1
Securities Exchange Act of 1934 -- Form10-Q
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
-----------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended to
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Commission File Number 1-12494
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CBL & Associates Properties, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 62-1545718
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Park Place, 6148 Lee Highway, Chattanooga, TN 37421
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code)(423) 855-0001
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(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
----- -----
The number of shares outstanding of each of the registrants classes
of common stock, as of May 1, 1997 : Common Stock, par value $.01
per share, 23,980,069 shares.
2
CBL & ASSOCIATES PROPERTIES, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE NUMBER
ITEM 1: FINANCIAL INFORMATION 3
CONSOLIDATED BALANCE SHEETS - AS OF
MARCH 31, 1997 AND DECEMBER 31, 1996 4
CONSOLIDATED STATEMENTS OF OPERATIONS -
FOR THE THREE MONTHS ENDED MARCH 31,
1997 AND 1996 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
1997 AND 1996 6
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS 7
ITEM 2: MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 9
PART II OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS 20
ITEM 2: CHANGES IN SECURITIES 20
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 20
ITEM 4: SUBMISSION OF MATTERS TO HAVE A
VOTE OF SECURITY HOLDERS 20
ITEM 5: OTHER INFORMATION 20
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 21
SIGNATURE 22
3
CBL & ASSOCIATES PROPERTIES, INC.
ITEM 1 - FINANCIAL INFORMATION
The accompanying financial statements are unaudited; however, they
have been prepared in accordance with generally accepted accounting
principles for interim financial information and in conjunction with
the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the disclosures required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting
solely of normal recurring matters) necessary for a fair presentation
of the financial statements for these interim periods have been
included. The results for the interim period ended March 31, 1997 are
not necessarily indicative of the results to be obtained for the full
fiscal year.
These financial statements should be read in conjunction with the
CBL & Associates Properties, Inc. (the "Company") December 31, 1996
audited financial statements and notes thereto included in the CBL
& Associates Properties, Inc. Form 10-K for the year ended December
31, 1996.
4
CBL & ASSOCIATES PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
March 31, December 31,
1997 1996
(UNAUDITED) (AUDITED)
----------- ------------
ASSETS
Real estate assets:
Land..................................... $ 127,573 $ 119,965
Buildings and improvements............... 910,630 883,683
---------- -----------
1,038,203 1,003,648
Less: Accumulated depreciation........... (121,815) (114,536)
---------- -----------
916,388 889,112
Developments in progress................. 104,439 98,148
---------- -----------
Net investment in real estate assets..... 1,020,827 987,260
Cash and cash equivalents................ 3,295 4,298
Receivables:
Tenant............................... 11,616 11,417
Other................................ 761 1,087
Mortgage notes receivable................ 14,612 14,858
Other assets............................. 7,967 7,005
---------- -----------
$1,059,078 $ 1,025,925
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage and other notes payable......... $ 557,726 $ 590,295
Accounts payable and accrued liabilities. 18,712 39,785
---------- -----------
Total liabilities.................... 576,438 630,080
---------- -----------
Commitments and contingencies............ -- --
Distributions and losses in excess of
investment in unconsolidated
affiliates............................. 8,284 8,616
---------- -----------
Minority interest........................ 128,676 114,425
---------- -----------
Shareholders' Equity:
Preferred stock, $.01 par value,
5,000,000 shares authorized,
none issued........................ -- --
Common stock, $.01 par value,
95,000,000 shares authorized,
23,974,347 and 20,965,790 shares
issued and outstanding in 1997
and 1996, respectively............. 240 210
Excess stock, $.01 par value,
100,000,000 shares authorized,
none issued........................ -- --
Additional paid - in capital......... 357,602 293,824
Accumulated deficit.................. (11,875) (20,855)
Deferred compensation................ (287) (375)
---------- -----------
Total shareholders' equity... 345,680 272,804
---------- -----------
$1,059,078 $ 1,025,925
========== ===========
The accompanying notes are an integral part of these balance sheets.
5
CBL & ASSOCIATES PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATE)
(UNAUDITED)
Three Months Ended
March 31,
---------------------------
1997 1996
----------- -----------
REVENUES:
Rentals:
Minimum . . . . . . . . . . . . . . . . . . . $ 26,562 $ 22,498
Percentage. . . . . . . . . . . . . . . . . . 1,376 1,046
Other . . . . . . . . . . . . . . . . . . . . 220 233
Tenant reimbursements . . . . . . . . . . . . . 11,716 10,123
Management, leasing and development fees . . . 679 608
Interest and other . . . . . . . . . . . . . . 689 872
----------- -----------
Total revenues . . . . . . . . . . . . . . . 41,242 35,380
----------- -----------
EXPENSES:
Property operating . . . . . . . . . . . . . . 7,073 5,418
Depreciation and amortization . . . . . . . . . 7,688 6,149
Real estate taxes . . . . . . . . . . . . . . . 3,365 2,660
Maintenance and repairs . . . . . . . . . . . . 2,359 2,256
General and administrative . . . . . . . . . . 2,217 2,189
Interest . . . . . . . . . . . . . . . . . . . 8,940 7,891
Other . . . . . . . . . . . . . . . . . . . . . 27 196
----------- -----------
Total expenses . . . . . . . . . . . . . . . 31,669 26,759
----------- -----------
INCOME FROM OPERATIONS . . . . . . . . . . . . 9,573 8,621
GAIN ON SALES OF REAL ESTATE ASSETS . . . . . . 3,019 615
EQUITY IN EARNINGS OF UNCONSOLIDATED
AFFILIATES . . . . . . . . . . . . . . . . . . 620 670
MINORITY INTEREST IN EARNINGS:
Operating partnership . . . . . . . . . . . . (3,594) (3,019)
Shopping center properties . . . . . . . . . (142) (150)
----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM . . . . . . . $ 9,476 $ 6,737
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT
OF DEBT . . . . . . . . . . . . . . . . . . (496) --
----------- -----------
NET INCOME . . . . . . . . . . . . . . . . . . $ 8,980 $ 6,737
=========== ===========
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE DATA:
INCOME BEFORE EXTRAORDINARY ITEM . . . . . . . $ 0.40 $ 0.32
=========== ===========
NET INCOME . . . . . . . . . . . . . . . . . . $ 0.38 $ 0.32
=========== ===========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING . . . . . . . . . . . . . . . 23,784 20,847
=========== ===========
The accompanying notes are an integral part of these statements.
6
CBL & ASSOCIATES PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
---------------------------
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . $ 8,980 $ 6,737
Adjustments to reconcile net income to net
cash provided by operating activities:
Minority interest in earnings . . . . . . . . 3,736 3,169
Depreciation . . . . . . . . . . . . . . . . 6,941 5,683
Amortization . . . . . . . . . . . . . . . . 916 466
Gain on sales of real estate assets . . . . . (3,019) (615)
Equity in earnings of unconsolidated
affiliates . . . . . . . . . . . . . . . . (620) (670)
Distributions from unconsolidated
affiliates . . . . . . . . . . . . . . . . 1,053 1,083
Issuance of stock under incentive plan . . . 83 197
Amortization of deferred compensation . . . . 88 71
Write-off of development projects . . . . . . 27 196
Distributions to minority investors . . . . . (4,122) (3,772)
Changes in assets and liabilities -
Tenant and other receivables . . . . . . . . (139) (89)
Other assets . . . . . . . . . . . . . . . . (486) (956)
Accounts payable and accrued expenses . . . . (6,397) 4,308
----------- -----------
Net cash provided by operating
activities . . . . . . . . . . . . . 7,041 15,808
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction of real estate and land
acquisition . . . . . . . . . . . . . . . . (34,659) (22,327)
Acquisition of real estate assets . . . . . . (5,716) --
Capitalized interest . . . . . . . . . . . . (1,676) (747)
Revenue enhancing capital expenditures . . . (55) (36)
Other capital expenditures . . . . . . . . . (2,686) (574)
Proceeds from sales of real estate
assets . . . . . . . . . . . . . . . . . . 5,556 1,491
Additions to notes receivable . . . . . . . . (232) (263)
Payments received on notes receivable . . . . 478 85
Advances and investments in unconsolidated
affiliates. . . . . . . . . . . . . . . . . (765) (315)
----------- -----------
Net cash used in investing
activities . . . . . . . . . . . . . (39,755) (22,686)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage and other notes
payable . . . . . . . . . . . . . . . . . . 94,755 111,285
Principal payments on mortgage and
other notes payable . . . . . . . . . . . . (127,324) (97,069)
Additions to deferred finance costs . . . . . (824) --
Dividends paid . . . . . . . . . . . . . . . (8,806) (8,283)
Proceeds from issuance of common stock . . . 74,352 33
Proceeds from exercise of stock options . . . 54 --
Prepayment penalties on early
extinguishment of debt . . . . . . . . . . (496) --
----------- -----------
Net cash provided by financing
activities . . . . . . . . . . . . . 31,711 5,966
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS . . . . (1,003) (912)
CASH AND CASH EQUIVALENTS, beginning of
period . . . . . . . . . . . . . . . . . . . 4,298 3,029
----------- -----------
CASH AND CASH EQUIVALENTS, end of period . . . $ 3,295 $ 2,117
=========== ===========
The accompanying notes are an integral part of these statements.
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CBL & ASSOCIATES PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - UNCONSOLIDATED AFFILIATES
At March 31, 1997, the Company had investments in three partnerships
and joint ventures all of which are reflected using the equity method
of accounting. Condensed combined results of operations for the
unconsolidated affiliates are presented as follows (dollars in thousands):
Company's Share
Total For The For The
Three Months Ended Three Months Ended
March 31, March 31,
---------------------- ---------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Revenues . . . . . . . . . $ 5,564 $ 5,653 $ 2,770 $ 2,772
-------- -------- ------- --------
Depreciation and
amortization . . . . . . 673 650 401 318
Interest expense . . . . . 1,969 2,085 893 1,022
Other operating expenses . 1,645 1,548 856 762
--------- --------- --------- ---------
NET INCOME . . . . . . . . $ 1,277 $ 1,370 $ 620 $ 670
========= ========= =========
=========
NOTE 2 - CONTINGENCIES
The Company is currently involved in certain litigation arising in the
ordinary course of business. In the opinion of management, the pending
litigation will not materially affect the financial statements of the
Company. Additionally, based on environmental studies completed to date
on the real estate properties, management believes any exposure related
to environmental cleanup will not be significent to the financial position
and results of operations of the Company.
NOTE 3 - CREDIT AGREEMENTS
In February 1997, the Company reduced the interest rate from 137 basis
points to 120 basis points over LIBOR and added $38 million and one
additional bank to its credit facility led by First Tennessee Bank N.A.
bringing the total to $80 million. In February 1997, the Company's major
line bank, Wells Fargo, reduced the pricing on its $85 million facility
from 150 basis points to 125 basis points over LIBOR. The Company's
total available under the revolving lines of credit was $175 million
at March 31, 1997.
8
In April 1995, the Company executed a three-year interest rate swap
agreement with First Union National Bank of Tennessee which has a principal
balance of $5.3 million. The effective date was March 16, 1995. The
interest rate is fixed at 8.5%. There was no fee for this transaction.
Effective June 6, 1995, the Company executed a three-year interest rate
swap agreement on a notional principal amount of $50 million with
NationsBank N.A. The base interest rate is fixed at 5.52%. This
agreement effectively fixes $50 million of the Company's variable rate
debt at a rate no greater than 7.27%. There was no fee for this
transaction. These transactions had no significant impact on interest
expense for the three months ended March 31, 1997.
NOTE 4 - RECLASSIFICATION
Certain reclassifications have been made in the 1996 financial statements
to conform with the 1997 presentation.
9
CBL & ASSOCIATES PROPERTIES, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations should be read in conjunction with CBL & Associates
Properties, Inc. Consolidated Financial Statements and Notes thereto.
GENERAL BACKGROUND
CBL & Associates Properties, Inc.(the "Company") Consolidated
Financial Statements and Notes thereto reflect the consolidated financial
results of CBL & Associates Limited Partnership (the "Operating
Partnership") which includes at March 31, 1997, the operations of a
portfolio of properties consisting of fifteen regional malls, nine
associated centers, seventy-eight community centers, an office building,
joint venture investments in three regional malls, and income from six
mortgages,("the Properties"). The Operating Partnership also has one
mall, one associated center, two power centers, one community center,
and two community center expansions currently under construction and
options to acquire certain shopping center development sites. The
consolidated financial statements also include the accounts of CBL &
Associates Management, Inc. (the "Management Company").
The Company classifies its regional malls into two categories-malls
which have completed their initial lease-up ("Stabilized Malls") and malls
which are in their initial lease-up phase ("New Malls"). The New Mall
category is presently comprised of the redeveloped and expanded Westgate
Mall in Spartanburg, South Carolina, Turtle Creek Mall in Hattiesburg,
Mississippi, and Oak Hollow Mall in High Point, North Carolina.
In September 1995, the Company completed a follow-on offering of
4,163,500 shares of its Common Stock at $20.625, including 150,000 shares
purchased by management. The net proceeds of $80.7 million were used to
repay floating rate indebtedness under the Company's revolving lines of
credit.
In January 1997, the Company completed a spot offering of 3,000,000
shares of its Common Stock at $26.125 per share. Management purchased
55,000 of those shares as part of the offering. The net proceeds of $74.3
million, were used to repay variable rate indebtedness incurred in the
Company's development and acquisition program.
10
RESULTS OF OPERATIONS
Operational highlights for the three months ended March 31, 1997 as
compared to March 31, 1996 are as follows:
SALES
Mall shop sales, for those tenants who have reported, in the
thirteen Stabilized Malls in the Company's portfolio increased
by 3.0% on a comparable per square foot basis.
Three Months Ended March 31,
----------------------------
1997 1996
--------- ---------
Sales per square foot $ 51.45 $ 49.95
Total sales volume in the mall portfolio, including New Malls,
increased 6.3% to $148.8 million for the three months ended
March 31, 1997 from $140.0 million for the three months ended
March 31, 1996.
Occupancy costs as a percentage of sales for the three months
ended March 31, 1997 and 1996 for the Stabilized Malls were
14.6% and 14.3%, respectively. Occupancy costs were 11.5%,
12.3% and 12.2% for the years ended December 31, 1996, 1995,
and 1994, respectively. Occupancy costs as a percentage of
sales are generally higher in the first three quarters of the
year as compared to the fourth quarter due to the seasonality
of retail sales.
OCCUPANCY
Occupancy changes for the Company's overall portfolio are as
follows:
At March 31,
---------------------------
1997 1996
-------- --------
Stabilized malls 88.1% 87.7%
New malls 88.2 84.1
Associated centers 91.1 99.0
Community centers 96.6 96.9
-------- --------
TOTAL PORTFOLIO 92.5% 92.8%
======== ========
Our associated center occupancy declined to 91.1% primarily due to the
relocation of one of the anchors at Foothills Plaza to Foothills Mall in
Maryville, Tennessee. Excluding this relocation, our associated center
occupancy would have been 98.7% at March 31, 1997.
11
AVERAGE BASE RENT
Average base rents for the Company's three portfolio categories
were as follows:
At March 31,
---------------------------
1997 1996
-------- --------
Malls . . . . . . . . . . . . $ 18.99 $ 17.50
Associated centers . . . . . . 9.65 8.24
Community centers. . . . . . . 7.12 6.59
LEASE ROLLOVERS
On spaces previously occupied, the Company achieved the following
results from rollover leasing for the three months ended March 31,
1997 over and above the base and percentage rent being paid by the
previous tenant:
Per Square Per Square
Foot Rent Foot Rent Percentage
Prior Lease(1) New Lease(2) Increase
-------------- ------------ -----------
Malls. . . . . . . . . . . $ 17.87 $ 19.64 9.90%
Associated centers . . . . 13.40 14.69 9.67%
Community centers. . . . . 7.89 7.97 1.10%
(1) - Rental achieved for spaces previously occupied at the
end of the lease including percentage rent.
(2) - Average base rent over the term of the lease.
For the three months ended March 31, 1997 malls represented 73.5% of
total revenues from the properties; revenues from associated centers
represented 3.2%; revenues from community centers represented 19.9%; and
revenues from mortgages and the office building represented 3.4%.
12
Accordingly, revenues and results of operations are disproportionately
impacted by the malls' achievements.
The shopping center business is somewhat seasonal in nature with
tenant sales achieving the highest levels during the fourth quarter
because of the holiday season. The malls earn most of their "temporary"
rents (rents from short-term tenants) during the holiday period. Thus,
occupancy levels and revenue production are generally the highest in the
fourth quarter of each year. Results of operations realized in any one
quarter may not be indicative of the results likely to be experienced
over the course of the entire year.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31,
1997 TO THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996
Total revenues for the three months ended March 31, 1997 increased by
$5.9 million, or 16.6%, to $41.2 million as compared to $35.4 million in
1996. Of this increase, minimum rents increased by $4.1 million, or 18.1%
to $26.6 million as compared to $22.5 million in 1996, and tenant
reimbursements increased by $1.6 million, or 15.7%, to $11.7 million in
1997 as compared to $10.1 million in 1996.
Approximately $5.9 million of the increase in revenues resulted from
operations at the nine new centers opened or acquired during the past
fifteen months. These centers consist of: (I) Devonshire Place in Cary,
North Carolina a 108,076 square foot community center, which opened in
September, 1996; (II) Kingston Overlook in Knoxville, TN a 118,891 square
foot community center which opened in November, 1996; (III) Westgate Mall
in Spartanburg, South Carolina a 1,100,575 square foot regional mall which
was expanded and reopened in October, 1996; (IV) LaGrange Commons in
LaGrange, New York a 59,799 square foot community center which opened in
November 1996; (V) St Clair Square in Fairview Heights, Illinois a
1,044,599 square foot regional mall which was acquired in December, 1996;
(VI) Sutton Plaza a 122,027 square foot community center in Mt Olive, New
Jersey which was acquired in January, 1997 (VII) The Terrace in Chattanooga,
Tennessee which opened in February and March, 1997; (VIII) Massard Crossing
in Ft. Smith, Arkansas which opened in March, 1997; and (IX) a free-standing
63,000 square foot Hannaford Food and Drug in Richmond, Virginia which
opened in March, 1997.
Management, leasing and development fees increased by $0.1 million to
$0.7 million in the first quarter of 1997 as compared to $0.6 million in the
first quarter of 1996. This increase was primarily due to development
fee income earned in the first quarter of 1997.
Property operating expense, including real estate taxes, maintenance
and repairs, and ground rent increased in the first quarter of 1997 by $2.5
million or 23.8% to $12.8 million as compared to $10.3 million in the first
quarter of 1996. This increase is primarily the result of the addition of
the nine new centers referred to above.
13
Depreciation and amortization increased in the first quarter of 1997
by $1.5 million or 25.0% to $7.7 million as compared to $6.1 million in the
first quarter of 1996. This increase is primarily the result of the
addition of the nine new centers referred to above.
Interest expense increased in the first quarter of 1997 by $1.0
million, or 13.3% to $8.9 million as compared to $7.9 million in 1996.
This increase is primarily due to the additional interest on the nine
centers opened during the last twelve months.
Other expense was negligible in the first quarter of 1997. This
represents pre-development costs written off during this period.
The gain on sales of real estate assets increased in the first
quarter of 1997 by $2.4 million, to $3.0 million as compared to
$0.6 million in 1996. The sales in the first quarter were in
connection with anchor pad and outparcel sales at our developments
in Courtlandt Town Center in Courtlandt, New York, Salem Crossing
in Virginia Beach, Virginia and Kingston Overlook in Knoxville,
Tennessee.
LIQUIDITY AND CAPITAL RESOURCES
The principal uses of the Company's liquidity and capital resources
have historically been for property development, expansion and renovation
programs, and debt repayment. To maintain its qualification as a real
estate investment trust under the Internal Revenue Code, the Company is
required to distribute to its shareholders at least 95% of its "Real Estate
Investment Trust Taxable Income" as defined in the Internal Revenue Code of
1986, as amended (the "Code").
As of May 1, 1997, the Company had $88.0 million available in unfunded
construction loans to be used for completion of the construction projects
and replenishment of working capital previously used for construction.
Additionally, as of May 1, 1997, the Company had obtained revolving credit
lines totaling $175 million of which $137.2 million was available. Also,
as a publicly traded company, the Company has access to capital through both
the public equity and debt markets. The Company has filed a Shelf
Registration authorizing shares of the company's preferred stock and common
stock and warrants to purchase shares of the Company's common stock with an
aggregate public offering price of up to $200 million, with $35.8 million
remaining after the Company's follow-on and spot offerings of common stock
on September 25, 1995 and January 15, 1997 respectively. The Company
anticipates that the combination of these sources will, for the foreseeable
future, provide adequate liquidity to enable it to continue its capital
programs substantially as in the past and make distributions to its
shareholders in accordance with the Code's requirements applicable to real
estate investment trusts.
Management expects to refinance the majority of the mortgage notes
payable maturing over the next five years with replacement loans.
14
The Company's policy is to maintain a conservative debt to total
market capitalization ratio in order to enhance its access to the broadest
range of capital markets, both public and private. The Company's current
capital structure includes property specific mortgages, which are generally
non-recourse, revolving lines of credit, common stock and a minority
interest in the Operating Partnership. The minority interest in the
Operating Partnership represents the 28.2% ownership in the Operating
Partnership held by the Company's executive and senior officers which may
be exchanged for approximately 9.4 million shares of common stock.
Additionally, Company executive officers and directors own approximately
1.6 million shares of the outstanding common stock of the Company, for a
combined total interest in the Operating Partnership of approximately
33.0%. Assuming the exchange of all limited partnership interests in the
Operating Partnership for common stock, there would be outstanding
approximately 33.4 million shares of common stock with a market value of
approximately $817.9 million at March 31, 1997 (based on the closing price
of $24.50 per share on March 31, 1997). Company executive and senior
officers' ownership interests had a market value of approximately $269.6
million at March 31, 1997.
Mortgage debt consists of debt on certain consolidated properties as
well as on three properties in which the Company owns a non-controlling
interest and is accounted for under the equity method of accounting. At
March 31, 1997, the Company's share of funded mortgage debt on its
consolidated properties adjusted for minority investors' interests in
nine properties was $535.6 million and its pro rata share of mortgage debt
on unconsolidated properties (accounted for under the equity method) was
$43.2 million for total debt obligations of $578.8 million with a weighted
average interest rate of 7.82%. Variable rate debt accounted for $155.7
million with a weighted average interest rate of 6.85%. Variable rate debt
accounted for approximately 26.9% of the Company's total debt and 11.2% of
its total capitalization. Of this variable rate debt, $88.4 million is
related to construction projects. Periodically, the Company enters into
interest rate cap and swap agreements to reduce interest rate risks on
variable rate debt. The Company has entered into interest rate swap
agreements for $55.3 million of variable rate debt at an average interest
rate of 6.6% through the third quarter of 1998. Therefore, the Company's
exposure to interest rate fluctuations as of March 31, 1997 is $88.4 million
on construction properties and $12.0 million on operating properties.
In April 1995, the Company executed a three-year interest rate swap
agreement on $5.5 million of debt with First Union National Bank. The
effective date was March 16, 1995. This swap agreement effectively fixes
the interest rate on what is now $5.3 million of debt at 8.5%. In
September 1995 the Company executed a $50.0 million interest rate swap
agreement with NationsBank N.A., for a three-year period at a LIBOR rate
of 5.52%. This agreement effectively fixes $50.0 million of the Company's
variable rate debt at a rate no greater than 7.27%. There were no fees
charged to the Company related to these transactions.
In February 1997, the Company reduced the interest rate from 137
basis points to 120 basis points over LIBOR and added $38 million and one
additional bank to its credit facility led by First Tennessee Bank N.A.
bringing the total to $80 million. In September 1996, the Company closed
a short term loan with Compass Bank in the amount of $25 million at an
interest rate of 50 basis point over LIBOR. The note matures on
15
May 15, 1997. In February 1997, the Company's major line bank, Wells Fargo,
reduced the pricing on its $85 million facility from 150 basis points to
125 basis points over LIBOR.
During the first quarter, the Company closed on two permanent loans:
a ten-year loan on Hamilton Place Mall in Chattanooga, Tennessee, owned 90%
by the Company, in the amount of $75 million at an interest rate of 7.0%
and a twenty-year loan with a five year rate reset option on Westgate Mall
in Spartanburg, South Carolina, in the amount of $52 million at an interest
rate of 6.95%. The proceeds from these loans were used to repay existing
fixed-rate debt and variable rate debt.
Based on the debt (including construction projects) and the market
value of equity described above, the Company's debt to total market
capitalization (debt plus market value equity) ratio was 41.4% at March 31,
1997.
DEVELOPMENT, EXPANSIONS AND ACQUISITIONS
During the first three months of 1997, the Company opened a 156,713
square foot associated center The Terrace in Chattanooga, Tennessee; a
290,717 square foot community center Massard Crossing in Ft Smith Arkansas;
a 60,954 square foot free-standing Hannaford Food and Drug in Richmond,
Virginia; a Dillard's department store and United Artists' 10-screen cinema
at Twin Peaks Mall in Longmont, Colorado; and a Dillard's department store
at Frontier Mall in Cheyenne, Wyoming. Subsequent to the end of the quarter
the company opened a 289,305 square foot community center, Salem Crossing in
Virginia Beach, Virginia. The Company also acquired in the first quarter a
122,207 square foot community center Sutton Plaza in Mt. Olive, New Jersey.
The Company currently has approximately 2.3 million square feet of
new development under construction consisting of: Bonita Lakes Mall in
Meridian, Mississippi, an approximate 631,000 square foot mall scheduled to
open in October 1997; Bonita Lakes Crossing in Meridian, Mississippi,
an approximate 74,000 square foot associated center scheduled to open in
October 1997; Springhurst Towne Center in Louisville, Kentucky, an
approximate 808,000 square foot power center scheduled to open beginning
in August 1997; Courtlandt Town Center in Courtlandt, New York, an
approximate 773,000 square foot power center scheduled to open beginning in
August 1997; an approximate 44,000 square foot free-standing Regal Cinema at
Strawbridge Marketplace in Virginia Beach, Virginia; an approximate 23,000
square foot expansion to Kingston Overlook in Knoxville, Tennessee scheduled
to open in July 1997; and an approximate 10,000 square foot expansion to
Chester Square in Richmond, Virginia.
During the later half of 1997, the Company expects to start
construction on the 1.0 million square foot Arbor Place Mall, in suburban
Atlanta, Georgia and the 600,000 square foot Sand Lakes Corner in Orlando,
Florida.
16
The Company has entered into a number of option agreements for the
development of future regional malls and community centers. Except for
these projects and as further described below, the Company currently has
no other capital commitments.
It is management's expectation that the Company will continue to have
access to the capital resources necessary to expand and develop its
business. Future development and acquisition activities will be undertaken
by the Company as suitable opportunities arise. Such activities are not
expected to be undertaken unless adequate sources of financing are available
and a satisfactory budget with targeted returns on investment has been
internally approved.
The Company will fund its major development, expansion and acquisition
activity with its traditional sources of construction and permanent debt
financing as well as from other debt and equity financings, including public
financings, and its credit facilities in a manner consistent with its
intention to operate with a conservative debt to total market capitalization
ratio.
OTHER CAPITAL EXPENDITURES
Management prepares an annual capital expenditure budget for each
property which is intended to provide for all necessary recurring capital
improvements. Management believes that its annual operating reserve for
maintenance and recurring capital improvements and reimbursements from
tenants will provide the necessary funding for such requirements. The
Company intends to distribute approximately 80% - 90% of its funds from
operations with the remaining 20% - 10% to be held as a reserve for capital
expenditures and continued growth opportunities. The Company believes that
this reserve will be sufficient to cover (I) tenant finish costs associated
with the renewal or replacement of current tenant leases as their leases
expire and (II) capital expenditures which will not be reimbursed by
tenants.
Major tenant finish costs for currently vacant space are expected to
be funded with working capital, operating reserves, or the revolving lines
of credit.
For the three months ended March 31, 1997, revenue generating capital
expenditures or tenant allowances for improvements were $2.6 million. These
capital expenditures generate increased rents from these tenants over the
term of their leases. Revenue enhancing capital expenditures, or remodeling
and renovation costs, were $55,000 for the three months ended March 31,
1997. Revenue neutral capital expenditures, which are recovered from the
tenants, were $160,000 for the first three months of 1997.
The Company believes that the Properties are in compliance in all
material respects with all federal, state and local ordinances and
regulations regarding the handling, discharge and emission of hazardous
or toxic substances. The Company has not been notified by any governmental
authority, or is not otherwise aware, of any material noncompliance,
liability or claim relating to hazardous or toxic substances in connection
with any of its present or former properties.
17
The Company has not recorded in its financial statements any material
liability in connection with environmental matters.
FUNDS FROM OPERATIONS
Management believes that Funds from Operations ("FFO") provides an
additional indicator of the financial performance of the Properties. FFO
is defined by the Company as net income (loss) before depreciation of real
estate assets, other non-cash items (consisting of the effect of straight-
lining of rents and the write-off of development projects not being
pursued), gains or losses on sales of real estate and gains or losses on
investments in marketable securities. FFO also includes the Company's share
of FFO in unconsolidated properties and excludes minority interests' share
of FFO in consolidated properties. The Company computes FFO in accordance
with The National Association of Real Estate Investments Trusts ("NAREIT")
recommendation concerning finance costs and non-real estate depreciation.
However, the Company does not include gains or losses on outparcel sales or
the effect of straight-lined rents in its calculation, even though NAREIT
permits their inclusion when calculating FFO.
The use of FFO as an indicator of financial performance is influenced
not only by the operations of the Properties, but also by the capital
structure of the Operating Partnership and the Company. Accordingly,
management expects that FFO will be one of the significant factors
considered by the Board of Directors in determining the amount of cash
distributions the Operating Partnership will make to its partners
(including the REIT). FFO does not represent cash flow from operations
as defined by GAAP and is not necessarily indicative of cash available to
fund all cash flow needs and should not be considered as an alternative
to net income(loss) for purposes of evaluating the Company's operating
performance or to cash flow as a measure of liquidity.
For the three months ended March 31, 1997, FFO increased by $2.2
million, or 14.8%, to $17.4 million as compared to $15.1 million for 1996.
The increase in FFO was primarily attributable to the acquisitions and new
developments opened at the end of the previous quarter and the beginning
of this quarter.
The Company does not include gains or losses on outparcel sales (which would
have added $3.0 million in 1997 and $0.6 million in 1996) or the effect of
straight-line rents (which would have added $0.5 million in 1997 and $0.2
million in 1996) in its calculation of funds from operations.
18
The Company's calculation of FFO is as follows: (dollars in thousands)
Three Months Ended
March 31,
---------------------
1997 1996
-------- --------
Income from operations. . . . . . . . . . . . $ 9,573 $ 8,621
ADD:
Depreciation & amortization from
consolidated properties . . . . . . . . . . 7,688(1) 6,149(2)
Income from operations of
unconsolidated affiliates . . . . . . . . . 620 670
Depreciation & amortization from
unconsolidated affiliates . . . . . . . . . 401 318
Write-off of development costs charged
to net income . . . . . . . . . . . . . . . 27 196
SUBTRACT:
Minority investors' share of income
from operations in nine properties . . . . (142) (150)
Minority investors share of
depreciation and amortization
in nine properties . . . . . . . . . . . . (178) (159)
Preference return paid to mortgagees. . . . . -- (263)
Adjustment for straight-lining of rents:
Consolidated properties . . . . . . . . . . (508) (164)
Unconsolidated affiliates . . . . . . . . . (7) (7)
Minority investors share of seven
properties. . . . . . . . . . . . . . . . 5 2
Depreciation and amortization of non-real
estate assets and finance costs . . . . . (94) (64)
-------- --------
TOTAL FUNDS FROM OPERATIONS . . . . . . . . . $17,385 $15,149
======== ========
(1) Excludes $168 of non-real estate depreciation, which is classified
as property operating expense on the income statement.
(2) Excludes $177 of non-real estate depreciation, which is classified
as property operating expense on the income statement.
19
IMPACT OF INFLATION
In the last three years, inflation has not had a significant impact on
the Company or CBL because of the relatively low inflation rate.
Substantially all tenant leases do, however, contain provisions designed
to protect the Company from the impact of inflation. Such provisions
include clauses enabling the Company to receive percentage rentals based
on tenant's gross sales, which generally increase as prices rise, and/or
escalation clauses, which generally increase rental rates during the terms
of the leases. In addition, many of the leases are for terms of less than
ten years which may enable the Company to replace existing leases with new
leases at higher base and/or percentage rentals if rents of the existing
leases are below the then-existing market rate. Most of the leases require
the tenants to pay their share of operating expenses, including common area
maintenance, real estate taxes and insurance, thereby reducing the Company's
exposure to increases in costs and operating expenses resulting from
inflation.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Standards("SFAS") No. 128, "Earnings Per Share" which establishes new
standards for computing and presenting earnings per share ("EPS"). SFAS No. 128
is effective for financial statements issued for periods ending after December
15, 1997, including interim periods. Early adoption is not permitted and upon
initial application, all prior-period EPS data is required to be restated. The
adoption of SFAS No. 128 is not expected to have a material effect on the
Company's EPS amounts.
20
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings
None
ITEM 2: Changes in Securities
None
ITEM 3: Defaults Upon Senior Securities
None
ITEM 4: Submission of Matter to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on May 1, 1997.
At the meeting, shareholders re-elected as directors John N. Foy
(21,890,574 votes for and 86,558 votes against or withheld), and
William J. Poorvu (21,888,935 votes for and 88,197 votes against or
withheld), to three-year terms expiring in 2000. Other
continuing directors of the Company are, Stephen D. Lebovitz
and Winston W. Walker, whose terms expire in 1998 and Charles B.
Lebovitz, Claude M. Ballard, and Leo Fields whose terms expire
in 1999.
In addition, at the meeting, shareholders approved a proposal to
ratify the selection of Arthur Andersen LLP as independent public
accountants for the fiscal year ending December 31, 1997
(21,952,465 votes for, 12,213 votes against or withheld).
ITEM 5: Other Information
None
21
ITEM 6: Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 27
Financial Data Schedule
B. Reports on Form 8-K
The following item was reported:
The outline from the Company's May 1, 1997
conference call with analysts and investors
regarding earnings (Item 5) was filed on
May 1, 1997.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CBL & ASSOCIATES PROPERTIES, INC.
John N. Foy
---------------------------------
John N. Foy
Executive Vice President,
Chief Financial Officer and
Secretary
(Authorized Officer of the
Registrant,
Principal Financial Officer and
Principal Accounting Officer)
Date: May 14, 1997
EXHIBIT INDEX
Exhibit
No.
-------
27 Financial Data Schedule