------------------
Completed in 2004:
Northwoods Mall North Charleston, SC
Cherryvale Mall Rockford, IL
Panama City Mall Panama City, FL
Scheduled for 2005:
CoolSprings Galleria Nashville, TN
Fayette Mall Lexington, KY
12
Development of New Retail Properties
In general, we seek development opportunities in middle-market trade
areas that we believe are under-served by existing retail operations. These
middle-markets must also have sufficient demographic trends to provide the
opportunity to effectively maintain a competitive position. The following shows
the new developments we opened during 2004 and those currently under
construction:
Property Location GLA Opening Date
- -------------------------------------- ------------------------ ------------------ -----------------------
Opened in 2004:
The Shoppes at Panama City Panama City, FL 56,000 February 2004
Coastal Grand-Myrtle Beach (50/50 joint
venture) Myrtle Beach, SC 908,000 March 2004
Wilkes-Barre Township Marketplace Wilkes-Barre Township,
PA 281,000 March 2004
Charter Oak Marketplace Hartford, CT 312,000 November 2004
-----------------
1,557,000
=================
Currently under construction:
Imperial Valley Mall (60/40 joint
venture) El Centro, CA 754,000 March 2005
Hamilton Corner Chattanooga, TN 68,000 March 2005
Coastal Grand Crossing Myrtle Beach, SC 15,000 April 2005
Cobblestone Village at Royal Palm BeachRoyal Palm Beach, FL 225,000 June 2005
Chicopee Marketplace Chicopee, MA 156,000 September 2005
Southaven Towne Center Southaven, MS 420,000 October 2005
------------------
1,638,000
==================
Our total investment in the Properties opened in 2004 was $89.5 and the
total investment in the Properties we currently have under construction will be
$106.2 million.
Acquisitions
We believe there is opportunity for growth through acquisitions of regional
malls and other associated properties. We selectively acquire regional mall
properties where we believe we can increase the value of the property through
our development, leasing and management expertise. We acquired the following
Properties during 2004:
Property Location GLA Date Acquired
- --------------------------------------- ------------------------ ------------------ -----------------------
Honey Creek Mall Terre Haute, IN 680,890 March 2004
Volusia Mall Daytona Beach, FL 1,064,768 March 2004
Greenbrier Mall Chesapeake, VA 889,683 April 2004
Fashion Square Orange Park, FL 27,286 April 2004
Chapel Hill Mall Akron, OH 861,653 May 2004
Chapel Hill Suburban Akron, OH 117,088 May 2004
Park Plaza Mall Little Rock, AR 546,500 June 2004
Monroeville Mall Monroeville, PA 1,128,747 July 2004
Monroeville Annex Monroeville, PA 229,588 July 2004
Northpark Mall Joplin, MO 991,076 November 2004
Mall del Norte Laredo, TX 1,198,199 November 2004
------------------
7,735,478
==================
Risks Associated with Our Growth Strategy
As with any strategy there are risks involved with our plan for growth.
Such risks include, but are not limited to: development opportunities pursued
may be abandoned; construction costs may exceed estimates; construction loans
with full recourse to us may not be refinanced; proforma objectives, such as
13
occupancy and rental rates, may not be achieved; and the required approval by an
anchor tenant, mortgage lender or joint venture partner for certain
expansion/development activities may not be obtained. An unsuccessful
development project could result in a loss greater than our investment.
Insurance
We carry a comprehensive blanket policy for liability, fire and rental loss
insurance covering all of the Properties, with specifications and insured limits
customarily carried for similar properties. The property and liability insurance
policies on our Properties currently do not exclude loss resulting from acts of
terrorism, whether foreign or domestic. We believe the Properties are adequately
insured in accordance with industry standards.
Environmental Matters
Under various federal, state and local laws, ordinances and regulations, a
current or previous owner or operator of real estate may be liable for the costs
of removal or remediation of petroleum, certain hazardous or toxic substances
on, under or in such real estate. Such laws typically impose such liability
without regard to whether the owner or operator knew of, or was responsible for,
the presence of such substances. The costs of remediation or removal of such
substances may be substantial. The presence of such substances, or the failure
to promptly remediate such substances, may adversely affect the owner's or
operator's ability to lease or sell such real estate or to borrow using such
real estate as collateral. Persons who arrange for the disposal or treatment of
hazardous or toxic substances may also be liable for the costs of removal or
remediation of such substances at the disposal or treatment facility, regardless
of whether such facility is owned or operated by such person. Certain laws also
impose requirements on conditions and activities that may affect the environment
or the impact of the environment on human health. Failure to comply with such
requirements could result in the imposition of monetary penalties (in addition
to the costs to achieve compliance) and potential liabilities to third parties.
Among other things, certain laws require abatement or removal of friable and
certain non-friable asbestos-containing materials in the event of demolition or
certain renovations or remodeling. Certain laws regarding asbestos-containing
materials require building owners and lessees, among other things, to notify and
train certain employees working in areas known or presumed to contain
asbestos-containing materials. Certain laws also impose liability for release of
asbestos-containing materials into the air and third parties may seek recovery
from owners or operators of real properties for personal injury or property
damage associated with asbestos-containing materials. In connection with the
ownership and operation of properties, we may be potentially liable for all or a
portion of such costs or claims.
All of our properties (but not properties for which we hold an option to
purchase but do not yet own) have been subject to Phase I environmental
assessments or updates of existing Phase I environmental assessments within
approximately the last ten years. Such assessments generally consisted of a
visual inspection of the properties, review of federal and state environmental
databases and certain information regarding historic uses of the property and
adjacent areas and the preparation and issuance of written reports. Some of the
properties contain, or contained, underground storage tanks used for storing
petroleum products or wastes typically associated with automobile service or
other operations conducted at the properties. Certain properties contain, or
contained, dry-cleaning establishments utilizing solvents. Where believed to be
warranted, samplings of building materials or subsurface investigations were
undertaken. At certain properties, where warranted by the conditions, we have
developed and implemented an operations and maintenance program that establishes
operating procedures with respect to asbestos-containing materials. The costs
associated with the development and implementation of such programs were not
material.
We believe that our 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. We have
not recorded in our financial statements any material liability in connection
with environmental matters. Nevertheless, it is possible that the environmental
assessments available to us do not reveal all potential environmental
liabilities. It is also possible that subsequent investigations will identify
14
material contamination, that adverse environmental conditions have arisen
subsequent to the performance of the environmental assessments, or that there
are material environmental liabilities of which management is unaware. Moreover,
no assurances can be given that (i) future laws, ordinances or regulations will
not impose any material environmental liability or (ii) the current
environmental condition of the properties has not been or will not be affected
by tenants and occupants of the properties, by the condition of properties in
the vicinity of the properties or by third parties unrelated to us, the
Operating Partnership or the relevant property's partnership. The existence of
any such environmental liability could have an adverse effect on our results of
operations, cash flow and the funds available to us to pay dividends.
Competition
The Properties compete with various shopping facilities in attracting
retailers to lease space. In addition, retailers at our properties face
continued competition from discount shopping centers, outlet malls, wholesale
clubs, direct mail, television shopping networks, the internet and other retail
shopping developments. The extent of the retail competition varies from market
to market. We work aggressively to attract customers through marketing
promotions and campaigns.
Seasonality
Our 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 entire year.
Qualification as a Real Estate Investment Trust ("REIT")
We intend to continue to be taxed as a REIT under Sections 856 through 860
of the Internal Revenue Code, as amended (the "Code"). We generally will not be
subject to federal income tax to the extent we distribute at least 90% of our
REIT ordinary taxable income to our shareholders. If we fail to qualify as a
REIT in any taxable year, we would be subject to federal income tax on our
taxable income at regular corporate rates.
Financial Information About Segments
See Note 12 to the consolidated financial statements for information about
our reportable segments.
Employees
CBL & Associates Properties, Inc. does not have any employees other than
its statutory officers. Our Management Company currently employees 738 full-time
and 621 part-time employees. None of our employees are represented by a union.
Corporate Offices
Our principal executive offices are located at CBL Center, 2030 Hamilton
Place Boulevard, Suite 500, Chattanooga, Tennessee, 37421 and our telephone
number is (423) 855-0001.
Available Information
There is additional information about us on our web site at
www.cblproperties.com. Electronic copies of our Annual Report on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any
amendments to those reports, are available free of charge by visiting the
"investor relations" section of our web site. These reports are posted as soon
as reasonably practical after they are electronically filed with, or furnished
to, the Securities and Exchange Commission. The information on the web site is
not, and should not, be considered to be a part of this Form 10-K.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
(a) Market Information
------------------
The New York Stock Exchange is the principal United States market in
which our common stock is traded.
The high and low sales prices for our common stock for each quarter of
our two most recent fiscal years were as follows, as adjusted for the
two-for-one stock split that occurred June 15, 2005:
Quarter Ended High Low
------------------------------------------- ----------- -------------
2004:
March 31 $31.050 $27.725
June 30 $31.085 $22.895
September 30 $31.830 $26.405
December 31 $38.565 $30.395
2003:
March 31 $20.635 $18.750
June 30 $22.570 $20.245
September 30 $25.380 $21.495
December 31 $28.755 $24.825
Holders
-------
There were approximately 555 shareholders of record for our common
stock as of March 7, 2005.
Dividends Declared
------------------
The frequency and amounts of dividends declared and paid on the common
stock for each quarter of our two most recent fiscal years were as
follows, as adjusted for the two-for-one stock split that occurred June
15, 2005:
Quarter Ended 2004 2003
------------------------------------------ ------------ ----------
March 31 $ 0.3625 $0.3275
June 30 $ 0.3625 $0.3275
September 30 $ 0.3625 $0.3275
December 31 $0.40625 $0.3625
Future dividend distributions are subject to our actual results of
operations, economic conditions and such other factors as our Board of
Directors deems relevant. Our actual results of operations will be
affected by a number of factors, including the revenues received from
the Properties, our operating expenses, interest expense, the ability
of the anchors and tenants at the Properties to meet their obligations
and unanticipated capital expenditures.
Securities Authorized For Issuance Under Equity Compensation Plans
------------------------------------------------------------------
See Part III, Item 12.
Recent Sales Of Unregistered Securities' Use Of Proceeds From
-------------------------------------------------------------
Registered Securities
---------------------
None
(b) None
(c) None
16
Item 6. Selected Financial Data:
The following table sets forth selected financial and operating information for
CBL & Associates Properties, Inc. (the "Company") for each of the five years in
the period ended December 31, 2004, which has been updated to reflect (i) the
application of the requirements of Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," to the sale of five community centers in March 2005 that requires the
results of operations of these community centers be retroactively reclassified
as discontinued operations in all periods presented and (ii) the Company's
two-for-one stock split effected in the form of a stock dividend that occurred
on June 15, 2005.. The reclassification to discontinued operations of the
results of operations of the five community centers has no effect on the
reported net income available to common shareholders in any prior period. Refer
to Note 1 of the Company's consolidated financial statements for a description
of the two-for-one stock split and to Note 4 for discussion of the sale of the
five community centers. The following information should be read in conjunction
with the Company's consolidated financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this report.
17
(In thousands, except per share data)
Year Ended December 31, (2)
-------------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- ------------
Total revenues $ 757,253 $ 664,312 $ 584,131 $ 534,424 $ 343,074
Total expenses 413,619 348,586 302,245 276,745 178,348
----------- ----------- ----------- ----------- ------------
Income from operations 344,634 315,726 282,886 257,679 164,726
Interest income 3,355 2,485 1,853 1,891 2,644
Interest expense (177,219) (153,321) (142,908) (156,404) (95,677)
Loss on extinguishment of debt - (167) (3,872) (13,558) (367)
Gain on sales of real estate assets 29,272 77,765 2,804 10,649 15,978
Equity in earnings of unconsolidated affiliates 10,308 4,941 8,215 7,155 3,684
Minority interest in earnings:
Operating partnership (85,186) (106,532) (64,251) (49,643) (28,507)
Shopping center properties (5,365) (2,758) (3,280) (1,654) (1,504)
----------- ----------- ----------- ----------- ------------
Income before discontinued operations 118,799 138,139 81,447 56,115 60,977
Discontinued operations 2,312 6,000 3,459 4,793 4,745
----------- ----------- ----------- ----------- ------------
Net income 121,111 144,139 84,906 60,908 65,722
Preferred dividends (18,309) (19,633) (10,919) (6,468) (6,468)
----------- ----------- ----------- ----------- ------------
Net income available to common shareholders $ 102,802 $ 124,506 $ 73,987 $ 54,440 $ 59,254
=========== =========== =========== =========== ============
Basic earnings per common share:
Income before discontinued operations, net
of preferred dividends $ 1.63 $ 1.98 $ 1.23 $ 0.98 $ 1.10
=========== =========== =========== =========== ============
Net income available to common shareholders $ 1.67 $ 2.08 $ 1.29 $ 1.07 $ 1.19
=========== =========== =========== =========== ============
Weighted average shares outstanding 61,602 59,872 57,380 50,716 49,762
Diluted earnings per common share:
Income before discontinued operations, net
of preferred dividends $ 1.57 $ 1.90 $ 1.19 $ 0.96 $ 1.09
=========== =========== =========== =========== ============
Net income available to common shareholders $ 1.61 $ 2.00 $ 1.25 $ 1.05 $ 1.18
=========== =========== =========== =========== ============
Weighted average shares and potential dilutive
common shares outstanding 64,004 62,386 59,336 51,666 50,042
Dividends declared per common share $ 1.49375 $ 1.345 $ 1.16 $ 1.065 $ 1.02
December 31, (2)
-------------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- ------------
BALANCE SHEET DATA:
Net investment in real estate assets $4,894,780 $3,912,220 $3,611,485 $3,201,622 $ 2,040,614
Total assets 5,204,500 4,264,310 3,795,114 3,372,851 2,115,565
Total mortgage and other notes payable 3,371,679 2,738,102 2,402,079 2,315,955 1,424,337
Minority interests 566,606 527,431 500,513 431,101 174,665
Shareholders' equity 1,054,151 837,300 741,190 522,008 434,825
OTHER DATA:
Cash flows provided by (used in):
Operating activities $ 339,197 $ 274,349 $ 273,923 $ 213,075 $ 139,118
Investing activities (608,651) (312,366) (274,607) (201,245) (122,215)
Financing activities 274,888 44,994 3,902 (6,877) (17,958)
Funds From Operations (FFO) (1)
of the Operating Partnership $ 310,405 $ 271,588 $ 235,474 $ 182,687 $ 137,132
FFO applicable to the Company 169,725 146,552 126,127 94,945 92,594
<FN>
(1) Please refer to Management's Discussion and Analysis of Financial
Condition and Results of Operations for the definition of FFO. FFO does
not represent cash flow from operations as defined by accounting
principles generally accepted in the United States and is not
necessarily indicative of the cash available to fund all cash
requirements.
(2) Please refer to Notes 3 and 5 to the consolidated financial statements
for a description of acquisitions and joint venture transactions that
have impacted the comparability of the financial information presented.
</FN>
18
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and accompanying notes that are included in this annual report.
Capitalized terms used, but not defined, in this Management's Discussion and
Analysis of Financial Condition and Results of Operations have the same meanings
as defined in the notes to the consolidated financial statements. In this
discussion, the terms "we", "us", "our" and the "Company" refer to CBL &
Associates Properties, Inc. and its subsidiaries.
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
these expectations will be attained, and it is possible that actual results may
differ materially from those indicated by these forward-looking statements due
to a variety of risks and uncertainties. Such risks and uncertainties include,
without limitation, general industry, economic and business conditions, interest
rate fluctuations, costs of capital and capital requirements, availability of
real estate properties, inability to consummate acquisition opportunities,
competition from other companies and retail formats, changes in retail rental
rates in our markets, shifts in customer demands, tenant bankruptcies or store
closings, changes in vacancy rates at our properties, changes in operating
expenses, changes in applicable laws, rules and regulations, the ability to
obtain suitable equity and/or debt financing and the continued availability of
financing in the amounts and on the terms necessary to support our future
business. We disclaim any obligation to update or revise any forward-looking
statements to reflect actual results or changes in the factors affecting the
forward-looking information.
Executive Overview
We are a self-managed, self-administered, fully integrated real estate
investment trust ("REIT") that is engaged in the ownership, development,
acquisition, leasing, management and operation of regional shopping malls and
community centers. Our shopping center properties are located primarily in the
Southeast and Midwest, as well as in select markets in other regions of the
United States.
As of December 31, 2004, we owned controlling interests in 64 regional
malls, 25 associated centers (each adjacent to a regional mall), 12 community
centers, and our corporate office building. We consolidate the financial
statements of all entities in which we have a controlling financial interest. As
of December 31, 2004, we owned non-controlling interests in five regional malls,
one associated center and 48 community centers. Because major decisions such as
the acquisition, sale or refinancing of principal partnership or joint venture
assets must be approved by one or more of the other partners, we do not control
these partnerships and joint ventures and, accordingly, account for these
investments using the equity method. We had one mall, which is owned in a joint
venture, two mall expansions, one open-air shopping center, two associated
centers, one of which is owned in a joint venture, one associated center
expansion, one associated center redevelopment and three community centers under
construction as of December 31, 2004.
The majority of our revenues is derived from leases with retail tenants and
generally include minimum rents, percentage rents based on tenants' sales
volumes and reimbursements from tenants for expenditures related to property
operating expenses, real estate taxes and maintenance and repairs, as well as
certain capital expenditures. We also generate revenues from sales of peripheral
land at the properties and from sales of real estate assets when it is
determined that we can realize the maximum value of the assets. Proceeds from
such sales are generally used to reduce borrowings on our credit facilities.
We expanded our portfolio in 2004 with the acquisition of eight malls, two
associated centers and a community center, representing a total investment of
$950.0 million. We opened nine new developments totaling 1.9 million square
feet, including the nearly 1.0 million square foot regional mall Coastal
Grand-Myrtle Beach in Myrtle Beach, SC, which we own in a joint venture. We have
approximately 2.0 million square feet of new developments, which represent over
$185.0 million of net investment, that is scheduled to open during 2005. We also
19
added a total of 12 big box stores and eight anchor retailers to our malls,
which have made positive contributions by strengthening the tenant mix of these
properties.
Results of Operations
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2004 TO THE YEAR ENDED DECEMBER 31,
2003
The following significant transactions impacted the consolidated results of
operations for the year ended December 31, 2004, compared to the year ended
December 31, 2003:
|X| The acquisition of eight malls, two associated centers and one
community center, and the opening of one new mall (which is accounted
for using the equity method), one associated center and one community
center during 2004. Additionally, 2004 was the first full year of
operations for the six malls and two associated centers that were
acquired during 2003 and the one associated center and two community
centers that were opened in 2003. The properties opened or acquired
during 2004 and 2003 are collectively referred to as the "New 2004
Properties" in this section and are as follows:
Property Location Date Acquired / Opened
- --------------------------------------------------------------------------------------------------
Acquisitions:
Sunrise Mall Brownsville, TX April 2003
Sunrise Commons Brownsville, TX April 2003
Cross Creek Mall Fayetteville, NC September 2003
River Ridge Mall Lynchburg, VA October 2003
Valley View Mall Roanoke, VA October 2003
Southpark Mall Colonial Heights, VA December 2003
Harford Mall Bel Air, MD December 2003
Harford Annex Bel Air, MD December 2003
Honey Creek Mall Terre Haute, IN March 2004
Daytona Beach, March 2004
Volusia Mall FL
Greenbrier Mall Chesapeake, VA April 2004
Fashion Square Orange Park, FL April 2004
Chapel Hill Mall Akron, OH May 2004
Chapel Hill kron, OH May 2004
Suburban A
Park Plaza Mall Little Rock, AR June 2004
Monroeville Mall Monroeville, PA July 2004
Monroeville Annex Monroeville, PA July 2004
Northpark Mall Joplin, MO November 2004
Mall del Norte Laredo, TX November 2004
New Developments:
The Shoppes at Hamilton Place Chattanooga, TN May 2003
Cobblestone Village St. Augustine, FL May 2003
Waterford Commons Waterford, CT September 2003
Wilkes-Barre Township Marketplace Wilkes-Barre Township, PA March 2004
Coastal Grand-Myrtle Beach Myrtle Beach, SC March 2004
The Shoppes at Panama City Panama City, FL March 2004
|X| In October 2003, we sold 41 community centers to Galileo America.
We sold six additional community centers to Galileo America in
January 2004. Since we have continuing involvement with these
properties through our ownership interest in Galileo America and
our role as manager of the properties, the results of operations
of these properties have not been reflected in discontinued
operations. Therefore, the year ended December 31, 2003 includes
results of operations for these properties through the dates they
were sold.
20
|X| Effective January 1, 2004, we began to consolidate the results of
operations of PPG Venture I Limited Partnership, which owns two
community centers and one associated center (the "PPG
Properties"), as a result of the adoption of a new accounting
pronouncement. The PPG Properties were accounted for as
unconsolidated affiliates using the equity method of accounting
prior to January 1, 2004.
|X| Properties that were in operation for the entire period during
2004 and 2003 are referred to as the "2004 Comparable Properties"
in this section, except for the five community centers located in
Michigan that were sold in March 2005, which are reflected as
discontinued operations as discussed in Note 4 to our
consolidated financial statements.
Revenues
The $92.9 million increase in revenues was primarily attributable to
increases of $113.6 million from the New 2004 Properties, $7.5 million related
to the PPG Properties and $4.1 million from the 2004 Comparable Properties.
These increases were offset by a reduction in revenues of $42.5 million related
to the community centers that were sold to Galileo America in October 2003 and
January 2004.
The increase in revenues of the 2004 Comparable Properties was driven by
our ability to maintain high occupancy levels, while achieving an increase of
3.3% in rents from both new leases and lease renewals for comparable small shop
spaces.
An increase in management and leasing fees of $2.8 million received from
Galileo America was the primary contributor to the $4.3 million increase in
management, development and leasing fees. Other revenues increased $5.9 million
due to growth of our taxable REIT subsidiary.
Operating Expenses
Property operating expenses including real estate taxes and maintenance and
repairs, increased as a result of increases of $35.7 million from the New 2004
Properties and $2.2 million from the PPG Properties, offset by decreases of $9.4
million related to the community centers that were sold to Galileo America and
$5.6 million in operating expenses of the 2004 Comparable Properties.
The increase in depreciation and amortization expense resulted from
increases of $29.0 million from the New 2004 Properties, $1.0 million related to
the PPG Properties and $6.6 million from the 2004 Comparable Properties. These
increases were offset by a decrease of $7.4 million related to the community
centers that we sold to Galileo America in October 2003 and January 2004. The
increase attributable to the 2004 Comparable Properties is due to ongoing
capital expenditures for renovations, expansions, tenant allowances and deferred
maintenance.
General and administrative expenses increased $4.9 million during 2004. As
a percentage of revenues, this was only a 0.1% increase over the comparable 2003
amount. General and administrative expenses were significantly impacted by an
additional $1.1 million of expenses in 2004 related to compliance with Section
404 of the Sarbanes-Oxley Act of 2002. State tax expenses also increased $1.8
million as a result of our continued growth. The remainder of the increase is
attributable to additional salaries and benefits for the personnel added to
manage the properties acquired during 2004 and 2003 combined with annual
compensation increases for existing personnel.
We identified ten community centers and recorded a loss on impairment of
real estate assets of $3.1 million to reduce the carrying value of these
properties to their respective estimated fair values. The ten community centers
include four community centers that we sold to Galileo America in January 2005,
five community centers that we sold during the first quarter of 2005 and one
community center that was sold for a loss during the fourth quarter of 2004.
21
Other Income and Expenses
Interest expense increased $23.9 million primarily due to the debt on the
New 2004 Properties and the PPG Properties, as well as the additional financings
that were obtained on the 2004 Comparable Properties. The increase was offset by
a reduction in interest expense related to the Galileo Transaction as well as
normal principal amortization.
The gain on sales of real estate assets of $29.3 million in 2004 included
$26.8 million of gain related to the Galileo Transaction and $2.5 million of
gain on sales of seven outparcels at various properties.
Equity in earnings of unconsolidated affiliates increased by $5.4 million
in 2004 as a result of our interest in Galileo America and the opening of
Coastal Grand-Myrtle Beach in March 2004.
We sold two community centers during 2004 for a gain on discontinued
operations of $0.9 million. We sold one community center for a loss of $0.1
million, which was included in loss on impairment of real estate assets. We sold
five community centers in March 2005 for which we recorded an impairment loss of
$0.6 million in 2004. Operating income from discontinued operations decreased in
2004 because the properties were owned for a shorter period of time in 2004 than
in 2003, and because 2003 includes the operations of properties that were sold
during 2003.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2003 TO THE YEAR ENDED DECEMBER 31,
2002
The following significant transactions impacted the consolidated results of
operations for the year ended December 31, 2003, compared to the year ended
December 31, 2002:
|X| The acquisition of six malls and two associated centers and the
opening of one new associated center and two new community
centers during 2003. Additionally, there was a full year of
operations in 2003 for three malls and one associated center that
were acquired during 2002 and one associated center that was
opened in 2002. The properties opened or acquired during 2003 and
2002 are collectively referred to as the "New 2003 Properties"
and are as follows:
Property Location Date Acquired / Opened
- ----------------------------------------------------------------------------------------
Acquisitions:
Richland Mall Waco, TX May 2002
Panama City Mall Panama City, FL May 2002
Westmoreland Mall Greensburg, PA December 2002
Westmoreland Crossing Greensburg, PA December 2002
Sunrise Mall Brownsville, TX April 2003
Sunrise Commons Brownsville, TX April 2003
Cross Creek Mall Fayetteville, NC September 2003
River Ridge Mall Lynchburg, VA October 2003
Valley View Mall Roanoke, VA October 2003
Southpark Mall Colonial Heights, VA December 2003
Harford Mall Bel Air, MD December 2003
Harford Annex Bel Air, MD December 2003
New Developments:
Parkdale Crossing Beaumont, TX November 2002
The Shoppes at Hamilton Place Chattanooga, TN May 2003
Cobblestone Village St. Augustine, FL May 2003
Waterford Commons Waterford, CT September 2003
22
|X| The consolidation of a full year of operations for East Towne
Mall, West Towne Mall and West Towne Crossing (the "Newly
Consolidated Properties") in which we acquired the remaining
ownership interest during December 2002. We had previously owned
a non-controlling interest in these properties and had accounted
for them using the equity method of accounting.
|X| The sale of interests in 41 community centers to Galileo America
in October 2003 ("the Galileo Transaction").
|X| Properties that were in operation for the entire period during
2003 and 2002 are referred to as the "2003 Comparable Properties"
in this section, except for the five community centers located in
Michigan that were sold in March 2005, which are reflected as
discontinued operations as discussed in Note 4 to our
consolidated financial statements.
Revenues
The $80.2 million increase in revenues was primarily attributable to
increases of $44.7 million from the New 2003 Properties, $23.6 million from the
Newly Consolidated Properties and $20.2 million from properties that were in
operation for all of 2003 and 2002, offset by a reduction of $6.7 million from
the Galileo Transaction.
The increase in revenues at properties that were in operation for all of
2003 and 2002 was primarily driven by our ability to maintain high occupancy
levels while achieving increases in rents from both new leases and lease
renewals on comparable spaces. Additionally, our cost recovery ratio improved to
99.2% in 2003 compared to 91.4% in 2002 due primarily to the partial recovery of
certain capital expenditures incurred in connection with the significant number
of mall renovations completed during the past three years.
Management, leasing and development fees decreased $1.6 million because of
a reduction in fees related to the Newly Consolidated Properties.
Operating Expenses
Property operating expenses (including real estate taxes and maintenance
and repairs) increased $19.7 million due to increases of $15.6 million from the
New 2003 Properties and $7.0 million from the Newly Consolidated Properties,
offset by a reduction of $2.9 million from the Galileo Transaction.
The $19.4 million increase in depreciation and amortization expense
resulted from increases of $9.2 million from the New 2003 Properties, $4.2
million from the Newly Consolidated Properties and $7.0 million from the
comparable centers, which is primarily attributable to the 16 property
renovations and expansions that were completed during 2003 and 2002. These
increases were offset by a reduction of $1.0 million from the Galileo
Transaction.
General and administrative expenses increased $7.1 million because we had a
lower level of development activity in 2003 than in 2002. As a result, we
capitalized less in salaries of leasing and development personnel, which
resulted in higher compensation expense. There were also additional salaries and
benefits for the personnel added to manage the properties acquired during 2003
and 2002 combined with annual compensation increases for existing personnel.
Other Income and Expenses
Interest expense increased $10.4 million due to the debt on the New 2003
Properties and the Newly Consolidated Properties. We also refinanced $196.0
million of short-term, variable-rate debt with fixed-rate, non-recourse
long-term debt with a higher interest rate. The increase was offset somewhat by
a reduction in debt related to the Galileo Transaction and normal principal
amortization. While converting to fixed-rate debt is dilutive in the short-term,
it is consistent with our strategy of minimizing exposure to variable-rate debt
when we can obtain fixed-rate debt on terms that are deemed favorable for the
long-term.
23
The net gain on sales of real estate assets of $77.8 million in 2003 was
primarily attributable to the $71.9 million gain recognized on the Galileo
Transaction. The remaining $5.9 million of gain was related to gains on sales of
20 outparcels at various properties and sales of two options on potential
development sites.
Equity in earnings of unconsolidated affiliates decreased by $3.3 million
in 2003 as a result of the Newly Consolidated Properties no longer being
accounted for using the equity method.
We sold six community centers during 2003 for a gain on discontinued
operations of $4.0 million. Operating income from discontinued operations
decreased in 2003 because the properties were owned for a shorter period of time
in 2003 than in 2002, and because 2002 includes the operations of properties
that were sold during 2002.
Operational Review
The shopping center business is, to some extent, seasonal in nature with
tenants achieving the highest levels of sales during the fourth quarter because
of the holiday season. Additionally, the malls earn most of their short-term
rents 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.
We classify our regional malls into two categories - malls that have
completed their initial lease-up are referred to as "stabilized malls" and malls
that are in their initial lease-up phase are referred to as "non-stabilized
malls". The non-stabilized malls currently include The Lakes Mall in Muskegon,
MI, which opened in August 2001; Parkway Place in Huntsville, AL, which opened
in October 2002; and Coastal Grand-Myrtle Beach in Myrtle Beach, SC, which
opened in March 2004.
We derive a significant amount of our revenues from the mall properties.
The sources of our revenues by property type were as follows:
Year Ended December 31,
---------------------------------
2004 2003
----------------- ---------------
Malls 90.4% 87.3%
Associated centers 4.1% 3.8%
Community centers 2.0% 7.4%
Mortgages, office building and other 3.5% 1.5%
Sales and Occupancy Costs
Mall store sales (for those tenants who occupy 10,000 square feet or less
and have reported sales) in the stabilized malls increased by 2.8% on a
comparable per square foot basis to $314 per square foot for 2004 compared with
$305 per square foot for 2003.
Occupancy costs as a percentage of sales for the stabilized malls were
12.0% and 12.2% for 2004 and 2003, respectively.
Occupancy
Total portfolio occupancy increased 90 basis points to 94.0%. Since June
2003, we experienced 118 store closings, totaling approximately 457,000 square
feet and representing approximately $8.1 million in annual minimum base rent. As
of December 31, 2004, we had re-leased approximately 217,000 square feet of this
space at rents per square foot that are 3.5% higher than the previous rent and
at comparable rents based on total annual base rent. Our portfolio occupancy is
summarized in the following table:
24
December 31,
---------------------------------
2004 2003
----------------- ---------------
Total portfolio 94.0% 93.1%
Total mall portfolio 94.3% 94.2%
Stabilized malls 94.4% 94.4%
Non-stabilized malls 92.8% 87.7%
Associated centers 91.8% 88.4%
Community centers (1) 94.0% 89.6%
<FN>
(1) Excludes the community centers that were sold in Phases I and II of
the Galileo Transaction
</FN>
Leasing
Average annual base rents per square foot were as follows for each property
type:
December 31,
------------------------------------
2004 2003
----------------- ------------------
Stabilized malls $25.60 $25.03
Non-stabilized malls 26.33 25.82
Associated centers 9.77 9.90
Community centers (1) 8.12 8.29
<FN>
(1) Excludes the community centers that were sold in Phases I and II of
the Galileo Transaction.
</FN>
During 2004, we achieved positive results from new and renewal leasing of
comparable small shop space during 2004 for spaces that were previously occupied
as summarized in the following table:
New
Prior New PSF Base
Square PSF PSF Base % Change Rent - % Change
Feet Base Rent Rent - Initial Initial Average Average
----------- ------------- ------------------------- ------------ ---------
Stabilized malls 1,982,406 $25.13 $25.40 1.1% $25.95 3.3%
Associated centers 46,805 13.03 12.98 (0.4)% 13.03 0.00%
Community centers (1) 53,330 10.16 10.77 6.0% 10.82 6.5%
----------- ------------- ------------------------- ------------ ---------
TOTAL 2,082,541 $24.47 $24.78 1.1% $25.27 3.3%
<FN>
(1) Excludes the community centers that were sold in Phases I and II of
the Galileo Transaction.
</FN>
Liquidity and Capital Resources
There was $25.8 million of unrestricted cash and cash equivalents as of
December 31, 2004, an increase of $5.4 million from December 31, 2003. Cash
flows from operations are used to fund short-term liquidity and capital needs
such as tenant construction allowances, capital expenditures and payments of
dividends and distributions. For longer-term liquidity needs such as
acquisitions, new developments, renovations and expansions, we typically rely on
property specific mortgages (which are generally non-recourse), construction and
term loans, revolving lines of credit, common stock, preferred stock, joint
venture investments and a minority interest in the Operating Partnership.
Cash provided by operating activities increased $64.8 million to $339.2
million for the year ended December 31, 2004. The increase was primarily
attributable to the operations of the New 2004 Properties and improved results
at the 2004 Comparable Properties.
Debt
The following tables summarize debt based on our pro rata ownership share,
including our pro rata share of unconsolidated affiliates and excluding minority
investors' share of consolidated properties, because we believe this provides
investors a clearer understanding of our total debt obligations and liquidity
(in thousands):
25
Weighted
Average
Minority Unconsolidated Interest
Consolidated Interests Affiliates Total Rate(1)
-------------- ---------------- ----------------- --------------- ---------------
December 31, 2004:
Fixed-rate debt:
Non-recourse loans on operating properties $ 2,688,186 $(52,914) $ 104,114 $2,739,386 6.35%
-------------- ---------------- ----------------- --------------- ---------------
Variable-rate debt:
Recourse term loans on operating properties 207,500 -- 29,415 236,915 3.40%
Construction loans 14,593 -- 39,493 54,086 4.05%
Lines of credit 461,400 -- -- 461,400 3.37%
-------------- ---------------- ----------------- --------------- ---------------
Total variable-rate debt 683,493 -- 68,908 752,401 3.44%
-------------- ---------------- ----------------- --------------- ---------------
Total $ 3,371,679 $ (52,914) $ 173,022 $3,491,787 5.72%
============== ================ ================= =============== ===============
December 31, 2003:
Fixed-rate debt:
Non-recourse loans on operating properties $2,256,544 $ (19,577) $ 57,985 $2,294,952 6.64%
-------------- ---------------- ----------------- --------------- ---------------
Variable-rate debt:
Recourse term loans on operating properties 105,558 -- 30,335 135,893 2.73%
Construction loans -- -- 46,801 46,801 2.94%
Lines of credit 376,000 -- -- 376,000 2.23%
-------------- ---------------- ----------------- --------------- ---------------
Total variable-rate debt 481,558 -- 77,136 558,694 2.39%
-------------- ---------------- ----------------- --------------- ---------------
Total $2,738,102 $ (19,577) $ 135,121 $2,853,646 5.81%
============== ================ ================= =============== ===============
<FN>
(1) Weighted average interest rate including the effect of debt premiums,
but excluding amortization of deferred financing costs.
</FN>
In August 2004, we entered into a new $400.0 million unsecured credit
facility, which bears interest at LIBOR plus a margin of 100 to 145 basis points
based on our leverage, as defined in the agreement. The credit facility matures
in August 2006 and we have three one-year extension options. We used borrowings
on the credit facility to repay all of the outstanding borrowings under our
previous $130.0 million unsecured credit facility, which had an interest rate of
LIBOR plus 1.30% and was scheduled to mature in September 2004. At December 31,
2004, total outstanding borrowings of $39.9 million under the new credit
facility had a weighted average interest rate of 3.54%.
We currently have four secured lines of credit with total availability of
$483.0 million that are used for construction, acquisition and working capital
purposes. Each of these lines is secured by mortgages on certain of our
operating properties. There were total borrowings of $421.5 million outstanding
at a weighted average interest rate of 3.36% as of December 31, 2004.
We also have secured lines of credit with total availability of $27.1
million that can only be used to issue letters of credit. There was $12.3
million outstanding under these lines at December 31, 2004.
We obtained a $57.3 million, nonrecourse loan secured by Eastgate Mall in
Cincinnati, OH that bears interest at 4.55% and matures in December 2009.
We assumed $304.6 million of debt and obtained an additional $272.6 million
of debt to fund the acquisitions completed during 2004. The assumed loans bear
interest at stated fixed rates ranging from 5.73% to 8.69% and mature at various
dates from March 2009 to December 2014. Since the stated interest rates on the
fixed-rate loans were above market rates for similar debt instruments as of the
respective dates of acquisition, debt premiums of $19.5 million were recorded to
reflect the assumed debt at estimated fair values. Including the effect of the
related debt premiums, the effective interest rates on the assumed loans range
from 4.75% to 5.50%. The additional loans include $159.2 million of loans that
bear interest at LIBOR plus 100 basis points and mature in April 2006 and May
2006, and a fixed-rate, interest-only, nonrecourse loan of $113.4 million that
bears interest at 5.04% and matures in December 2014.
The secured and unsecured credit facilities contain, among other
restrictions, certain financial covenants including the maintenance of certain
coverage ratios, minimum net worth requirements, and limitations on cash flow
distributions. We were in compliance with all financial covenants and
restrictions under our credit facilities at December 31, 2004. Additionally,
certain property-specific mortgage notes payable require the maintenance of debt
26
service coverage ratios on their respective properties. At December 31, 2004,
the properties subject to these mortgage notes payable were in compliance with
the applicable ratios.
We expect to refinance the majority of mortgage and other notes payable
maturing over the next five years with replacement loans. Based on our pro rata
share of total debt, there is $67.7 million of debt that is scheduled to mature
in 2005. There are extension options in place to extend the maturity of $30.0
million of this debt to 2006. We repaid $10.6 million of these loans subsequent
to December 31, 2004, and expect to repay the remaining $27.1 million of
maturing loans.
Equity
On December 13, 2004, we issued 7,000,000 depositary shares in a public
offering, each representing one-tenth of a share of 7.375% Series D Cumulative
Redeemable Preferred Stock (the "Series D Preferred Stock") with a liquidation
preference of $250.00 per share ($25.00 per depositary share). The dividends on
the Series D Preferred Stock are cumulative, accrue from the date of issuance
and are payable quarterly in arrears at a rate of $18.4375 per share ($1.84375
per depositary share) per annum. The Series D Preferred Stock has no stated
maturity, is not subject to any sinking fund or mandatory redemption, and is not
redeemable before December 13, 2009. The net proceeds of $169.3 million were
used to reduce outstanding borrowings on our credit facilities.
We received $15.8 million in proceeds from issuances of common stock during
2004 from exercises of employee stock options, our dividend reinvestment plan
and our employee stock purchase plan.
During 2004, we paid dividends of $106.9 million to holders of our common
stock and our preferred stock, as well as $78.5 million in distributions to the
minority interest investors in our Operating Partnership and certain shopping
center properties.
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 preferred stock, common
stock and warrants to purchase shares of common stock with an aggregate public
offering price up to $562.0 million, of which $272.0 million remains after the
Series D Preferred Stock offering.
We anticipate that the combination of equity and debt sources will, for the
foreseeable future, provide adequate liquidity 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 our equity, our
debt-to-total-market capitalization (debt plus market-value equity) ratio was as
follows at December 31, 2004 (in thousands, except stock prices):
Shares
Outstanding Stock Price (1) Value
------------------ ----------------- -----------------
Common stock and operating partnership units 113,928 $38.175 $4,349,201
8.75% Series B Cumulative Redeemable Preferred Stock 2,000 50.00 100,000
7.75% Series C Cumulative Redeemable Preferred Stock 460 250.00 115,000
7.375% Series D Cumulative Redeemable Preferred
Stock 700 250.00 175,000
-----------------
Total market equity 4,739,201
Our share of total debt 3,491,787
-----------------
Total market capitalization $8,230,988
=================
Debt-to-total-market capitalization ratio 42.4%
=================
<FN>
(1) The number of shares of common stock and operating partnership units
outstanding reflects the effect of the two-for-one stock split that
occurred on June 15, 2005, which is discussed in Note 1 to our
consolidated financial statements. The stock price for common stock
and operating partnership units equals the closing price of our common
stock on December 31, 2004 as adjusted for the two-for-one stock split
that occurred on June 15, 2005. The stock price for the preferred
stock represents the liquidation preference of each respective series
of preferred stock.
</FN>
27
Contractual Obligations
The following table summarizes our significant contractual obligations as
of December 31, 2004 (dollars in thousands):
Payments Due By Period
-----------------------------------------------------------------
Less Than 1 - 3 3 - 5 More Than
Total 1 Year Years Years 5 Years
------------- ------------ ------------ ----------- -------------
Long-term debt:
Total consolidated debt service (1) $4,230,608 $323,641 $1,347,226 $1,039,637 $1,520,104
Minority investors' share in shopping center properties (74,803) (4,886) (15,194) (16,198) (38,525)
Our share of unconsolidated affiliates debt service (2) 188,465 13,466 64,838 31,960 78,201
------------- ------------ ------------ ----------- -------------
Our share of total debt service obligations 4,344,270 332,221 1,396,870 1,055,399 1,559,780
------------- ------------ ------------ ----------- -------------
Operating leases: (3)
Ground leases on consolidated properties 40,002 1,320 2,674 2,695 33,313
Minority investors' share in shopping center properties (423) (31) (65) (71) (256)
Our share of ground leases on unconsolidated affiliates 5,295 64 128 129 4,974
------------- ------------ ------------ ----------- -------------
Our share of total ground lease obligations 44,874 1,353 2,737 2,753 38,031
------------- ------------ ------------ ----------- -------------
Purchase obligations: (4)
Construction contracts on consolidated properties 34,145 34,145 - - -
Minority investors' share in shopping center properties (60) (60) - - -
Our share of construction contracts of unconsolidated affiliates 7,631 7,631 - - -
------------- ------------ ------------ ----------- -------------
Our share of total construction contracts 41,716 41,716 - - -
------------- ------------ ------------ ----------- -------------
Other long-term liabilities:
Master lease obligation to Galileo America (5) 3,789 883 1,159 778 969
------------- ------------ ------------ ----------- -------------
Total contractual obligations $4,434,649 $376,173 $1,400,766 $1,058,930 $1,598,780
============= ============ ============ =========== =============
<FN>
(1) Represents principal and interest payments due under terms of mortgage
and other notes payable and includes $683,493 of variable-rate debt on
six operating properties, four secured credit facilities and one
unsecured credit facility. The variable-rate loans on the six
operating properties call for payments of interest only with the total
principal due at maturity. The credit facilities do not require
scheduled principal payments. The future contractual obligations for
all variable-rate indebtedness reflect payments of interest only
throughout the term of the debt with the total outstanding principal
at December 31, 2004 due at maturity. The future interest payments are
projected based on the interest rates that were in effect at December
31, 2004. See Note 6 to the consolidated financial statements for
additional information regarding the terms of long-term debt.
(2) Includes $68,908 of variable-rate indebtedness. Future contractual
obligations have been projected using the same assumptions as used in
(1) above.
(3) Obligations where we own the buildings and improvements, but lease the
underlying land under long-term ground leases. The maturities of these
leases range from 2006 to 2091 and generally provide for renewal
options. Renewal options have not been included in the future
contractual obligations.
(4) Represents the remaining balance to be incurred under construction
contracts that had been entered into as of December 31, 2004, but were
not complete. The contracts are primarily for development, renovation
and expansion of properties.
(5) See Note 5 to the consolidated financial statements for a description
of the master lease obligation to Galileo America. The future
contractual obligations shown above only include the remaining
obligation that was recorded in the consolidated balance sheet at
December 31, 2004.
</FN>
Capital Expenditures
We expect to 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 we can
achieve satisfactory returns on our investments.
An annual capital expenditures budget is prepared for each property that is
intended to provide for all necessary recurring and non-recurring capital
expenditures. We believe that property operating cash flows, which include
reimbursements from tenants for certain expenses, will provide the necessary
funding for these expenditures.
28
Developments and Expansions
The following is a summary of the projects currently under construction
(dollars in thousands):
Our
Share of
Gross Our Cost As of Scheduled
Leasable Share of December 31, Opening
Property Location Area Total Cost 2004 Date
- -----------------------------------------------------------------------------------------------------------------------
New Mall Developments:
Imperial Valley Mall (60/40 joint
venture) El Centro, CA 754,000 $ 45,538 $38,536 March 2005
Mall Expansions:
Citadel Mall Charleston, SC 45,000 6,389 156 August 2005
Fayette Mall Lexington, KY 144,000 25,532 4,793 October 2005
Open Air Center:
Southaven Towne Center Southaven, MS 420,000 24,655 19,427 October 2005
Associated Centers:
CoolSprings Crossing - Tweeters Nashville, TN 10,000 1,415 31 March 2005
Hamilton Corner Chattanooga, TN 68,000 5,500 2,472 March 2005
The District at Monroeville Mall Monroeville, PA 75,000 20,588 9,724 April 2005
Coastal Grand Crossing Myrtle Beach, SC 15,000 1,946 -- April 2005
Community Centers:
Cobblestone Village at Royal Palm Royal Palm, FL 225,000 8,784 4,194 June 2005
Chicopee Marketplace Chicopee, MA 156,000 19,743 5,094 August 2005
Fashion Square Orange Park, FL 18,000 2,031 218 July 2005
-----------------------------------------
1,930,000 $ 162,121 $84,645
=========================================
There are construction loans in place for the costs of the new mall and
open-air center developments. The costs of the remaining projects will be funded
with operating cash flows and the credit facilities.
We have entered into a number of option agreements for the development of
future regional malls and community centers. Except for the projects listed in
the above table, we do not have any other material capital commitments.
Acquisitions
We acquired eight malls, two associated centers and a community center
during 2004 for an aggregate purchase price of $950.0 million, including
transaction costs. We paid $587.2 million in cash, assumed $304.6 million of
debt, agreed to pay $12.0 million for land at a future date and issued limited
partnership interests in our Operating Partnership valued at $46.2 million to
fund these acquisitions. The cash portions of the purchase prices were funded
with borrowings under our credit facilities and the three new loans totaling
$272.6 million. These acquisitions are expected to generate an initial
weighted-average, unleveraged return of 7.68%.
Dispositions
During 2004, we generated aggregate net proceeds of $113.6 million from the
Galileo Transaction, the sales of four community centers and one community
center expansion and the sales of nine outparcels. The net proceeds were used to
reduce borrowings under our credit facilities. In January 2005, we sold two
power centers, one community center and a community center expansion to Galileo
America. The net proceeds of $42.5 million were used to reduce outstanding
balances under our lines of credit.
In March 2005, we sold five community centers for an aggregate sales price
of $12.1 million. We recognized an aggregate loss on impairment of real estate
assets of $0.6 million on these community centers in December 2004 and
recognized an additional loss on impairment of less than $0.1 million during the
three months ended March 31, 2005
29
Other Capital Expenditures
Including our share of unconsolidated affiliates' capital expenditures, we
spent $37.4 million in 2004 for tenant allowances, which generate increased
rents from tenants over the terms of their leases. Deferred maintenance
expenditures were $17.5 million for 2004 and included $6.0 million for
resurfacing and improved lighting of parking lots, $5.1 million for roof repairs
and replacements and $6.4 million for various other expenditures. Renovation
expenditures were $21.1 million in 2004.
Deferred maintenance expenditures are billed to tenants as common area
maintenance expense, and most are recovered over a 5- to 15-year period.
Renovation expenditures are primarily for remodeling and upgrades of malls, of
which approximately 30% is recovered from tenants over a 5- to 15-year period.
We expect to renovate two malls during 2005 at a total estimated cost of
$28.0 million, which will be funded from operating cash flows and availability
under our credit facilities. One of the renovation projects will be completed in
2005 and the other will be completed in 2006.
Off-Balance Sheet Arrangements
Unconsolidated Affiliates
We have ownership interests in nine unconsolidated affiliates that are
described in Note 5 to the consolidated financial statements. The unconsolidated
affiliates are accounted for using the equity method of accounting and are
reflected in the consolidated balance sheets as "Investments in Unconsolidated
Affiliates." The following are circumstances when we may consider entering into
a joint venture with a third party:
|X| Third parties may approach us with opportunities where they have
obtained land and performed some pre-development activities, but they
may not have sufficient access to the capital resources or the
development and leasing expertise to bring the project to fruition. We
enter into such arrangements when we determine such a project is
viable and we can achieve a satisfactory return on our investment. We
typically earn development fees from the joint venture and provide
management and leasing services to the property once it is placed in
operation.
|X| We determine that we may have the opportunity to capitalize on the
value we have created in a property by selling an interest in the
property to a third party. This provides us with an additional source
of capital that can be used to develop or acquire additional real
estate assets that we believe will provide greater potential for
growth. When we retain an interest in an asset rather than selling a
100% interest, it is typically because this allows us to continue to
manage the property, which provides us the ability to earn fees for
management, leasing, development, financing and acquisition services
provided to the joint venture.
Guarantees
We have guaranteed 100% of the debt to be incurred to develop the property
owned by Imperial Valley Mall L.P. and 50% of the debt of Parkway Place L.P. We
have issued these guarantees primarily because it allows the joint ventures to
obtain funding at a lower cost than could be obtained otherwise. This results in
a higher return for the joint venture on its investment, and in a higher return
on our investment in the joint venture. We may receive a fee from the joint
venture for providing the guaranty. Additionally, when we are required to
perform under a guaranty, the terms of the guaranty typically provide that the
joint venture partners' interests in the joint venture is assigned to us, to the
extent of our guaranty.
30
We had guaranteed the debt incurred to develop the property owned by Mall
of South Carolina L.P. and had received a fee for the guaranty. This debt was
refinanced during 2004 by Mall of South Carolina L.P. and, as a result, the
guaranty was terminated. We recognized revenues of $0.5 million and $0.2 million
related to this guaranty during 2004 and 2003, respectively.
The Company's guarantees and the related accounting are more fully
described in Note 17 to the consolidated financial statements.
Critical Accounting Policies
Our significant accounting policies are disclosed in Note 2 to the
consolidated financial statements. The following discussion describes our most
critical accounting policies, which are those that are both important to the
presentation of our financial condition and results of operations and that
require significant judgment or use of complex estimates.
Revenue Recognition
Minimum rental revenue from operating leases is recognized on a
straight-line basis over the initial terms of the related leases. Certain
tenants are required to pay percentage rent if their sales volumes exceed
thresholds specified in their lease agreements. Percentage rent is recognized as
revenue when the thresholds are achieved and the amounts become determinable.
We receive reimbursements from tenants for real estate taxes, insurance,
common area maintenance, and other recoverable operating expenses as provided in
the lease agreements. Tenant reimbursements are recognized as revenue in the
period the related operating expenses are incurred. Tenant reimbursements
related to certain capital expenditures are billed to tenants over periods of 5
to 15 years and are recognized as revenue when billed.
We receive management, leasing and development fees from third parties and
unconsolidated affiliates. Management fees are charged as a percentage of
revenues (as defined in the management agreement) and are recognized as revenue
when earned. Development fees are recognized as revenue on a pro rata basis over
the development period. Leasing fees are charged for newly executed leases and
lease renewals and are recognized as revenue when earned. Development and
leasing fees received from unconsolidated affiliates during the development
period are recognized as revenue to the extent of the third-party partners'
ownership interest. Fees to the extent of our ownership interest are recorded as
a reduction to our investment in the unconsolidated affiliate.
Gains on sales of real estate assets are recognized when it is determined
that the sale has been consummated, the buyer's initial and continuing
investment is adequate, our receivable, if any, is not subject to future
subordination, and the buyer has assumed the usual risks and rewards of
ownership of the asset. When we have an ownership interest in the buyer, gain is
recognized to the extent of the third party partner's ownership interest and the
portion of the gain attributable to our ownership interest is deferred.
Real Estate Assets
We capitalize predevelopment project costs paid to third parties. 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, all direct costs incurred to construct the project, including
interest and real estate taxes, are capitalized. Additionally, certain general
and administrative expenses are allocated to the projects and capitalized based
on the amount of time applicable personnel work on the development project.
Ordinary repairs and maintenance are expensed as incurred. Major replacements
and improvements are capitalized and depreciated over their estimated useful
lives.
31
All acquired real estate assets are accounted for using the purchase method
of accounting and accordingly, the results of operations are included in the
consolidated statements of operations from the respective dates of acquisition.
The purchase price is allocated to (i) tangible assets, consisting of land,
buildings and improvements, and tenant improvements and (ii) identifiable
intangible assets generally consisting of above- and below-market leases and
in-place leases. We use estimates of fair value based on estimated cash flows,
using appropriate discount rates, and other valuation methods to allocate the
purchase price to the acquired tangible and intangible assets. Liabilities
assumed generally consist of mortgage debt on the real estate assets acquired.
Assumed debt with a stated interest rate that is significantly different from
market interest rates is recorded at its fair value based on estimated market
interest rates at the date of acquisition.
Depreciation is computed on a straight-line basis over estimated lives of
40 years for buildings, 10 to 20 years for certain improvements and 7 to 10
years for equipment and fixtures. Tenant improvements are capitalized and
depreciated on a straight-line basis over the term of the related lease.
Lease-related intangibles from acquisitions of real estate assets are amortized
over the remaining terms of the related leases. The amortization of above- and
below-market leases is recorded as an adjustment to minimum rental revenue,
while the amortization of all other lease-related intangibles is recorded as
amortization expense. Any difference between the face value of the debt assumed
and its fair value is amortized to interest expense over the remaining term of
the debt using the effective interest method.
Carrying Value of Long-Lived Assets
We periodically evaluate long-lived assets to determine if there has been
any impairment in their carrying values and record impairment losses if the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amounts or if there are other indicators of impairment. If
it is determined that an impairment has occurred, the excess of the asset's
carrying value over its estimated fair value is charged to operations. We
recorded losses on the impairment of real estate assets of $3,080 in 2004, which
are discussed in Note 2 to the consolidated financial statements. There were no
impairment charges in 2003 and 2002.
Recent Accounting Pronouncements
Effective January 1, 2004, we adopted the provisions of Financial
Accounting Standards Board ("FASB") Interpretation ("FIN") No. 46(R),
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51."
The interpretation requires the consolidation of entities in which an enterprise
absorbs a majority of the entity's expected losses, receives a majority of the
entity's expected residual returns, or both, as a result of ownership,
contractual or other financial interests in the entity. We determined that one
unconsolidated affiliate, PPG Venture I Limited Partnership ("PPG"), is a
variable interest entity and that we are the primary beneficiary. We began
consolidating the assets, liabilities and results of operations of PPG effective
January 1, 2004. We initially measured the assets, liabilities and
noncontrolling interest of PPG at the carrying amounts at which they would have
been carried in the consolidated financial statements as if FIN 46(R) had been
effective when we first met the conditions to be the primary beneficiary, which
was the inception of PPG. We own a 10% interest in PPG, which owns one
associated center and two community centers.
In May 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity," which specifies that
instruments within its scope are obligations of the issuer and, therefore, the
issuer must classify them as liabilities. Financial instruments within the scope
of the pronouncement include mandatorily redeemable financial instruments,
obligations to repurchase the issuer's equity shares by transferring assets, and
certain obligations to issue a variable number of shares. SFAS No. 150 is
effective for all financial instruments entered into or modified after May 31,
2003. However, on October 29, 2003, the FASB indefinitely deferred the
provisions of paragraphs 9 and 10 of SFAS No. 150 related to noncontrolling
interests in limited-life subsidiaries. During 2004, the joint venture
agreements with minority interest partners were amended so that they no longer
have a limited life.
32
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB No. 29, Accounting for Nonmonetary Transactions."
SFAS No. 153 requires exchanges of productive assets to be accounted for at fair
value, rather than at carryover basis, unless (1) neither the asset received nor
the asset surrendered has a fair value that is determinable within reasonable
limits or (2) the transactions lack commercial substance. SFAS No. 153 is
effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. We do not expect the adoption of this standard to have a
material effect on our financial position or results of operations.
In December 2004, the FASB released its final revised standard, SFAS No.
123 (Revised 2004), "Share-Based Payment." SFAS No. 123(R) requires that a
public entity measure the cost of equity based service awards based on the
grant-date fair value of the award. That cost will be recognized over the period
during which an employee is required to provide service in exchange for the
award or the vesting period. No compensation cost is recognized for equity
instruments for which employees do not render the requisite service. Adoption of
SFAS No. 123(R) is required for fiscal periods beginning after June 15, 2005. We
previously adopted the fair value provisions of SFAS No. 123, "Accounting for
Stock Based Compensation", as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB
Statement No. 123" effective January 1, 2003. We do not expect the adoption of
this standard to have a material effect on our financial position or results of
operations.
Impact of Inflation
In the last three years, inflation has not had a significant impact on our
operations 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 rent based on tenants' 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 10 years which may provide us the opportunity to replace existing
leases with new leases at higher base and/or percentage rent 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, which reduces our exposure to
increases in costs and operating expenses resulting from inflation.
Funds From Operations
Funds From Operations ("FFO") is a widely used measure of the operating
performance of real estate companies that supplements net income determined in
accordance with generally accepted accounting principles ("GAAP"). The National
Association of Real Estate Investment Trusts ("NAREIT") defines FFO as net
income (computed in accordance with GAAP) excluding gains or losses on sales of
operating properties, plus depreciation and amortization, and after adjustments
for unconsolidated partnerships and joint ventures. Adjustments for
unconsolidated partnerships and joint ventures are calculated on the same basis.
We compute FFO as defined above by NAREIT less dividends on preferred stock. Our
method of calculating FFO may be different from methods used by other REITs and,
accordingly, may not be comparable to such other REITs.
We believe that FFO provides an additional indicator of the operating
performance of our properties without giving effect to real estate depreciation
and amortization, which assumes the value of real estate assets declines
predictably over time. Since values of well-maintained real estate assets have
historically risen with market conditions, we believe that FFO enhances
investors' understanding of our operating performance. The use of FFO as an
indicator of financial performance is influenced not only by the operations of
our properties and interest rates, but also by our capital structure.
FFO does not represent cash flows from operations as defined by accounting
principles generally accepted in the United States, is not necessarily
indicative of cash available to fund all cash flow needs and should not be
considered as an alternative to net income for purposes of evaluating our
operating performance or to cash flow as a measure of liquidity.
33
FFO increased 14.3% in 2004 to $310.4 million compared to $271.6 million in
2003. The New 2004 Properties generated 69% of the growth in FFO. Consistently
high portfolio occupancy, increases in rental rates from new and renewal leasing
and increased recoveries of operating expenses primarily accounted for the
remaining 31% growth in FFO.
The calculation of FFO is as follows (in thousands):
Year Ended December 31,
------------------------------------------------------------------
2004 2003 2002
------------------------------------------------------------------
Net income available to common shareholders $ 102,802 $ 124,506 $ 73,987
Add:
Depreciation and amortization from consolidated properties 142,043 112,857 93,589
Depreciation and amortization from unconsolidated affiliates 6,144 4,307 4,490
Depreciation and amortization from discontinued operations 587 934 1,370
Minority interest in earnings of operating partnership 85,186 106,532 64,251
Less:
Gains on sales of operating real estate assets (23,696) (71,886) -
Minority investors' share of depreciation and amortization (1,230) (1,111) (1,348)
Gain on discontinued operations (845) (4,042) (372)
Depreciation and amortization of non-real estate assets (586) (508) (493)
------------- ------------- ------------
Funds from operations $ 310,405 $ 271,589 $ 235,474
============= ============= ===========
FFO applicable to our shareholders $ 169,725 $ 146,552 $ 126,127
============= ============= ===========
SUPPLEMENTAL FFO INFORMATION:
Lease termination fees $ 3,864 $ 4,552 $ 5,888
Straight-line rental income $ 2,688 $ 3,908 $ 4,348
Gains on outparcel sales $ 3,449 $ 6,195 $ 2,483
Amortization of acquired above- and below-market leases $ 3,656 $ 332 $ -
Amortization of debt premiums $ 5,418 $ 646 $ -
Gain on sales of nonoperating properties $ 4,285 $ - $ -
Loss on impairment of real estate assets $ (3,080) $ - $ -
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the Index to Financial statements contained in
Item 15 on page 36.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(1) Financial Statements Page Number
Report of Management on Internal Control Over Financial
Reporting 37
Report Of Independent Registered Public Accounting Firm 39
CBL & Associates Properties, Inc. Consolidated Balance
Sheets as of December 31, 2004 and 2003 40
34
CBL & Associates Properties, Inc. Consolidated
Statements of Operations for the Years Ended
December 31, 2004, 2003 and 2002 41
CBL & Associates Properties, Inc. Consolidated
Statements of Shareholders' Equity for the Years Ended
December 31, 2004, 2003 and 2002 42
CBL & Associates Properties, Inc. Consolidated
Statements of Cash Flows for the Years Ended
December 31, 2004, 2003 and 2002 43
Notes to Consolidated Financial Statements 44
35
INDEX TO FINANCIAL STATEMENTS
Report of Management on Internal Control Over Financial Reporting 37
Report Of Independent Registered Public Accounting Firm 39
CBL & Associates Properties, Inc. Consolidated Balance Sheets
as of December 31, 2004 and 2003 40
CBL & Associates Properties, Inc. Consolidated Statements of
Operations for the Years Ended December 31, 2004, 2003
and 2002 41
CBL & Associates Properties, Inc. Consolidated Statements of
Shareholders' Equity for the Years Ended December 31, 2004,
2003 and 2002 42
CBL & Associates Properties, Inc. Consolidated Statements of
Cash Flows for the Years Ended December 31, 2004, 2003
and 2002 43
Notes to Consolidated Financial Statements 44
36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
CBL & Associates Properties, Inc.:
We have audited management's assessment, included in the Report of
Management on Internal Control over Financial Reporting (that was included in
CBL & Associates Properties, Inc. Form 10-K for the year ended December 31,
2004), that CBL & Associates Properties, Inc. and subsidiaries (the "Company")
maintained effective internal control over financial reporting as of December
31, 2004, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process designed
by, or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment (not presented herein) that the
Company maintained effective internal control over financial reporting as of
December 31, 2004, is fairly stated, in all material respects, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Also in our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2004, based on the criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
37
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated financial
statements and financial statement schedules as of and for the year ended
December 31, 2004 of the Company and our report dated March 16, 2005, except for
the effect of Note 23 as to which the date is January 9, 2006, expressed an
unqualified opinion on those financial statements and financial statement
schedules.
/s/ DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 16, 2005
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
CBL & Associates Properties, Inc.:
We have audited the accompanying consolidated balance sheets of CBL & Associates
Properties, Inc. and subsidiaries (the "Company") as of December 31, 2004 and
2003, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 2004. Our audits also included the financial statement schedules (that were
included in CBL & Associates Properties, Inc. Form 10-K for the year ended
December 31, 2004). These financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements and financial statement schedules
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of CBL and Associates Properties, Inc.
and subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 16, 2005 expressed an unqualified opinion on management's assessment
of the effectiveness of the Company's internal control over financial reporting
and an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 16, 2005, except for the effect of Note 23 as to which the date is January
9, 2006
39
CBL & Associates Properties, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
December 31,
---------------------------------------
ASSETS 2004 2003
---------------------------------------
Real estate assets:
Land $ 659,782 $ 578,310
Buildings and improvements 4,670,462 3,678,074
---------------------------------------
5,330,244 4,256,384
Accumulated depreciation (575,464) (467,614)
---------------------------------------
4,754,780 3,788,770
Real estate assets held for sale 61,607 64,354
Developments in progress 78,393 59,096
---------------------------------------
Net investment in real estate assets 4,894,780 3,912,220
Cash and cash equivalents 25,766 20,332
Cash in escrow - 78,476
Receivables:
Tenant, net of allowance for doubtful accounts
of $3,237 in 2004 and 2003 38,409 42,165
Other 13,706 3,033
Mortgage notes receivable 27,804 36,169
Investments in unconsolidated affiliates 84,782 96,450
Other assets 119,253 75,465
---------------------------------------
$5,204,500 $4,264,310
=======================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage and other notes payable $3,359,466 $2,709,348
Mortgage notes payable on real estate assets held for sale 12,213 28,754
Accounts payable and accrued liabilities 212,064 161,477
---------------------------------------
Total liabilities 3,583,743 2,899,579
---------------------------------------
Commitments and contingencies (Notes 3, 5 and 17)
Minority interests 566,606 527,431
---------------------------------------
Shareholders' equity:
Preferred stock, $.01 par value, 15,000,000 shares authorized:
8.75% Series B Cumulative Redeemable Preferred Stock, 2,000,000
Shares outstanding in 2004 and 2003 20 20
7.75% Series C Cumulative Redeemable Preferred Stock, 460,000
Shares outstanding in 2004 and 2003 5 5
7.375% Series D Cumulative Redeemable Preferred Stock,
700,000 shares outstanding in 2004 7 -
Common stock, $.01 par value, 180,000,000 shares authorized,
62,667,104 and 60,646,952 shares issued and outstanding
in 2004 and 2003, respectively 627 606
Additional paid-in capital 1,025,478 817,310
Deferred compensation (3,081) (1,607)
Retained earnings 31,095 20,966
---------------------------------------
Total shareholders' equity 1,054,151 837,300
---------------------------------------
$5,204,500 $4,264,310
=======================================
<FN>
The accompanying notes are an integral part of these balance sheets.
</FN>
40
CBL & Associates Properties, Inc.
Consolidated Statements of Operations
(In thousands, except per share amounts)
Year Ended December 31,
----------------------------------------------
2004 2003 2002
----------------------------------------------
REVENUES:
Minimum rents $ 476,578 $ 426,318 $ 379,243
Percentage rents 15,948 12,900 13,320
Other rents 16,102 12,633 11,013
Tenant reimbursements 218,736 192,760 159,407
Management, development and leasing fees 9,791 5,525 7,146
Other 20,098 14,176 14,002
----------------------------------------------
Total revenues 757,253 664,312 584,131
----------------------------------------------
EXPENSES:
Property operating 115,173 102,909 92,454
Depreciation and amortization 142,043 112,857 93,418
Real estate taxes 58,081 51,340 46,831
Maintenance and repairs 43,531 39,596 34,903
General and administrative 35,338 30,395 23,332
Loss on impairment of real estate assets 3,080 - -
Other 16,373 11,489 10,307
----------------------------------------------
Total expenses 413,619 348,586 301,245
----------------------------------------------
Income from operations 343,634 315,726 282,886
Interest income 3,355 2,485 1,853
Interest expense (177,219) (153,321) (142,908)
Loss on extinguishment of debt - (167) (3,872)
Gain on sales of real estate assets 29,272 77,765 2,804
Equity in earnings of unconsolidated affiliates 10,308 4,941 8,215
Minority interest in earnings:
Operating Partnership (85,186) (106,532) (64,251)
Shopping center properties (5,365) (2,758) (3,280)
----------------------------------------------
Income before discontinued operations 118,799 138,139 81,447
Operating income of discontinued operations 1,467 1,958 3,087
Gain on discontinued operations 845 4,042 372
----------------------------------------------
Net income 121,111 144,139 84,906
Preferred dividends (18,309) (19,633) (10,919)
----------------------------------------------
Net income available to common shareholders $ 102,802 $ 124,506 $ 73,987
==============================================
Basic per share data:
Income before discontinued operations, net of preferred
dividends $ 1.63 $ 1.98 $ 1.23
Discontinued operations 0.04 0.10 0.06
----------------------------------------------
Net income available to common shareholders $ 1.67 $ 2.08 $ 1.29
----------------------------------------------
Weighted average common shares outstanding 61,602 59,872 57,380
==============================================
Diluted per share data:
Income before discontinued operations, net of preferred
dividends $ 1.57 $ 1.90 $ 1.19
Discontinued operations 0.04 0.10 0.06
Net income available to common shareholders $ 1.61 $ 2.00 $ 1.25
----------------------------------------------
Weighted average common and potential dilutive
common shares outstanding 64,004 62,386 59,336
==============================================
<FN>
The accompanying notes are an integral part of these statements.
</FN>
41
CBL & Associates Properties, Inc.
Consolidated Statement Of Shareholders' Equity
(In thousands, except share data)
Accumulated Retained
Additional Other Earnings
Preferred Common Paid-in Comprehensive Deferred (Accumulated
Stock Stock Capital Loss Compensation Deficit) Total
--------- ------ ---------- ------------- ----------- ------------ ---------
Balance, December 31, 2001 $ 29 $ 513 $ 556,126 $ (6,784) $ - $(27,796) $ 522,088
Net income - - - - - 84,906 84,906
Gain on current period cash flow hedges - - - 4,387 - - 4,387
---------
Total comprehensive income 89,293
Dividends declared - common stock - - - - - (68,635) (68,635)
Dividends declared - preferred stock - - - - - (10,919) (10,919)
Issuance of 2,000,000 shares of Series B
preferred stock 20 - 96,350 - - - 96,370
Purchase of 200,000 shares of Series A preferred
stock (2) - (5,091) - - - (5,093)
Issuance of 7,048,598 shares of common stock - 70 120,555 - - - 120,625
Exercise of stock options - 4 5,003 - - - 5,007
Accrual under deferred compensation arrangements - - 2,194 - - - 2,194
Conversion of Operating Partnership units into
893,304 shares of common stock - 9 7,154 - - - 7,163
Adjustment for minority interest in Operating
Partnership - - (16,903) - - - (16,903)
--------- ------ ---------- ------------- ----------- ------------ ---------
Balance, December 31, 2002 47 596 765,388 (2,397) - (22,444) 741,190
Net income - - - - - 144,139 144,139
Gain on current period cash flow hedges - - - 2,397 - - 2,397
---------
Total comprehensive income 146,536
Dividends declared - common stock - - - - - (81,096) (81,096)
Dividends declared - preferred stock - - - - - (17,453) (17,453)
Issuance of 460,000 shares of Series C preferred
stock 5 - 111,222 - - - 111,227
Redemption of 2,675,000 shares of Series A -
preferred stock (27) - (64,668) - - (2,180) (66,875)
Issuance of 405,676 shares of common stock - 4 8,753 - (1,855) - 6,902
Exercise of stock options - 6 7,756 - - - 7,762
Accrual under deferred compensation arrangements - - 618 - - - 618
Amortization of deferred compensation - - - - 248 - 248
Adjustment for minority interest in Operating
Partnership - - (11,759) - - - (11,759)
--------- ------ ---------- ------------- ----------- ------------ ---------
Balance, December 31, 2003 25 606 817,310 - (1,607) 20,966 837,300
Net income and total comprehensive income - - - - - 121,111 121,111
Dividends declared - common stock - - - - - (92,678) (92,678)
Dividends declared - preferred stock - - - - - (18,304) (18,304)
Issuance of 700,000 shares of Series D preferred -
stock 7 - 169,326 - - 169,333
Issuance of 169,962 shares of common stock - 2 4,526 - (2,129) - 2,399
Exercise of stock options - 14 15,254 - - - 15,268
Accrual under deferred compensation arrangements - - 776 - - - 776
Amortization of deferred compensation - - - - 655 - 655
Conversion of Operating Partnership units into
525,636 shares of common stock - 5 5,625 - - - 5,630
Adjustment for minority interest in Operating
Partnership - - 12,661 - - - 12,661
--------- ------ ---------- ------------- ----------- ------------ ---------
Balance, December 31, 2004 $32 $627 $1,025,478 $ - $ (3,081) $31,095 $1,054,151
================================================================================
<FN>
The accompanying notes are an integral part of theses statements.
</FN>
42
CBL & Associates Properties, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
--------------------------------------------
2004 2003 2002
--------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $121,111 $144,139 $84,906
Adjustments to reconcile net income to net cash
provided
by operating activities:
Minority interest in earnings 90,551 109,331 67,554
Depreciation 100,667 85,584 74,501
Amortization 49,162 34,301 25,242
Amortization of debt premiums (5,262) (646) -
Loss on extinguishment of debt - 167 3,930
Gain on sales of real estate assets (29,583) (77,775) (2,804)
Gain on discontinued operations (845) (4,042) (372)
Issuance of stock under incentive plan 1,870 1,876 2,578
Accrual of deferred compensation 776 618 2,194
Amortization of deferred compensation 655 248 -
Write-off of development projects 3,714 2,056 236
Loss on impairment of real estate assets 3,080 - -
Net amortization of above and below market leases (3,515) (311) -
Changes in assets and liabilities:
Tenant and other receivables (1,678) (9,773) (1,110)
Other assets (3,413) (12,770) (6,089)
Accounts payable and accrued liabilities 11,907 1,346 23,157
--------------------------------------------
Net cash provided by operating activities 339,197 274,349 273,923
--------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate assets (219,383) (227,362) (176,799)
Acquisitions of real estate assets and other assets (587,163) (273,265) (166,489)
Proceeds from sales of real estate assets 113,565 284,322 84,885
Cash in escrow 78,476 (78,476) -
Additions to mortgage notes receivable (9,225) (10,000) (5,965)
Payments received on mortgage notes receivable 17,590 1,840 2,135
Distributions in excess of equity in earnings of
unconsolidated affiliates 28,908 9,740 5,751
Additional investments in and advances to
unconsolidated affiliates (27,112) (15,855) (15,394)
Additions to other assets (4,307) (3,310) (2,731)
--------------------------------------------
Net cash used in investing activities (608,651) (312,366) (274,607)
--------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage and other notes payable 642,743 572,080 751,881
Principal payments on mortgage and other notes
payable (355,651) (390,115) (815,444)
Additions to deferred financing costs (6,029) (4,830) (5,589)
Proceeds from issuance of common stock 529 5,026 118,047
Proceeds from exercise of stock options 15,268 7,762 5,007
Proceeds from issuance of preferred stock 169,333 111,227 96,370
Redemption of preferred stock - (64,695) -
Purchase of preferred stock - - (5,093)
Purchase of minority interest in the Operating
Partnership (5,949) (21,013) -
Prepayment penalties on extinguishment of debt - - (2,290)
Distributions to minority interests (78,493) (72,186) (65,310)
Dividends paid (106,863) (98,262) (73,677)
--------------------------------------------
Net cash provided by financing activities 274,888 44,994 3,902
--------------------------------------------
Net change in cash and cash equivalents 5,434 6,977 3,218
Cash and cash equivalents, beginning of period 20,332 13,355 10,137
--------------------------------------------
Cash and cash equivalents, end of period $25,766 $20,332 $13,335
============================================
<FN>
The accompanying notes are an integral part of these statements.
</FN>
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
NOTE 1. ORGANIZATION
CBL & Associates Properties, Inc. ("CBL"), a Delaware corporation, is a
self-managed, self-administered, fully integrated real estate investment trust
("REIT") that is engaged in the ownership, development, acquisition, leasing,
management and operation of regional shopping malls and community shopping
centers. CBL's shopping center properties are located primarily in the Southeast
and Midwest, as well as in select markets in other regions of the United States.
CBL conducts substantially all of its business through CBL & Associates
Limited Partnership (the "Operating PartnershAs of December 31, 2004, the
Operating Partnership owned controlling interests in 64 regional malls, 25
associated centers (each located adjacent to a regional mall), 12 community
centers and CBL's corporate office building. The Operating Partnership
consolidates the financial statements of all entities in which it has a
controlling financial interest. The Operating Partnership owned non-controlling
interests in five regional malls, one associated center and 48 community
centers. Because major decisions such as the acquisition, sale or refinancing of
principal partnership or joint venture assets must be approved by one or more of
the other partners, the Operating Partnership does not control these
partnerships and joint ventures and, accordingly, accounts for these investments
using the equity method. The Operating Partnership had one mall, which is owned
in a joint venture, two mall expansions, one open-air shopping center, two
associated centers, one of which is owned in a joint venture, one associated
center expansion, one associated center redevelopment and three community
centers under construction at December 31, 2004. The Operating Partnership also
holds options to acquire certain development properties owned by third parties.
CBL is the 100% owner of two qualified REIT subsidiaries, CBL Holdings I,
Inc. and CBL Holdings II, Inc. At December 31, 2004, CBL Holdings I, Inc., the
sole general partner of the Operating Partnership, owned a 1.6% general
partnership interest in the Operating Partnership and CBL Holdings II, Inc.
owned a 53.4% limited partnership interest for a combined interest held by CBL
of 55.0%.
The minority interest in the Operating Partnership is held primarily by CBL
& Associates, Inc. and its affiliates (collectively "CBL's Predecessor") and by
affiliates of The Richard E. Jacobs Group, Inc. ("Jacobs"). CBL's Predecessor
contributed their interests in certain real estate properties and joint ventures
to the Operating Partnership in exchange for a limited partnership interest when
the Operating Partnership was formed in November 1993. Jacobs contributed their
interests in certain real estate properties and joint ventures to the Operating
Partnership in exchange for a limited partnership interest when the Operating
Partnership acquired the majority of Jacobs' interests in 23 properties in
January 2001 and the balance of such interests in February 2002. At December 31,
2004, CBL's Predecessor owned a 15.4% limited partnership interest, Jacobs owned
a 20.9% limited partnership interest and third parties owned an 8.7% limited
partnership interest in the Operating Partnership. CBL's Predecessor also owned
2.7 million shares of CBL's common stock at December 31, 2004, for a combined
total interest of 20.0% in the Operating Partnership.
The Operating Partnership conducts CBL's property management and
development activities through CBL & Associates Management, Inc. (the
"Management Company") to comply with certain requirements of the Internal
Revenue Code of 1986, as amended (the "Code"). During March 2004, the Operating
Partnership acquired the 94% of the Management Company's common stock that was
owned by individuals who are directors and/or officers of CBL, resulting in the
Operating Partnership owning 100% of the Management Company's common stock. The
Operating Partnership paid $75 for the 94% of common stock acquired, which was
equal to the initial capital contribution of the individuals that owned the
interest. The Operating Partnership continues to own 100% of the Management
Company's preferred stock. As a result, the Operating Partnership continues to
consolidate the Management Company.
44
CBL, the Operating Partnership and the Management Company are collectively
referred to herein as "the Company." All significant intercompany balances and
transactions have been eliminated in the consolidated presentation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Real Estate Assets
The Company capitalizes predevelopment project costs paid to third parties.
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, all direct costs incurred to construct the project, including
interest and real estate taxes, are capitalized. Additionally, certain general
and administrative expenses are allocated to the projects and capitalized based
on the amount of time applicable personnel work on the development project.
Ordinary repairs and maintenance are expensed as incurred. Major replacements
and improvements are capitalized and depreciated over their estimated useful
lives.
All acquired real estate assets have been accounted for using the purchase
method of accounting and accordingly, the results of operations are included in
the consolidated statements of operations from the respective dates of
acquisition. The Company allocates the purchase price to (i) tangible assets,
consisting of land, buildings and improvements, and tenant improvements, and
(ii) identifiable intangible assets, generally consisting of above- and
below-market leases and in-place leases, which are included in other assets in
the consolidated balance sheet. The Company uses estimates of fair value based
on estimated cash flows, using appropriate discount rates, and other valuation
techniques to allocate the purchase price to the acquired tangible and
intangible assets. Liabilities assumed generally consist of mortgage debt on the
real estate assets acquired. Assumed debt with a stated interest rate that is
significantly different from market interest rates for similar debt instruments
is recorded at its fair value based on estimated market interest rates at the
date of acquisition.
Depreciation is computed on a straight-line basis over estimated lives of
40 years for buildings, 10 to 20 years for certain improvements and 7 to 10
years for equipment and fixtures. Tenant improvements are capitalized and
depreciated on a straight-line basis over the term of the related lease.
Lease-related intangibles from acquisitions of real estate assets are amortized
over the remaining terms of the related leases. The amortization of above- and
below-market leases is recorded as an adjustment to minimum rental revenue,
while the amortization of all other lease-related intangibles is recorded as
amortization expense. Any difference between the face value of the debt assumed
and its fair value is amortized to interest expense over the remaining term of
the debt using the effective interest method.
The Company's acquired intangibles and their balance sheet classifications
as of December 31, 2004 and 2003, are summarized as follows:
December 31, 2004 December 31, 2003
------------------------------- ------------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
--------------- ------------- -------------- -------------
Other assets:
Above-market leases $ 12,250 $(1,335) $5,635 $ (270)
In-place leases 53,850 (5,810) 19,945 (686)
Accounts payable and accrued liabilities:
Below-market leases 38,967 (4,870) 12,975 (539)
The total net amortization expense of the above acquired intangibles for
the next five succeeding years will be $1,691 in 2005, $2,645 in 2006, $2,999 in
2007, $3,030 in 2008 and $2,371 in 2009.
Total interest expense capitalized was $4,517, $5,974 and $5,109 in 2004,
2003 and 2002, respectively.
45
Carrying Value of Long-Lived Assets
The Company evaluates the carrying value of long-lived assets to be held
and used when events or changes in circumstances warrant such a review. The
carrying value of a long-lived asset is considered impaired when its estimated
future undiscounted cash flows are less than its carrying value. If it is
determined that an impairment has occurred, the excess of the asset's carrying
value over its estimated fair value is charged to operations.
During 2004, the Company recognized a loss of $114 on the sale of one
community center as a loss on impairment of real estate assets.
During 2004, the Company determined that the carrying value of a vacant
community center exceeded the community center's estimated fair value by $402.
The Company recorded the reduction in the carrying value of the related real
estate assets to their estimated fair value as a loss on impairment of real
estate assets.
Subsequent to December 31, 2004, the Company completed the third phase of
the Galileo America joint venture transaction discussed in Note 5. The Company
recognized a loss of $1,947 on this transaction as an impairment of real estate
assets in 2004 and reduced the carrying value of the related assets, which are
classified as real estate assets held for sale as of December 31, 2004 in the
accompanying consolidated balance sheet.
Subsequent to December 31, 2004, the Company reached a tentative agreement
to sell five of its community centers. As a result, the Company recorded a loss
on impairment of real estate assets of $617 in 2004 to reduce the carrying
values of the five community centers to their respective estimated fair values
based on the expected selling price. Since the Company determined that the
properties were held for sale subsequent to December 31, 2004, the real estate
assets related to these five community centers are reflected as held and used in
the accompanying consolidated balance sheet.
There were no impairment charges in 2003 and 2002.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less as cash equivalents.
Deferred Financing Costs
Net deferred financing costs of $13,509 and $10,808 were included in other
assets at December 31, 2004 and 2003, respectively. Deferred financing costs
include fees and costs incurred to obtain financing and are amortized to
interest expense over the terms of the related notes payable. Amortization
expense was $4,390, $3,268, and $4,114 in 2004, 2003 and 2002, respectively.
Accumulated amortization was $7,815 and $5,030 as of December 31, 2004 and 2003,
respectively.
Revenue Recognition
Minimum rental revenue from operating leases is recognized on a
straight-line basis over the initial terms of the related leases. Certain
tenants are required to pay percentage rent if their sales volumes exceed
thresholds specified in their lease agreements. Percentage rent is recognized as
revenue when the thresholds are achieved and the amounts become determinable.
The Company receives reimbursements from tenants for real estate taxes,
insurance, common area maintenance, and other recoverable operating expenses as
provided in the lease agreements. Tenant reimbursements are recognized as
46
revenue in the period the related operating expenses are incurred. Tenant
reimbursements related to certain capital expenditures are billed to tenants
over periods of 5 to 15 years and are recognized as revenue when billed.
The Company receives management, leasing and development fees from third
parties and unconsolidated affiliates. Management fees are charged as a
percentage of revenues (as defined in the management agreement) and are
recognized as revenue when earned. Development fees are recognized as revenue on
a pro rata basis over the development period. Leasing fees are charged for newly
executed leases and lease renewals and are recognized as revenue when earned.
Development and leasing fees received from unconsolidated affiliates during the
development period are recognized as revenue only to the extent of the
third-party partners' ownership interest. Development and leasing fees during
the development period to the extent of the Company's ownership interest are
recorded as a reduction to the Company's investment in the unconsolidated
affiliate.
Gain on Sales of Real Estate Assets
Gains on sales of real estate assets are recognized when it is determined
that the sale has been consummated, the buyer's initial and continuing
investment is adequate, the Company's receivable, if any, is not subject to
future subordination, and the buyer has assumed the usual risks and rewards of
ownership of the asset. When the Company has an ownership interest in the buyer,
gain is recognized to the extent of the third party partner's ownership interest
and the portion of the gain attributable to the Company's ownership interest is
deferred.
Income Taxes
The Company is qualified as a REIT under the provisions of the Code. To
maintain qualification as a REIT, the Company is required to distribute at least
90% of its taxable income to shareholders and meet certain other requirements.
As a REIT, the Company is generally not liable for federal corporate income
taxes. If the Company fails to qualify as a REIT in any taxable year, the
Company will be subject to federal and state income taxes on its taxable income
at regular corporate tax rates. Even if the Company maintains its qualification
as a REIT, the Company may be subject to certain state and local taxes on its
income and property, and to federal income and excise taxes on its undistributed
income. State income taxes were not material in 2004, 2003 and 2002.
The Company has also elected taxable REIT subsidiary status for some of its
subsidiaries. This enables the Company to receive income and provide services
that would otherwise be impermissible for REITs. For these entities, deferred
tax assets and liabilities are established for temporary differences between the
financial reporting basis and the tax basis of assets and liabilities at the
enacted tax rates expected to be in effect when the temporary differences
reverse. A valuation allowance for deferred tax assets is provided if the
Company believes all or some portion of the deferred tax asset may not be
realized. An increase or decrease in the valuation allowance that results from
the change in circumstances that causes a change in our judgment about the
realizability of the related deferred tax asset is included in income. The
Company had a net deferred tax asset of $16,636 and $8,018 at December 31, 2004
and 2003, respectively, which consisted primarily of net operating loss
carryforwards, that was reduced to zero by a valuation allowance because of
uncertainty about the realization of the net deferred tax asset considering all
available evidence.
Derivative Financial Instruments
The Company records derivative financial instruments as either an asset or
liability measured at the instrument's fair value. Any fair value adjustments
affect either shareholders' equity or net income depending on whether the
derivative instrument qualifies as a hedge for accounting purposes and, if so,
the nature of the hedging activity. See Note 15 for more information.
Concentration of Credit Risk
47
The Company's tenants include national, regional and local retailers.
Financial instruments that subject the Company to concentrations of credit risk
consist primarily of tenant receivables. The Company generally does not obtain
collateral or other security to support financial instruments subject to credit
risk, but monitors the credit standing of tenants.
The Company derives a substantial portion of its rental income from various
national and regional retail companies; however, no single tenant collectively
accounted for more than 10.0% of the Company's total revenues in 2004, 2003 and
2002.
Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income
available to common shareholders by the weighted average number of unrestricted
common shares outstanding for the period. Diluted EPS assumes the issuance of
common stock for all potential dilutive common shares outstanding. The limited
partners' rights to convert their minority interest in the Operating Partnership
into shares of common stock are not dilutive (Note 9). The following summarizes
the impact of potential dilutive common shares on the denominator used to
compute earnings per share:
Year Ended December 31,
--------------------------------------------------
2004 2003 2002
---------------- ----------------- ---------------
Weighted average shares 61,878 60,108 57,586
Effect of nonvested stock awards (276) (236) (206)
---------------- ----------------- ---------------
Denominator - basic earnings per share 61,602 59,872 57,380
Dilutive effect of stock options, nonvested stock awards
and
deemed shares related to deferred compensation
arrangements 2,402 2,514 1,956
---------------- ----------------- ---------------
Denominator - diluted earnings per share 64,004 62,386 59,336
================ ================= ===============
Stock-Based Compensation
Historically, the Company accounted for its stock-based compensation plans,
which are described in Note 19, under the recognition and measurement principles
of Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB No. 25") and related interpretations. Effective January 1,
2003, the Company elected to begin recording the expense associated with stock
options granted after January 1, 2003, on a prospective basis in accordance with
the fair value and transition provisions of SFAS No. 123, "Accounting for Stock
Based Compensation", as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - An Amendment of FASB Statement No.
123." There were no stock options granted during the years ended December 31,
2004 and 2003.
No stock-based compensation expense related to stock options granted prior
to January 1, 2003, has been reflected in net income since all options granted
had an exercise price equal to the fair value of the Company's common stock on
the date of grant. Therefore, stock-based compensation expense included in net
income available to common shareholders in 2004, 2003 and 2002 is less than that
which would have been recognized if the fair value method had been applied to
all stock-based awards since the effective date of SFAS No. 123. The following
table illustrates the effect on net income and earnings per share if the Company
had applied the fair value recognition provisions of SFAS No. 123 to all
outstanding and unvested awards in each period:
Year Ended December 31,
-------------------------------------------------
2004 2003 2002
---------------- ---------------- ---------------
Net income available to common shareholders, as reported $102,802 $124,506 $73,987
Add: Stock-based employee compensation expense included
in reported net income available to common
shareholders 2,890 2,742 4,772
Less: Total stock-based compensation expense determined
under fair value method (3,398) (3,344) (5,423)
---------------- ---------------- ---------------
Pro forma net income available to common shareholders $102,294 $123,904 $73,336
================ ================ ===============
Earnings per share:
Basic, as reported $ 1.67 $ 2.08 $ 1.29
================ ================ ===============
Basic, pro forma $ 1.66 $ 2.07 $ 1.28
================ ================ ===============
Diluted, as reported $ 1.61 $ 2.00 $ 1.25
================ ================ ===============
Diluted, pro forma $ 1.60 $ 1.99 $ 1.17
================ ================ ===============
48
The fair value of each employee stock option grant during 2002 was
estimated as of the date of grant using the Black-Scholes option pricing model
and the following weighted average assumptions:
Year Ended December 31,
----------------------------
2002
------------
Risk-free interest rate 4.84%
Dividend yield 6.83%
Expected volatility 19.7%
Expected life 7.0 years
The per share weighted average fair value of stock options granted during
2002 was $1.75.
Comprehensive Income
Comprehensive income includes all changes in shareholders' equity during
the period, except those resulting from investments by shareholders and
distributions to shareholders.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from those
estimates.
Recent Accounting Pronouncements
Effective January 1, 2004, the Company adopted the provisions of Financial
Accounting Standards Board ("FASB") Interpretation No. ("FIN") 46(R),
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51."
The interpretation requires the consolidation of entities in which an enterprise
absorbs a majority of the entity's expected losses, receives a majority of the
entity's expected residual returns, or both, as a result of ownership,
contractual or other financial interests in the entity. Previously, entities
were generally consolidated by an enterprise when it had a controlling financial
interest through ownership of a majority voting interest in the entity. The
Company determined that one unconsolidated affiliate, PPG Venture I Limited
Partnership ("PPG"), is a variable interest entity and that the Company is the
primary beneficiary. The Company began consolidating the assets, liabilities and
results of operations of PPG effective January 1, 2004. The Company initially
measured the assets, liabilities and noncontrolling interest of PPG at the
carrying amounts at which they would have been carried in the consolidated
financial statements as if FIN 46(R) had been effective when the Company first
met the conditions to be the primary beneficiary, which was the inception of
PPG. The Company owns a 10% interest in PPG, which owns one associated center
and two community centers. At December 31, 2004, PPG had non-recourse,
fixed-rate debt of $37,795 that was secured by the real estate assets it owns,
which had a net carrying value of $50,265.
In May 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity," which specifies that
instruments within its scope are obligations of the issuer and, therefore, the
issuer must classify them as liabilities. Financial instruments within the scope
of the pronouncement include mandatorily redeemable financial instruments,
obligations to repurchase the issuer's equity shares by transferring assets, and
certain obligations to issue a variable number of shares. SFAS No. 150 is
effective for all financial instruments entered into or modified after May 31,
2003. However, on October 29, 2003, the FASB indefinitely deferred the
provisions of paragraphs 9 and 10 of SFAS No. 150 related to noncontrolling
interests in limited-life subsidiaries. During 2004, the joint venture
agreements with minority interest partners were amended so that they no longer
have a limited life.
49
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB No. 29, Accounting for Nonmonetary Transactions."
SFAS No. 153 requires exchanges of productive assets to be accounted for at fair
value, rather than at carryover basis, unless (1) neither the asset received nor
the asset surrendered has a fair value that is determinable within reasonable
limits or (2) the transactions lack commercial substance. SFAS No. 153 is
effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. The Company does not expect the adoption of this standard
to have a material effect on its financial position or results of operations.
In December 2004, the FASB released its final revised standard, SFAS No.
123 (Revised 2004), "Share-Based Payment." SFAS No. 123(R) requires that a
public entity measure the cost of equity based service awards based on the
grant-date fair value of the award. That cost will be recognized over the period
during which an employee is required to provide service in exchange for the
award or the vesting period. No compensation cost is recognized for equity
instruments for which employees do not render the requisite service. Adoption of
SFAS No. 123(R) is required for fiscal periods beginning after June 15, 2005.
The Company previously adopted the fair value provisions of SFAS No. 123,
"Accounting for Stock Based Compensation", as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - An
Amendment of FASB Statement No. 123" effective January 1, 2003. The Company does
not expect the adoption of this standard to have a material effect on its
financial position or results of operations.
NOTE 3. ACQUISITIONS
The Company includes the results of operations of real estate assets
acquired in the consolidated statement of operations from the date of the
related acquisition.
2004 Acquisitions
On March 12, 2004, the Company acquired Honey Creek Mall in Terre Haute, IN
for a purchase price, including transaction costs, of $83,114, which consisted
of $50,114 in cash and the assumption of $33,000 of non-recourse debt that bears
interest at a stated rate of 6.95% and matures in May 2009. The Company recorded
a debt premium of $3,146, computed using an estimated market interest rate of
4.75%, since the debt assumed was at an above-market interest rate compared to
similar debt instruments at the date of acquisition.
On March 12, 2004, the Company acquired Volusia Mall in Daytona Beach, FL
for a purchase price, including transaction costs, of $118,493, which consisted
of $63,686 in cash and the assumption of $54,807 of non-recourse debt that bears
interest at a stated rate of 6.70% and matures in March 2009. The Company
recorded a debt premium of $4,615, computed using an estimated market interest
rate of 4.75%, since the debt assumed was at an above-market interest rate
compared to similar debt instruments at the date of acquisition.
On April 8, 2004, the Company acquired Greenbrier Mall in Chesapeake, VA
for a cash purchase price, including transaction costs, of $107,450. The
purchase price was partially financed with a new recourse term loan of $92,650
that bears interest at LIBOR plus 100 basis points, matures in April 2006 and
has three one-year extension options that are at the Company's election.
On April 21, 2004, the Company acquired Fashion Square, a community center
in Orange Park, FL for a cash purchase price, including transaction costs, of
$3,961.
On May 20, 2004, the Company acquired Chapel Hill Mall and its associated
center, Chapel Hill Suburban, in Akron, OH for a cash purchase price, including
transaction costs, of $78,252. The purchase price was partially financed with a
new recourse term loan of $66,500 that bears interest at LIBOR plus 100 basis
points, matures in May 2006 and has three one-year extension options that are at
the Company's election.
50
On June 22, 2004, the Company acquired Park Plaza Mall in Little Rock, AR
for a purchase price, including transaction costs, of $77,526, which consisted
of $36,213 in cash and the assumption of $41,313 of non-recourse debt that bears
interest at a stated rate of 8.69% and matures in May 2010. The Company recorded
a debt premium of $7,737, computed using an estimated market interest rate of
4.90%, since the debt assumed was at an above-market interest rate compared to
similar debt instruments at the date of acquisition.
On July 28, 2004, the Company acquired Monroeville Mall, and its associated
center, the Annex, in the eastern Pittsburgh suburb of Monroeville, PA, for a
total purchase price, including transaction costs, of $231,621, which consisted
of $39,455 in cash, the assumption of $134,004 of non-recourse debt that bears
interest at a stated rate of 5.73% and matures in January 2013, an obligation of
$11,950 to pay for the fee interest in the land underlying the mall and
associated center on or before July 28, 2007, and the issuance of 1,560,940
special common units in the Operating Partnership with a fair value of $46,212
($29.605 per special common unit). The Company recorded a debt premium of
$3,270, computed using an estimated market interest rate of 5.30%, since the
debt assumed was at an above-market interest rate compared to similar debt
instruments at the date of acquisition.
On November 22, 2004, the Company acquired Mall del Norte in Laredo, TX for
a cash purchase price, including transaction costs, of $170,413. The purchase
price was partially financed with a new non-recourse, interest-only loan of
$113,400 that bears interest at 5.04% and matures in December 2014.
On November 22, 2004, the Company acquired Northpark Mall in Joplin, MO for
a purchase price, including transaction costs, of $79,141. The purchase price
consisted of $37,619 in cash and the assumption of $41,522 of non-recourse debt
that bears interest at a stated rate of 5.75% and matures in March 2014. The
Company recorded a debt premium of $687, computed using an estimated market
interest rate of 5.50%, since the debt assumed was at an above-market interest
rate compared to similar debt instruments at the date of acquisition.
The results of operations of the acquired properties have been included in
the consolidated financial statements since their respective dates of
acquisition. The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed as of the respective acquisition dates
during the year ended December 31, 2004:
Land $ 81,673
Buildings and improvements 872,855
Above-market leases 8,329
In-place leases 33,921
--------------
Total assets 996,778
Mortgage note payables assumed (304,646)
Premiums on mortgage note payables assumed (19,455)
Below-market leases (27,352)
Land purchase obligation (11,950)
--------------
Net assets acquired $ 633,375
==============
The following unaudited pro forma financial information is for the years
ended December 31, 2004 and 2003. It presents the results of the Company as if
each of the 2004 acquisitions had occurred on January 1, 2003. However, the
unaudited pro forma financial information does not represent what the
consolidated results of operations or financial condition actually would have
been if the acquisitions had occurred on January 1, 2003. The pro forma
financial information also does not project the consolidated results of
operations for any future period. The pro forma results for 2004 and 2003 are as
follows:
51
2004 2003
-------------- ----------------
Total revenues $ 812,782 $780,324
Total expenses (446,784) (415,189)
-------------- ----------------
Income from operations $ 365,998 $ 365,135
============== ================
Income before discontinued operations $ 121,040 $ 145,196
============== ================
Net income available to common shareholders $ 105,043 $ 131,563
============== ================
Basic per share data:
Income before discontinued operations, net of preferred dividends $ 1.67 $ 2.10
Net income available to common shareholders $ 1.71 $ 2.20
Diluted per share data:
Income before discontinued operations, net of preferred dividends $ 1.61 $ 2.01
Net income available to common shareholders $ 1.64 $ 2.11
2003 Acquisitions
On April 30, 2003, the Company acquired Sunrise Mall and its associated
center, Sunrise Commons, which are located in Brownsville, TX. The total
purchase price, including transaction costs, of $80,686 consisted of $40,686 in
cash and the assumption of $40,000 of variable-rate debt that matures in May
2004.
On September 10, 2003, the Company acquired Cross Creek Mall in
Fayetteville, NC for a purchase price, including transaction costs, of $116,729,
which consisted of $52,484 in cash and the assumption of $64,245 of non-recourse
debt that bears interest at a stated rate of 7.4% and matures in April 2012. The
Company recorded a debt premium of $10,209, computed using an estimated market
interest rate of 5.00%, since the debt assumed was at an above-market interest
rate compared to similar debt instruments at the date of acquisition.
On October 1, 2003, the Company acquired River Ridge Mall in Lynchburg, VA
for a purchase price, including transaction costs, of $61,933, which consisted
of $38,622 in cash, a short-term note payable of $793 and the assumption of
$22,518 of non-recourse debt that bears interest at a stated rate of 8.05% and
matures in January 2007. The Company also recorded a debt premium of $2,724,
computed using an estimated market interest rate of 4.00%, since the debt
assumed was at an above-market interest rate compared to similar debt
instruments at the date of acquisition.
On October 1, 2003, the Company acquired Valley View Mall in Roanoke, VA
for a purchase price, including transaction costs, of $86,094, which consisted
of $35,351 in cash, a short-term note payable of $5,708 and the assumption of
$45,035 of non-recourse debt that bears interest at a weighted-average stated
rate of 8.61% and matures in September 2010. The Company also recorded a debt
premium of $8,813, computed using an estimated market interest rate of 5.10%,
since the debt assumed was at an above-market interest rate compared to similar
debt instruments at the date of acquisition.
On December 15, 2003, the Company acquired Southpark Mall in Colonial
Heights, VA for a purchase price, including transaction costs, of $78,031, which
consisted of $34,879 in cash, a short-term note payable of $5,116 and the
assumption of $38,036 of non-recourse debt that bears interest at a stated rate
of 7.00% and matures in May 2012. The Company also recorded a debt premium of
$4,544, computed using an estimated market interest rate of 5.10%, since the
debt assumed was at an above-market interest rate compared to similar debt
instruments at the date of acquisition.
On December 30, 2003, the Company acquired Harford Mall Business Trust, a
Maryland business trust that owns Harford Mall and its associated center,
Harford Annex, in Bel Air, MD for a cash purchase price, including transaction
costs, of $71,110.
52
The following summarizes the allocation of the purchase prices to the
assets acquired and liabilities assumed for the 2003 acquisitions:
Land $ 72,620
Buildings and improvements 434,318
Above-market leases 5,709
In-place leases 19,542
--------------
Total assets 532,189
Mortgage note payables assumed (209,834)
Short-term notes payable (11,617)
Premiums on mortgage note payables assumed (26,290)
Below-market leases (11,384)
--------------
Net assets acquired $ 273,064
==============
The following unaudited pro forma financial information is for the years
ended December 31, 2003 and 2002. It presents the results of the Company as if
each of the 2003 acquisitions had occurred on January 1, 2002. However, the
unaudited pro forma financial information does not represent what the
consolidated results of operations or financial condition actually would have
been if the acquisitions had occurred on January 1, 2002. The pro forma
financial information also does not project the consolidated results of
operations for any future period. The pro forma results for 2003 and 2002 are as
follows:
2003 2002
-------------- ------------------
Total revenues $ 713,740 $ 651,623
Total expenses (383,450) (346,862)
-------------- ------------------
Income from operations $ 330,290 $ 304,761
============== ==================
Income before discontinued operations $ 139,776 $ 83,580
============== ==================
Net income available to common shareholders $ 125,568 $ 75,752
============== ==================
Basic per share data:
Income before discontinued operations, net of preferred dividends $ 2.01 $ 1.27
Net income available to common shareholders $ 2.10 $ 1.32
Diluted per share data:
Income before discontinued operations, net of preferred dividends $ 1.93 $ 1.22
Net income available to common shareholders $ 2.01 $ 1.28
2002 Acquisitions
In March 2002, the Company closed on the second and final stage of its
acquisition of interests in 21 malls and two associated centers from Jacobs by
acquiring additional interests in the joint ventures that own the following
properties:
o West Towne Mall, East Towne Mall and West Towne Crossing in Madison,
WI (17% interest)
o Columbia Place in Columbia, SC (31% interest)
o Kentucky Oaks Mall in Paducah, KY (2% interest)
The purchase price of $42,519 for the additional interests consisted of
$422 in cash, the assumption of $24,487 of debt and the issuance of 999,460
special common units with a fair value of $17,610 (weighted average of $17.62
per unit).
The Company acquired Richland Mall, located in Waco, TX, in May 2002, for a
cash purchase price of $43,250. The Company acquired Panama City Mall, located
in Panama City, FL, for a purchase price of $45,645 in May 2002. The purchase
price of Panama City Mall consisted of the assumption of $40,700 of non-recourse
53
mortgage debt with an interest rate of 7.30%, the issuance of 237,390 common
units of the Operating Partnership with a fair value of $4,487 ($18.90 per unit)
and $458 in cash closing costs.
The Company also entered into a ground lease in May 2002, for land adjacent
to Panama City Mall. The terms of the ground lease provided that the lessor
could require the Company to purchase the land for $4,148 between August 1,
2003, and February 1, 2004. The Company purchased the land in August 2003.
The Company acquired the remaining 21% ownership interest in Columbia Place
in Columbia, SC in August 2002. The total consideration of $9,875 consisted of
the issuance of 123,324 common units with a fair value of $2,280 ($18.485 per
unit) and the assumption of $7,595 of debt.
In December 2002, the Company acquired the remaining 35% interest in East
Towne Mall, West Towne Mall and West Towne Crossing, which are all located in
Madison, WI. The purchase price $62,029 consisted of the issuance of 1,865,338
common units with a fair value of $36,411 ($19.52 per unit) and the assumption
of $25,618 of debt.
In December 2002, the Company acquired Westmoreland Mall and its associated
center, Westmoreland Crossing, located in Greensburg, PA, for a cash purchase
price of $112,416.
NOTE 4. DISCONTINUED OPERATIONS
During 2004, the Company sold three community centers for a total sales
price $7,250 and recognized a total gain of $845 on two of the community centers
that is recorded as gain on discontinued operations. The Company recognized a
loss of $114 in December 2004 on one of the community centers, which is included
in loss on impairment of real estate assets in the consolidated statement of
operations. Total revenues from these community centers were $782, $1,168 and
$1,134 in 2004, 2003 and 2002, respectively.
During 2003, the Company sold six community centers for a total sales price
$17,280 and recognized a net gain on discontinued operations of $4,042. Total
revenues from these community centers were $1,528 and $2,093 in 2003 and 2002,
respectively.
During 2002, the Company sold five community centers and an office building
for a total sales price of $36,800 and recognized a net gain on discontinued
operations of $372. Total revenues for these properties were $2,331 in 2002.
Certain amounts in the consolidated financial statements have been
reclassified to reflect the results of operations of the above properties as
discontinued operations in all periods presented.
NOTE 5. UNCONSOLIDATED AFFILIATES
At December 31, 2004, the Company had investments in the following nine
partnerships and joint ventures, which are accounted for using the equity method
of accounting:
Company's
Joint Venture Property Name Interest
- ------------------------------------------------------------------------------------------------
Governor's Square IB Governor's Square Plaza 50.0%
Governor's Square Company Governor's Square 47.5%
Imperial Valley Mall L.P. Imperial Valley Mall 60.0%
Kentucky Oaks Mall Company Kentucky Oaks Mall 50.0%
Mall of South Carolina L.P. Coastal Grand-Myrtle Beach 50.0%
Mall of South Carolina Outparcel L.P. Coastal Grand-Myrtle Beach 50.0%
Mall Shopping Center Company Plaza del Sol 50.6%
Parkway Place L.P. Parkway Place 45.0%
Galileo America LLC Portfolio of community centers 7.2%
54
Condensed combined financial statement information of the unconsolidated
affiliates is presented as follows:
December 31,
------------------------------
2004 2003
------------------------------
ASSETS:
Net investment in real estate assets $1,013,475 $759,073
Other assets 63,903 65,253
------------------------------
Total assets $1,077,378 $824,326
==============================
LIABILITIES :
Mortgage notes payable $ 603,664 $465,602
Other liabilities 41,995 36,167
------------------------------
Total liabilities 645,659 501,769
OWNERS' EQUITY:
The Company 103,512 96,961
Other investors 328,207 225,596
------------------------------
Total owners' equity 431,719 322,557
------------------------------
Total liabilities and owners' equity $1,077,378 $824,326
==============================
Year Ended December 31,
------------------------------------------------
2004 2003 2002
------------------------------------------------
Revenues $ 109,696 $ 49,855 $57,084
Depreciation and amortization (24,994) (9,338) (7,603)
Other operating expenses (27,479) (14,067) (17,634)
------------------------------------------------
Income from operations 57,223 26,450 31,847
Interest income 138 -- --
Interest expense (27,353) (13,981) (14,827)
Gain on sales of real estate assets 4,555 892 --
Discontinued operations 1,945 207 --
------------------------------------------------
Net income $ 36,508 $ 13,568 $17,020
================================================
Company's share of net income $ 10,308 $ 4,941 $ 8,215
================================================
Initial investments in joint ventures that are in economic substance a
capital contribution to the joint venture are recorded in an amount equal to the
Company's historical carryover basis in the real estate contributed. Initial
investments in joint ventures that are in economic substance the sale of a
portion of the Company's interest in the real estate are accounted for as a
contribution of real estate recorded in an amount equal to the Company's
historical carryover basis in the ownership percentage retained and as a sale of
real estate with profit recognized to the extent of the other joint venturers'
interests in the joint venture. Profit recognition assumes the Company has no
commitment to reinvest with respect to the percentage of the real estate sold
and the accounting requirements of the full accrual method under SFAS No. 66 are
met. In general, contributions and distributions of capital or cash flows and
allocations of income and expense are made on a pro rata basis in proportion to
the equity interest held by each general or limited partner. All debt on these
properties is non-recourse. See Note 17 for a description of guarantees the
Company has issued related to certain unconsolidated affiliates.
Galileo America Joint Venture
On September 24, 2003, the Company formed Galileo America LLC ("Galileo
America"), a joint venture with Galileo America, Inc., the U.S. affiliate of
Australia-based Galileo America Shopping Trust, to invest in community centers
throughout the United States. The arrangement provides for the Company to sell,
in three phases, its interests in 51 community centers for a total price of
$516,000 plus a 10% interest in Galileo America.
55
The first phase of the transaction closed on October 23, 2003, when the
Company sold its interests in 41 community centers to Galileo America for
$393,925, which consisted of $250,705 in cash, the retirement of $24,922 of debt
on one of the community centers, a note receivable of $4,813, Galileo America's
assumption of $93,037 in debt and $20,448 representing the Company's 10%
interest in Galileo America. The Company used the net proceeds to fund escrow
amounts to be used in like-kind exchanges and to reduce outstanding borrowings
under the Company's credit facilities. The Company recognized a gain of $71,886
from the first phase and recorded its investment in Galileo America at the
carryover basis of the real estate assets contributed for its 10% interest. The
note receivable was paid subsequent to December 31, 2003.
The second phase of the Galileo America transaction closed on January 5,
2004, when the Company sold its interest in six community centers for $92,375,
which consisted of $62,687 in cash, the retirement of $25,953 of debt on one of
the community centers, the joint venture's assumption of $2,816 of debt and
closing costs of $919. The real estate assets and related mortgage notes payable
of the properties in the second phase were reflected as held for sale from
October 23, 2003, the date that it was determined these assets met the criteria
to be reflected as held for sale. There was no depreciation expense recorded on
these assets subsequent to October 23, 2003.
The Company sold a community center expansion to Galileo America during
September 2004 for $3,447 in cash. The Company recognized gain of $1,316 to the
extent of the third party partner's ownership interest and recorded an
investment of $147 in Galileo America at the carryover basis of the real estate
assets contributed for its 10% interest.
In October 2004, the Company sold its interests in one community center to
Galileo America for a purchase price of $17,900, which consisted of $2,900 in
cash, Galileo America's assumption of $10,500 of debt and a limited partnership
interest in Galileo America, Inc. The community center was originally scheduled
to be included in the third phase of the transaction that closed in January
2005. The Company recognized a gain of $2,840 on the sale of this property and
recorded an investment of $3,820 in Galileo America at the carryover basis of
the real estate assets contributed for its 10% interest in this property.
The third phase of the Galileo America transaction closed on January 5,
2005, when the Company sold its interest in two power centers, one community
center and one community center expansion for $58,600, which consisted of
$42,529 in cash, the joint venture's assumption of $12,141 of debt, $3,596
representing the Company's interest in Galileo America and closing costs of
$334. The real estate assets and related mortgage notes payable of the
properties in the third phase were reflected as held for sale from January 2004,
the date that it was determined these assets met the criteria to be reflected as
held for sale. There was no depreciation expense recorded on these assets during
2004.
The Company, as tenant, has entered, or will enter into, separate master
lease agreements with Galileo America, as landlord, covering certain spaces in
certain of the properties sold or, to be sold, to the joint venture. Under each
master lease agreement, the Company is obligated to pay Galileo America an
agreed-upon minimum annual rent, plus a pro rata share of common area
maintenance expenses and real estate taxes, for each designated space for a term
of five years from the applicable property's closing date. If the Company is
able to lease a designated space to a third party, then the amounts owed by the
Company under the master lease will be reduced by the amounts received under the
third party lease. If the amounts under the third party lease are equal to or
greater than the Company's obligation for the full term of the master lease
agreement, then the Company's obligation is zero. When a third party lease is
executed that releases the Company from its obligation, Galileo America assumes
the credit risk related to the third party lease. This arrangement is in effect
until the end of the five-year term of the master lease. Therefore, if a third
party lease expires before the expiration of the master lease term, then the
Company is obligated under the remaining term of the master lease. Two
properties in the first phase and one in the second phase are subject to master
lease agreements. The Company had a liability of $3,789 and $2,184 at December
31, 2004 and 2003, respectively, for the amounts to be paid over the remaining
terms of the master lease obligations. The Company reduces the liability as
payments are made under the obligations or as it is relieved of its obligations
under the terms of the master lease arrangements. The reduction in the liability
is recognized as gain to the extent that the Company is relieved of its
obligation under the master lease arrangements by obtaining third party leases
that are sufficient to satisfy the related master lease obligation. During 2004
and 2003, the Company recognized gain of $7,206 and $0, respectively, as a
result of being relieved of its obligation under the master lease arrangements.
56
The Company may also receive up to $8,000 of additional contingent
consideration if, as the exclusive manager of the properties, it achieves
certain leasing objectives related to spaces that were vacant, or projected to
soon be vacant, at the time the first phase closed. The Company earned $4,167 in
2004 for leasing objectives that were met during 2004, of which $3,750 was
recognized as gain on sales of real estate assets and $417, representing the
portion attributable to the Company's ownership interest, was recorded as a
reduction of the Company's investment in Galileo America. In 2003, the Company
earned $3,833 for leasing objectives that were met as of December 31, 2003, of
which $3,450 was recognized as gain on sales of real estate assets and $383,
representing the portion attributable to the Company's 10% ownership interest,
was recorded as a reduction of the Company's investment in Galileo America.
Pursuant to a long-term agreement, the Company is the exclusive manager for
all of the joint venture's properties in the United States, and will be entitled
to management, leasing, acquisition, disposition, asset management and financing
fees.
In December 2004, Galileo America acquired interests in six properties from
a third party. The Company elected not to contribute its pro rata share of the
equity contribution necessary to maintain a 10% interest in Galileo America
after the completion of this acquisition. As a result, the Company's ownership
interest in Galileo America was reduced to 7.2% as of December 31, 2004.
Other Unconsolidated Affiliates
In February 2002, the Company contributed its interests in two community
centers and one associated center to PPG Venture I Limited Partnership, a joint
venture with a third party, and retained a 10% interest. The total consideration
of $63,030 consisted of cash of $46,000 and the Company's retained interest. As
discussed in Note 2, the Company began to consolidate PPG Venture I Limited
Partnership effective January 1, 2004, as a result of the adoption of FIN 46(R).
In March 2002, the Company acquired an additional 2% interest in Kentucky
Oaks Mall Company, an additional 17% interest in Madison Joint Venture and an
additional 31% interest in Columbia Mall Company as discussed in Note 3. Since
the additional interest in Columbia Mall Company resulted in the Company having
a 79% controlling interest in that joint venture, the Company discontinued
accounting for it using the equity method and began consolidating it as of the
date the additional 31% interest was acquired.
During 2002, the Company entered into three joint ventures with third
parties to develop two malls, Imperial Valley Mall and Coastal Grand.
In September 2004, Mall of South Carolina L.P. obtained a long-term,
non-recourse, fixed-rate mortgage loan totaling $118,000. The loan is comprised
of a $100,000 A-note to a financial institution that bears interest at 5.09%,
which matures in September 2014, and two 10-year B-notes of $9,000 each that
bear interest at 7.75% and mature in September 2014. The Company and its third
party partner in Mall of South Carolina L.P. each hold one of the B-notes. The
total net proceeds from these loans were used to retire $80,493 of outstanding
borrowings under the construction loan that partially financed the development
of Coastal Grand-Myrtle Beach.
57
NOTE 6. MORTGAGE AND OTHER NOTES PAYABLE
Mortgage and other notes payable consisted of the following:
December 31, 2004 December 31, 2003
-------------------------------- --------------------------------
Weighted Average Weighted Average
Amount Interest Rate(1) Amount Interest Rate(1)
------------- ----------------- ------------- -----------------
Fixed-rate debt:
Non-recourse loans on operating properties $2,688,186 6.38% $2,256,544 6.63%
------------- -------------
Variable-rate debt:
Recourse term loans on operating properties 207,500 3.45% 105,558 2.67%
Lines of credit 461,400 3.37% 376,000 2.23%
Construction loans 14,593 3.94% -- --
------------- -------------
Total variable-rate debt 683,493 3.41% 481,558 2.33%
------------- -------------
Total $3,371,679 5.78% $2,738,102 5.87%
============= =============
<FN>
(1) Weighted average interest rate including the effect of debt premiums,
but excluding the amortization of deferred financing costs.
</FN>
Non-recourse and recourse loans include loans that are secured by
properties owned by the Company that have a net carrying value of $4,130,922 at
December 31, 2004. At December 31, 2004, the Company had $950 available and
unfunded under a recourse term loan commitment on one property.
Fixed-Rate Debt
At December 31, 2004, fixed-rate loans bear interest at stated rates
ranging from 4.52% to 10.4%. Outstanding borrowings under fixed-rate loans
include unamortized debt premiums of $39,837 that were recorded when the Company
assumed debt to acquire real estate assets that was at an above-market interest
rate compared to similar debt instruments at the date of acquisition. Fixed-rate
loans generally provide for monthly payments of principal and/or interest and
mature at various dates from March 2006 through April 2016, with a weighted
average maturity of 5.6 years.
Variable-Rate Debt
Recourse term loans bear interest at variable interest rates indexed to the
prime lending rate or London Interbank Offered Rate ("LIBOR"). At December 31,
2004, interest rates on recourse loans varied from 3.35% to 3.94%. These loans
mature at various dates from January 2005 to December 2006, with a weighted
average maturity of 1.3 years.
Unsecured Line of Credit
In August 2004, the Company entered into a new $400,000 unsecured credit
facility, which bears interest at LIBOR plus a margin of 100 to 145 basis points
based on the Company's leverage, as defined in the agreement. The credit
facility matures in August 2006 and has three one-year extension options, which
are at the Company's election. The Company drew on the credit facility to repay
all $102,400 of outstanding borrowings under the Company's previous $130,000
unsecured credit facility, which had an interest rate of LIBOR plus 1.30% and
was scheduled to mature in September 2004. At December 31, 2004, the outstanding
borrowings of $39,900 under the $400,000 credit facility had a weighted average
interest rate of 3.54%.
58
Secured Lines of Credit
The Company has four secured lines of credit that are used for
construction, acquisition, and working capital purposes. Each of these lines is
secured by mortgages on certain of the Company's operating properties. The
following summarizes certain information about the secured lines of credit as of
December 31, 2004:
Total Total Maturity
Available Outstanding Date
- ----------------------------------------------------
$ 373,000 $ 368,150 February 2006
80,000 23,350 June 2006
20,000 20,000 March 2007
10,000 10,000 April 2006
- -----------------------------------
$ 483,000 $ 421,500
===================================
The secured lines of credit are secured by 21 of the Company's properties,
which had an aggregate net carrying value of $475,831 at December 31, 2004.
Borrowings under the secured lines of credit had a weighted average interest
rate of 3.36% at December 31, 2004.
Letters of Credit
At December 31, 2004, the Company had additional secured lines of credit
with a total commitment of $27,123 that can only be used for issuing letters of
credit. The total outstanding under these lines of credit was $12,267 at
December 31, 2004.
Covenants and Restrictions
The secured and unsecured line of credit agreements contain, among other
restrictions, certain financial covenants including the maintenance of certain
financial coverage ratios, minimum net worth requirements, and limitations on
cash flow distributions. Additionally, certain property-specific mortgage notes
payable require the maintenance of debt service coverage ratios on their
respective properties. The Company was in compliance with all covenants and
restrictions at December 31, 2004.
Nineteen malls, five associated centers, two community centers and the
office building are owned by special purpose entities that are included in the
Company's consolidated financial statements. The sole business purpose of the
special purpose entities is to own and operate these properties, each of which
is encumbered by a commercial-mortgage-backed-securities loan. The real estate
and other assets owned by these special purpose entities are restricted under
the loan agreements in that they are not available to settle other debts of the
Company. However, so long as the loans are not under an event of default, as
defined in the loan agreements, the cash flows from these properties, after
payments of debt service, operating expenses and reserves, are available for
distribution to the Company.
Debt Maturities
As of December 31, 2004, the scheduled principal payments on all mortgage
and other notes payable, including construction loans and lines of credit, are
as follows:
2005 $ 92,444
2006 827,594
2007 242,979
2008 422,209
2009 351,335
Thereafter 1,395,281
-------------
3,331,842
Net unamortized premiums 39,837
-------------
$3,371,679
=============
59
Of the $92,444 of scheduled principal payments in 2005, $40,187 is related
to three loans that are scheduled to mature in 2005. The Company has extension
options in place for $30,000 on one loan that will extend its scheduled maturity
to 2006. Galileo America assumed one loan in the amount of $9,800 in the third
phase that closed in January 2005 (see Note 5). The Company intends to repay the
remaining loan of $387.
NOTE 7. LOSS ON EXTINGUISHMENT OF DEBT
The losses on extinguishment of debt resulted from prepayment penalties and
the write-off of unamortized deferred financing costs when notes payable were
retired before their scheduled maturity dates as follows:
Year Ended December 31,
------------------------------------
2004 2003 2002
------------------------------------
Prepayment penalties $ -- $ -- $ 2,232
Prepayment penalties on discontinued operations -- -- 58
Unamortized deferred financing costs -- 167 1,640
------------------------------------
$
-- $ 167 $ 3,930
====================================
NOTE 8. SHAREHOLDERS' EQUITY
Common Stock
In March 2002, the Company completed an offering of 6,705,540 shares of its
$0.01 par value common stock at $17.275 per share. The net proceeds of $114,705
were used to repay outstanding borrowings under the Company's credit facilities
and to retire debt on certain operating properties.
Preferred Stock
In June 1998, the Company issued 2,875,000 shares of 9.0% Series A
Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock") with a
liquidation preference of $25.00 per share in a public offering. In June 2002,
the Company purchased 200,000 shares of the Series A Preferred Stock for $5,093.
On November 28, 2003, the Company redeemed the remaining 2,675,000 outstanding
shares of the Series A Preferred Stock at its liquidation preference of $25.00
per share plus accrued and unpaid dividends. In connection with the redemption
of the Series A Preferred Stock, the Company recorded a charge of $2,181 to
write-off direct issuance costs that were recorded as a reduction of additional
paid-in capital when the Series A Preferred Stock was issued. The charge is
included in preferred dividends in the accompanying consolidated statement of
operations.
In June 2002, the Company completed an offering of 2,000,000 shares of
8.75% Series B Cumulative Redeemable Preferred Stock (the "Series B Preferred
Stock"), having a par value of $.01 per share, at its liquidation preference of
$50.00 per share. The net proceeds of $96,370 were used to reduce outstanding
balances under the Company's 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. The Series B Preferred
Stock cannot be redeemed by the Company prior to June 14, 2007. After that date,
the Company may redeem shares, in whole or in part, at any time for a cash
redemption price of $50.00 per share plus accrued and unpaid dividends.
On August 22, 2003, the Company issued 4,600,000 depositary shares in a
public offering, each representing one-tenth of a share of 7.75% Series C
Cumulative Redeemable Preferred Stock (the "Series C Preferred Stock") with a
60
par value of $0.01 per share. The Series C Preferred Stock has a liquidation
preference of $250.00 per share ($25.00 per depositary share). The dividends on
the Series C Preferred Stock are cumulative, accrue from the date of issuance
and are payable quarterly in arrears at a rate of $19.375 per share ($1.9375 per
depositary share) per annum. The Series C 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. The Series C Preferred
Stock cannot be redeemed by the Company prior to August 22, 2008. After that
date, the Company may redeem shares, in whole or in part, at any time for a cash
redemption price of $250.00 per share ($25.00 per depositary share) plus accrued
and unpaid dividends. The net proceeds of $111,227 were used to partially fund
certain acquisitions discussed in Note 3 and to reduce outstanding borrowings on
the Company's credit facilities.
On December 13, 2004, the Company issued 7,000,000 depositary shares in a
public offering, each representing one-tenth of a share of 7.375% Series D
Cumulative Redeemable Preferred Stock (the "Series D Preferred Stock") with a
par value of $0.01 per share. The Series D Preferred Stock has a liquidation
preference of $250.00 per share ($25.00 per depositary share). The dividends on
the Series D Preferred Stock are cumulative, accrue from the date of issuance
and are payable quarterly in arrears at a rate of $18.4375 per share ($1.84375
per depositary share) per annum. The Series D 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. The Series D Preferred
Stock cannot be redeemed by the Company prior to December 13, 2009. After that
date, the Company may redeem shares, in whole or in part, at any time for a cash
redemption price of $250.00 per share ($25.00 per depositary share) plus accrued
and unpaid dividends. The net proceeds of $169,333 were used to reduce
outstanding borrowings on the Company's credit facilities.
Holders of each series of preferred stock will have limited voting rights
if dividends are not paid for six or more quarterly periods and in certain other
events.
NOTE 9. MINORITY INTERESTS
Minority interests represent (i) the aggregate partnership interest in the
Operating Partnership that is not owned by the Company and (ii) the aggregate
ownership interest in 13 of the Company's shopping center properties that is
held by third parties.
Minority Interest in Operating Partnership
The minority interest in the Operating Partnership is represented by common
units and special common units of limited partnership interest in the Operating
Partnership (the "Operating Partnership Units") that the Company does not own.
The assets and liabilities allocated to the Operating Partnership's
minority interests are based on their ownership percentage of the Operating
Partnership at December 31, 2004 and 2003. The ownership percentage is
determined by dividing the number of Operating Partnership Units held by the
minority interests at December 31, 2004 and 2003 by the total Operating
Partnership Units outstanding at December 31, 2004 and 2003, respectively. The
minority interest ownership percentage in assets and liabilities of the
Operating Partnership was 45.0% and 45.4% at December 31, 2004 and 2003,
respectively.
Income is allocated to the Operating Partnership's minority interests based
on their weighted average ownership during the year. The ownership percentage is
determined by dividing the weighted average number of Operating Partnership
Units held by the minority interests by the total weighted average number of
Operating Partnership Units outstanding during the year.
A change in the number of shares of common stock or Operating Partnership
Units changes the percentage ownership of all partners of the Operating
Partnership. An Operating Partnership Unit is considered to be equivalent to a
share of common stock since it generally is redeemable for cash or shares of the
Company's common stock. As a result, an allocation is made between shareholders'
equity and minority interest in the Operating Partnership in the accompanying
61
balance sheet to reflect the change in ownership of the Operating Partnership's
underlying equity when there is a change in the number of shares and/or
Operating Partnership Units outstanding.
The total minority interest in the Operating Partnership was $554,629 and
$523,779 at December 31, 2004 and 2003, respectively.
Minority Interest in Operating Partnership-Conversion Rights
Under the terms of the Operating Partnership's limited partnership
agreement, each of the limited partners has the right to exchange all or a
portion of its partnership interests for shares of CBL's common stock or, at
CBL's election, their cash equivalent. When an exchange occurs, CBL assumes the
limited partner's ownership interests in the Operating Partnership. The number
of shares of common stock received by a limited partner of the Operating
Partnership upon exercise of its exchange rights will be equal on a one-for-one
basis to the number of partnership units exchanged by the limited partner. The
amount of cash received by the limited partner, if CBL elects to pay cash, will
be based on the five-day trailing average of the trading price at the time of
exercise of the shares of common stock that would otherwise have been received
by the limited partner in the exchange. Neither the limited partnership
interests in the Operating Partnership nor the shares of common stock of CBL are
subject to any right of mandatory redemption.
As of January 31, 2004, holders of 26,318,804 special common units may
exchange them for shares of common stock or cash. The special common units
receive a minimum distribution of $1.45125 per unit per year. When the
distribution on the common units exceeds $1.45125 per unit per year, the special
common units will receive a distribution equal to that paid on the common units.
The distribution on the common units exceeded $1.45125 per unit during 2004.
In July 2004, the Company issued 1,560,940 special common units in
connection with the acquisition of Monroeville Mall, which is discussed in Note
3. These special common units receive a minimum distribution of $2.53825 per
unit per year for the first three years, and a minimum distribution of $2.92875
per unit per year thereafter.
The Operating Partnership issued 2,226,052 common units in 2002 in
connection with acquisitions discussed in Notes 3 and 5. The 237,390 common
units issued in connection with the acquisition of Panama City Mall, which is
discussed in Note 3, receive a minimum annual dividend of $1.6875 per unit until
May 2012. When the distribution on the common units exceeds $1.6875 per unit,
these common units will receive a distribution equal to that paid on the common
units. Additionally, if the annual distribution on the common units should ever
be less than $1.11 per unit, the $1.6875 per unit dividend will be reduced by
the amount the per unit distribution is less than $1.11 per unit.
During 2004, holders elected to exchange 62,392 special common units and
683,250 common units. The Company elected to exchange $5,949 of cash and 525,636
shares of common stock for these units. The Company purchased 920,166 common
units from a former executive of the Company who retired in 1997 for $21,013
during 2003. During 2002, third parties converted 893,304 common units to shares
of the Company's common stock.
Outstanding rights to convert minority interests in the Operating
Partnership to common stock were held by the following parties at December 31,
2004 and 2003:
December 31,
--------------------------------
2004 2003
--------------- ----------------
Common shares outstanding 62,667,104 60,646,952
Outstanding rights:
Jacobs 23,845,414 23,907,806
CBL's Predecessor 17,511,224 17,511,224
Third parties 9,904,486 9,026,794
--------------- ----------------
Total Operating Partnership Units 113,928,228 111,092,776
=============== ================
62
Minority Interest in Shopping Center Properties
The Company's consolidated financial statements include the assets,
liabilities and results of operations of 13 properties that the Company does not
wholly own. The minority interests in shopping center properties represents the
aggregate ownership interest of third parties in these properties. The total
minority interests in shopping center properties was $11,977 and $3,652 at
December 31, 2004 and 2003, respectively.
The assets and liabilities allocated to the minority interests in shopping
center properties are based on the third parties' ownership percentages in each
shopping center property at December 31, 2004 and 2003. Income is allocated to
the minority interests in shopping center properties based on the third parties'
weighted average ownership in each shopping center property during the year.
NOTE 10. MINIMUM RENTS
The Company receives rental income by leasing retail shopping center space
under operating leases. Future minimum rents are scheduled to be received under
noncancellable tenant leases at December 31, 2004, as follows:
2005 $452,324
2006 386,423
2007 335,734
2008 287,209
2009 241,567
Thereafter 769,526
Future minimum rents do not include percentage rents or tenant
reimbursements that may become due.
NOTE 11. MORTGAGE NOTES RECEIVABLE
Mortgage notes receivable are collateralized by first mortgages,
wrap-around mortgages on the underlying real estate and related improvements or
by assignment of 100% of the partnership interests that own the real estate
assets. Interest rates on notes receivable range from 3.63% to 9.50% at December
31, 2004. Maturities of notes receivable range from 2005 to 2019.
NOTE 12. SEGMENT INFORMATION
The Company measures performance and allocates resources according to
property type, which is determined based on differences such as nature of
tenants, capital requirements, economic risks and leasing terms. Rental income
and tenant reimbursements from tenant leases provide the majority of revenues
from all segments. The accounting policies of the reportable segments are the
same as those described in Note 2. Information on the Company's reportable
segments is presented as follows:
Associated Community
Year Ended December 31, 2004 Malls Centers Centers All Other(2) Total
- ----------------------------------------------------------------------------------------------------------------------
Revenues $ 684,756 $ 30,921 $ 15,222 $ 26,354 $ 757,253
Property operating expenses (1) (219,096) (6,536) (4,771) 13,618 (216,785)
Interest expense (159,998) (5,063) (3,154) (9,004) (177,219)
Other expense - - - (16,373) (16,373)
Gain on sales of real estate assets 847 322 24,945 3,158 29,272
-------------------------------------------------------------------
Segment profit and loss $ 306,509 $ 19,644 $ 32,242 $ 17,753 376,148
=======================================================
Depreciation and amortization expense (142,043)
General and administrative expense (35,338)
Interest income 3,355
Loss on impairment of real estate assets (3,080)
Equity in earnings and minority interest (80,243)
------------
Income before discontinued operations $ 118,799
============
Total assets (2) $ 4,653,707 $ 273,166 $155,042 $122,585 $5,205,400
Capital expenditures (2) $ 1,081,529 $ 56,109 $ 18,631 $ 20,541 $1,176,810
63
Associated Community
Year Ended December 31, 2003 Malls Centers Centers All Other(2) Total
- ----------------------------------------------------------------------------------------------------------------------
Revenues $ 580,117 $ 24,961 $ 49,239 $ 9,995 $ 664,312
Property operating expenses (1) (194,301) (5,614) (11,290) 17,360 (193,845)
Interest expense (139,900) (5,381) (6,746) (1,294) (153,321)
Other expense - - - (11,489) (11,489)
Gain(loss) on sales of real estate assets 2,214 - 75,559 (8) 77,765
-------------------------------------------------------------------
Segment profit and loss $ 248,130 $ 13,966 $106,762 $ 14,564 383,422
=======================================================
Depreciation and amortization expense (112,857)
General and administrative expense (30,395)
Interest income 2,485
Loss on extinguishment of debt (167)
Equity in earnings and minority interest (104,349)
------------
Income before discontinued operations $138,139
============
Total assets (2) $ 3,682,158 $ 199,356 $265,467 $117,329 $4,264,310
Capital expenditures (2) $ 651,567 $ 28,901 $ 32,063 $ 31,274 $ 743,805
Associated Community
Year Ended December 31, 2002 Malls Centers Centers All Other(2) Total
- ----------------------------------------------------------------------------------------------------------------------
Revenues $ 498,834 $ 19,511 $ 56,457 $ 9,329 $ 584,131
Property operating expenses (1) (171,951) (4,268) (14,440) 16,471 (174,188)
Interest expense (123,977) (3,968) (9,137) (5,826) (142,908)
Other expense - - - (10,307) (10,307)
Gain (loss) on sales of real estate assets (251) - 925 2,130 2,804
-------------------------------------------------------------------
Segment profit and loss $ 202,655 $ 11,275 $ 33,805 $ 11,797 259,532
=======================================================
Depreciation and amortization expense (93,418)
General and administrative expense (23,332)
Interest income 1,853
Loss on extinguishment of debt (3,872)
Equity in earnings and minority interest (59,316)
------------
Income before discontinued operations $ 81,447
============
Total assets (2) $ 3,067,611 $ 151,606 $418,856 $157,041 $3,795,114
Capital expenditures (2) $ 454,727 $ 29,164 $ 25,930 $ 49,903 $ 559,718
<FN>
(1) Property operating expenses include property operating, real estate
taxes and maintenance and repairs.
(2) The All Other category includes mortgage notes receivable, the
Company's office building and the Management Company.
</FN>
NOTE 13. OPERATING PARTNERSHIP
Condensed consolidated financial statement information for the Operating
Partnership is presented as follows:
December 31,
----------------------------------
2004 2003
----------------------------------
ASSETS:
Net investment in real estate assets $4,894,780 $3,912,220
Investment in unconsolidated affiliates 84,782 96,989
Other assets 224,476 253,985
----------------------------------
Total assets $5,204,038 $4,263,194
==================================
LIABILITIES:
Mortgage and other notes payable $3,371,679 $2,738,102
Other liabilities 185,839 138,210
----------------------------------
Total liabilities 3,557,518 2,876,312
Minority interests 11,977 3,652
OWNERS' EQUITY 1,634,543 1,383,230
----------------------------------
Total liabilities and owners' equity $5,204,038 $4,263,194
==================================
64
Year Ended December 31,
---------------------------------------------------------
2004 2003 2002
---------------------------------------------------------
Total revenues $ 757,253 $ 664,312 $584,131
Depreciation and amortization (142,043) (112,857) (93,418)
Other operating expenses (270,185) (234,246) (206,631)
---------------------------------------------------------
Income from operations 345,025 317,209 284,082
Interest income 3,355 2,485 1,850
Interest expense (177,191) (153,314) (142,910)
Loss on extinguishment of debt -- (167) (3,872)
Gain on sales of real estate assets 29,272 77,765 2,804
Equity in earnings of unconsolidated
affiliates 10,308 4,941 8,215
Minority interest in shopping center
properties (5,365) (2,758) (3,280)
---------------------------------------------------------
Income before discontinued operations 205,404 246,161 146,889
Operating income of discontinued operations 1,467 1,958 3,087
Gain on discontinued operations 845 4,042 372
---------------------------------------------------------
Net income $207,716 $252,161 $150,348
=========================================================
NOTE 14. NONCASH INVESTING AND FINANCING ACTIVITIES
The Company's noncash investing and financing activities were as
follows for 2004, 2003 and 2002:
2004 2003 2002
--------------- --------------------------------
Cash paid during the year for interest, net of
amounts capitalized $ 174,496 $ 151,012 $ 141,425
Debt assumed to acquire property interests 304,646 209,834 149,687
Premiums related to debt assumed to acquire property
interests 19,455 26,290 --
Issuance of minority interest to acquire property
interests 46,212 -- 60,788
Debt consolidated from application of FIN 46(R) 38,147 -- --
Land purchase obligation related to acquired property 11,950 -- --
Conversion of Operating Partnership units into
common stock 5,630 -- 7,163
Short-term notes payable issued to acquire property
interests -- 11,617 --
Note receivable from sale of real estate assets -- 4,813 --
NOTE 15. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to manage its exposure to
changes in interest rates. The Company does not use derivative financial
instruments for speculative purposes. The Company's interest rate risk
management policy requires that derivative instruments be used for hedging
purposes only and that they be entered into only with major financial
institutions based upon their credit ratings and other factors.
The Company's objective in using derivatives is to manage its exposure to
changes in interest rates. To accomplish this objective, the Company primarily
uses interest rate swap and cap agreements as part of its cash flow hedging
strategy.
At December 31, 2003, the Company had one interest rate cap agreement that
was already in place on $40,000 of variable-rate debt that was assumed in
connection with the acquisition of Sunrise Mall in 2003 (see Note 3). The
interest rate cap matured in May 2004. The interest rate cap's fair value was $0
at both the acquisition date and December 31, 2004.
Interest rate swap agreements designated as cash flow hedges involve the
receipt of variable-rate amounts in exchange for fixed-rate payments over the
life of the agreements without the exchange of the underlying principal amount.
During 2002, such derivatives were used to hedge the variable cash flows
associated with variable-rate debt. Under an interest rate swap in place, the
Company received interest payments at a rate equal to LIBOR and paid interest at
a fixed rate of 5.83%. The interest rate swap had a notional amount of $80,000
65
and expired August 30, 2003. The change in net unrealized gains on cash flow
hedges in 2003 and 2002 reflects a reclassification of net unrealized gains from
accumulated other comprehensive loss to interest expense in the amounts of
$2,397 and $4,387, respectively, related to this interest rate swap agreement.
NOTE 16. RELATED PARTY TRANSACTIONS
CBL's Predecessor and certain officers of the Company have a significant
minority interest in the construction company that the Company engaged to build
substantially all of the Company's development properties. The Company paid
approximately $81,153, $163,617 and $96,185 to the construction company in 2004,
2003, and 2002, respectively, for construction and development activities. The
Company had accounts payable to the construction company of $7,774 and $8,082 at
December 31, 2004 and 2003, respectively.
The Management Company provides management, development and leasing
services to the Company's unconsolidated affiliates and other affiliated
partnerships. Revenues recognized for these services amounted to $5,970, $3,030
and $3,493 in 2004, 2003 and 2002, respectively.
NOTE 17. CONTINGENCIES
The Company is currently involved in certain litigation that arises in the
ordinary course of business. It is management's opinion that the pending
litigation will not materially affect the financial position or results of
operations of the Company. Additionally, management believes that, based on
environmental studies completed to date, any exposure to environmental cleanup
will not materially affect the financial position and results of operations of
the Company.
The Company has guaranteed 50% of the debt of Parkway Place L.P., an
unconsolidated affiliate in which the Company owns a 45% interest. The total
amount outstanding at December 31, 2004, was $53,323, of which the Company has
guaranteed $26,662. The Company did not receive a fee for this guaranty.
Under the terms of the partnership agreement of Mall of South Carolina
L.P., an unconsolidated affiliate in which the Company owns a 50% interest, the
Company had guaranteed 100% of the construction debt incurred to develop Coastal
Grand - Myrtle Beach in Myrtle Beach, SC. The Company received a fee of $1,572
for this guaranty when it was issued during 2003. The Company was recognizing
one-half of this fee as revenue pro rata over the term of the guaranty until its
expiration in May 2006, which represents the portion of the fee attributable to
the third-party partner's ownership interest. As discussed in Note 5, Mall of
South Carolina L.P. refinanced the construction loan with new mortgage loans in
September 2004. As a result, the Company recognized one-half of the unamortized
balance of the guaranty fee, or $328, as revenue when the construction loan was
retired. The remaining $328 attributable to the Company's ownership interest was
recorded as a reduction to the Company's investment in the partnership. The
Company recognized total revenue of $568 and $218 related to this guaranty
during 2004 and 2003, respectively.
The Company has guaranteed 100% of the debt of Imperial Valley Mall L.P.,
an unconsolidated affiliate in which the Company owns a 60% interest. The total
amount outstanding at December 31, 2004 was $39,943.
The Company has issued various bonds that it would have to satisfy in the
event of non-performance. The total amount outstanding on these bonds was
$11,789 at December 31, 2004.
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, receivables, accounts
payable and accrued liabilities are reasonable estimates of their fair values
because of the short maturity of these financial instruments. Based on the
interest rates for similar financial instruments, the carrying value of mortgage
notes receivable is a reasonable estimate of fair value. The fair value of
mortgage and other notes payable was $3,667,151 and $3,094,285 at December 31,
2004 and 2003, respectively. The fair value was calculated by discounting future
cash flows for the notes payable using estimated rates at which similar loans
would be made currently.
66
NOTE 19. STOCK INCENTIVE PLAN
The Company maintains the CBL & Associates Properties, Inc. Amended and
Restated Stock Incentive Plan, as amended, which permits the Company to issue
stock options and common stock to selected officers, employees and directors of
the Company. The shares available under the plan were increased from 8,000,000
to 10,400,000 during 2002. The Compensation Committee of the Board of Directors
(the "Committee") administers the plan.
Stock Options
Stock options issued under the plan allow for the purchase of common stock
at the fair market value of the stock on the date of grant. Stock options
granted to officers and employees vest and become exercisable in installments on
each of the first five anniversaries of the date of grant and expire 10 years
after the date of grant. Stock options granted to independent directors are
fully vested upon grant. However, the independent directors may not sell, pledge
or otherwise transfer their stock options during their board term or for one
year thereafter.
The Company's stock option activity for 2004, 2003 and 2002 is summarized
as follows:
2004 2003 2002
--------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------------------------------------ -------------------------------------------
Outstanding, beginning of year 4,368,216 $12.84 5,066,834 $12.76 4,703,934 $11.70
Granted - - - - 859,500 18.28
Exercised (1,324,374) 11.53 (646,518) 12.00 (419,200) 11.95
Canceled (10,300) 15.76 (52,100) 15.46 (77,400) 14.14
------------- -------------- ---------------
Outstanding, end of year 3,033,542 13.39 4,368,216 12.84 5,066,834 12.76
============= ============== ===============
Options exercisable at end of
year 2,150,242 12.35 2,923,316 11.60 2,851,634 11.13
============= ============== ===============
Weighted average fair value of
options granted during
the year - - $ 1.75
============= ============== ===============
The following is a summary of the stock options outstanding at December 31,
2004:
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Price Exercise Price
Options Contractual of Options Options of Options
Exercise Price Range Outstanding Life in Years Outstanding Exercisable Exercisable
- ------------------------ -------------- ----------------- ----------------- --------------- -----------------
$9.78125 - $10.8125 105,000 0.4 $9.82 105,000 $9.82
$11.8125 - $12.8125 1,749,538 3.3 11.59 1,617,638 11.57
$13.8375 - $19.9000 1,179,004 6.9 16.39 427,604 15.91
-------------- ----------------- ----------------- --------------- -----------------
Totals 3,033,542 4.6 $13.39 2,150,242 $12.34
============== ================= ================= =============== =================
Stock Awards
Under the plan, common stock may be awarded either alone, in addition to,
or in tandem with other stock awards granted under the plan. The Committee has
the authority to determine eligible persons to whom common stock will be
awarded, the number of shares to be awarded, and the duration of the vesting
period, as defined. The Committee may also provide for the issuance of common
stock under the plan on a deferred basis pursuant to deferred compensation
arrangements, as described in Note 20.
67
The Company granted awards for 93,600 and 86,450 shares of the Company's
common stock to employees in May 2004 and May 2003, respectively. The terms of
the awards allow for a recipient to vest and receive shares of common stock in
equal installments on each of the first five anniversaries of the date of grant.
Under the terms of the awards, the Company pays the recipient additional
compensation, in an amount equal to the dividends paid on the Company's common
stock, on the unvested portion of the award as if the recipient owned the
unvested shares.
The Company recorded deferred compensation of $2,206 and $1,870 when the
awards were granted in May 2004 and 2003, respectively, based on the market
value of the Company's common stock on the grant dates, which was $23.57 and
$21.53 per share, respectively. The deferred compensation is being amortized on
a straight-line basis as compensation expense over the five-year vesting period.
The Company recognized $664 and $248 of compensation expense in 2004 and 2003,
respectively, related to the amortization of deferred compensation. The Company
also recorded a reduction to deferred compensation of $68 and $15 for grants
that were canceled during 2004 and 2003, respectively.
During 2004, the Company issued an additional 63,314 shares of common stock
to employees and nonemployee directors with a weighted-average grant date fair
value of $30.56. The shares vested immediately.
During 2003, the Company issued an additional 87,212 shares of common stock
to employees and nonemployee directors with a weighted-average grant date fair
value of $21.51. The shares vested immediately.
During 2002, the Company issued 146,456 shares of common stock to employees
with a weighted average grant-date fair value of $17.61 per share. There were
83,032 shares that vested immediately. The remaining 63,424 shares vest at
various dates from 2003 to 2007.
NOTE 20. EMPLOYEE BENEFIT PLANS
401(k) Plan
The Management Company maintains a 401(k) profit sharing plan, which is
qualified under Section 401(a) and Section 401(k) of the Code to cover employees
of the Management Company. All employees who have attained the age of 21 and
have completed at least one year of service are eligible to participate in the
plan. The plan provides for employer matching contributions on behalf of each
participant equal to 50% of the portion of such participant's contribution that
does not exceed 2.5% of such participant's compensation for the plan year.
Additionally, the Management Company has the discretion to make additional
profit-sharing-type contributions not related to participant elective
contributions. Total contributions by the Management Company were $657, $518 and
$439 in 2004, 2003 and 2002, respectively.
Employee Stock Purchase Plan
The Company maintains an employee stock purchase plan that allows eligible
employees to acquire shares of the Company's common stock in the open market
without incurring brokerage or transaction fees. Under the plan, eligible
employees make payroll deductions that are used to purchase shares of the
Company's common stock. The shares are purchased by the fifth business day of
the month following the month when the deductions were withheld. The shares are
purchased at the prevailing market price of the stock at the time of purchase.
Deferred Compensation Arrangements
The Company has entered into agreements with certain of its officers that
allow the officers to defer receipt of selected salary increases and/or bonus
compensation for periods ranging from 5 to 10 years.
For certain officers, the deferred compensation arrangements provide that
when the salary increase or bonus compensation is earned and deferred, shares of
the Company's common stock issuable under the Amended and Restated Stock
68
Incentive Plan are deemed set aside for the amount deferred. The number of
shares deemed set aside is determined by dividing the amount of compensation
deferred by the fair value of the Company's common stock on the deferral date,
as defined in the arrangements. The shares set aside are deemed to receive
dividends equivalent to those paid on the Company's common stock, which are then
deemed to be reinvested in the Company's common stock in accordance with the
Company's dividend reinvestment plan. When an arrangement terminates, the
Company will issue shares of the Company's common stock to the officer
equivalent to the number of shares deemed to have accumulated under the
officer's arrangement. At December 31, 2004 and 2003, respectively, there were
214,196 and 187,592 shares that were deemed set aside in accordance with these
arrangements.
For other officers, the deferred compensation arrangements provide that
their bonus compensation is deferred in the form of a note payable to the
officer. Interest accumulates on these notes at 7.0%. When an arrangement
terminates, the note payable plus accrued interest is paid to the officer in
cash. At December 31, 2004 and 2003, respectively, the Company had notes
payable, including accrued interest, of $52 and $296 related to these
arrangements.
NOTE 21. DIVIDENDS
On November 4, 2004, the Company declared a cash dividend of $0.40625 per
share of common stock for the quarter ended December 31, 2004. The dividend was
paid on January 14, 2005, to shareholders of record as of December 31, 2004. The
total dividend of $25,459 is included in accounts payable and accrued
liabilities at December 31, 2004.
On November 4, 2004, the Operating Partnership declared a distribution of
$21,185 to the Operating Partnership's limited partners. The distribution was
paid on January 14, 2005. This distribution represented a distribution of
$0.40625 per unit for each common unit and $0.40625 to $0.648 per unit for the
special common units in the Operating Partnership. The total distribution is
included in accounts payable and accrued liabilities at December 31, 2004.
On October 29, 2003, the Company declared a cash dividend of $0.3625 per
share of common stock for the quarter ended December 31, 2003. The dividend was
paid on January 16, 2004, to shareholders of record as of December 31, 2003. The
total dividend of $21,985 is included in accounts payable and accrued
liabilities at December 31, 2003.
On October 29, 2003, the Operating Partnership declared a distribution of
$18,309 to the Operating Partnership's limited partners. The distribution was
paid on January 16, 2004. This distribution represented a distribution of
$0.3625 per unit for each common unit and $0.363 to $0.422 per unit for the
special common units in the Operating Partnership. The total distribution is
included in accounts payable and accrued liabilities at December 31, 2003.
The allocations of dividends declared and paid for income tax purposes are
as follows:
Year Ended December 31,
2004 2003 2002
--------------- ------------------- -----------------
Dividends declared:
Common stock $1.49375 $ 1.345 $ 1.16
Series A preferred stock -- $ 2.05 $ 2.25
Series B preferred stock 4.37505 $ 4.3752 $ 2.3942
Series C preferred stock 19.3750 $ 6.99653(1) $ --
Series D preferred stock -- $ -- $ --
Allocations: (2)
Ordinary income 87.41% 98.83% 95.63%
Capital gains 15% rate 11.27% 0.00% 0.00%
Capital gains 20% rate 0.00% 0.00% 0.13%
Capital gains 25% rate 1.32% 1.17%(3) 4.24%
Return of capital 0.00% 0.00% 0.00%
--------------- ------------------- -----------------
Total 100.00% 100.00% 100.00%
69
=============== =================== =================
<FN>
(1) Represents a dividend of $1.9375 and $0.699653 per depositary share in
2004 and 2003, respectively.
(2) The allocations for income tax purposes are the same for the common
stock and each series of preferred stock for each period presented.
(3) All of the 2003 capital gains represent pre-May 6, 2003 capital gains.
</FN>
NOTE 22. QUARTERLY INFORMATION (UNAUDITED)
The following quarterly information differs from previously reported
results since the results of operations of long-lived assets disposed of
subsequent to each quarter end in 2004 have been reclassified to discontinued
operations for all periods presented. Additionally, total revenues differs from
previously reported amounts due to a reclassification made to conform to the
fourth quarter and year-end presentations.
2004 First Second Third Fourth Total (1)
Quarter Quarter Quarter Quarter
------------- ------------ ------------ ------------ ------------
Total revenues $172,158 $175,502 $193,637 $215,956 $757,253
Income from operations 77,418 79,092 83,442 103,682 343,634
Income before discontinued operations 34,282 24,977 23,566 35,974 118,799
Discontinued operations 324 1,147 613 228 2,312
Net income available to common
shareholders 30,189 21,708 19,764 31,141 102,802
Basic per share data:
Income before discontinued
operations,
net of preferred dividends $ 0.49 $ 0.34 $ 0.31 $ 0.50 $ 1.64
Net income available to common
shareholders $ 0.50 $ 0.36 $ 0.32 $ 0.50 $ 1.68
Diluted per share data:
Income before discontinued
operations, net of preferred
dividends $ 0.47 $ 0.32 $ 0.30 $ 0.48 $ 1.57
Net income available to common
shareholders $ 0.48 $ 0.34 $ 0.31 $ 0.48 $ 1.61
First Second Third Fourth
2003 Quarter Quarter Quarter Quarter Total (1)
------------- ------------ ------------ ------------ ------------
Total revenues $162,931 $161,748 $162,293 $177,340 $664,312
Income from operations 77,744 77,357 77,342 83,283 315,726
Income before discontinued operations 23,064 24,293 23,871 66,909 138,139
Discontinued operations 3,408 414 1,038 1,140 6,000
Net income available to common
shareholders 22,776 21,022 20,225 60,483 124,506
Basic per share data:
Income before discontinued
operations,
net of preferred dividends $ 0.33 $ 0.34 $ 0.32 $ 0.99 $ 1.98
Net income available to common
Shareholders $ 0.38 $ 0.35 $ 0.34 $ 1.01 $ 2.08
Diluted per share data:
Income before discontinued
operations, net of preferred
dividends $ 0.31 $ 0.33 $ 0.31 $ 0.94 $ 1.89
Net income available to common
shareholders $ 0.37 $ 0.34 $ 0.33 $ 0.96 $ 2.00
<FN>
(1) The sum of quarterly earnings per share may differ from annual earnings per
share due to rounding.
</FN>
NOTE 23. SUBSEQUENT EVENTS
Discontinued Operations
In March 2005, the Company sold five community centers for an aggregate
sales price of $12,100. The Company recognized an aggregate loss on impairment
of real estate assets of $617 on these community centers in December 2004 and
70
recognized an additional loss on impairment of $32 during the three months ended
March 31, 2005. Total revenues for these community centers were $1,911, $1,684
and $1,706 in 2004, 2003 and 2002, respectively. Certain amounts in the
consolidated financial statements have been reclassified to reflect the results
of operations of these properties as discontinued operations in all periods
presented.
Common Stock-Split
At the Company's Annual Meeting of Shareholders on May 9, 2005, the
Company's shareholders approved an increase in the authorized shares of the
common stock under the Company's amended and restated certificate of
incorporation to 180,000,000 shares from 95,000,000 shares. On May 10, 2005, the
Company's Board of Directors approved a two-for-one stock split of the Company's
common stock, which was effected in the form of a stock dividend. The record
date for the stock split was June 1, 2005, and the distribution date was June
15, 2005. The Company retained the current par value of $0.01 per share for all
shares of common stock. All references to numbers of common shares and per share
data in the accompanying consolidated financial statements and notes thereto
have been adjusted to reflect the stock split on a retroactive basis.
Shareholders' equity reflects the stock split through a reclassification of $313
from Additional Paid-In Capital to Common Stock, which represents the par value
of the additional shares resulting from the stock split.
The Operating Partnership currently has common units and special common
units of limited partner interest outstanding that may be exchanged by their
holders, under certain circumstances, for shares of common stock on a
one-for-one basis. These common units and special common units were also split
on a two-for-one basis so that they continue to be exchangeable on a one-for-one
basis into shares of the Company's common stock.