Securities Exchange Act of 1934 -- Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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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
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The number of shares outstanding of each of the registrants classes of
common stock, as of May 5, 1998 : Common Stock, par value $.01 per share,
24,078,375 Shares.
CBL & ASSOCIATES PROPERTIES, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE NUMBER
ITEM 1: FINANCIAL INFORMATION 3
CONSOLIDATED BALANCE SHEETS - AS OF MARCH 31,
1998 AND DECEMBER 31, 1997 4
CONSOLIDATED STATEMENTS OF OPERATIONS - FOR
THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 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
Page 2
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, 1998 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, 1997 audited
financial statements and notes thereto included in the CBL & Associates
Properties, Inc. Form 10-K for the year ended December 31, 1997.
Page 3
CBL & ASSOCIATES PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
ASSETS
Real estate assets:
Land $ 193,853 $ 164,895
Buildings and improvements 1,210,328 1,019,283
----------- ----------
1,404,181 1,184,178
Less: Accumulated depreciation (154,510) (145,641)
----------- ----------
1,249,671 1,038,537
Developments in progress 57,092 103,787
----------- ----------
Net investment in real estate assets 1,306,763 1,142,324
Cash and cash equivalents 9,008 3,124
Cash in escrow __ 66,108
Receivables:
Tenant 14,380 12,891
Other 1,161 1,121
Mortgage notes receivable 12,032 11,678
Other assets 9,061 7,779
----------- ----------
$1,352,405 $1,245,025
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage and other notes payable $849,845 $741,413
Accounts payable and accrued liabilities 25,397 41,978
----------- ----------
Total liabilities 875,242 783,391
----------- ----------
Distributions and losses in excess of
investment in unconsolidated affiliates 7,321 6,884
----------- ----------
Minority interest 128,123 123,897
Commitments and contingencies
Shareholders' Equity:
Preferred stock, $.01 par value, 5,000,000
shares authorized, none issued __ __
Common stock, $.01 par value, 95,000,000
shares authorized, 24,074,732 and 24,063,963
shares issued and outstanding in 1998 and
1997, respectively 241 241
Excess stock, $.01 par value, 100,000,000
shares authorized, none issued __ __
Additional paid - in capital 359,796 359,541
Accumulated deficit (17,834) (28,433)
Deferred compensation (484) (496)
----------- ----------
Total shareholders' equity 341,719 330,853
----------- ----------
$1,352,405 $1,245,025
=========== ==========
The accompanying notes are an integral part of these balance sheets.
Page 4
CBL & ASSOCIATES PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended
March 31,
------------------
1998 1997
-------- --------
REVENUES:
Rentals:
Minimum $ 36,053 $ 26,562
Percentage 1,675 1,376
Other 433 220
Tenant reimbursements 15,451 11,716
Management, leasing and development fees 696 679
Interest and other 748 689
-------- --------
Total revenues 55,056 41,242
EXPENSES:
Property operating 8,844 7,073
Depreciation and amortization 9,155 7,688
Real estate taxes 4,962 3,365
Maintenance and repairs 3,000 2,359
General and administrative 3,001 2,217
Interest 13,775 8,940
Other 6 27
-------- --------
Total expenses 42,743 31,669
-------- --------
INCOME FROM OPERATIONS 12,313 9,573
GAIN ON SALES OF REAL ESTATE ASSETS 1,931 3,019
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES 737 620
MINORITY INTEREST IN EARNINGS:
Operating partnership (4,173) (3,594)
Shopping center properties (209) (142)
-------- --------
INCOME BEFORE EXTRAORDINARY ITEM 10,599 9,476
EXTRAORDINARY LOSS ON EXTINGUISHMENT OF DEBT -- (496)
-------- --------
NET INCOME $ 10,599 $ 8,980
======== ========
BASIC PER SHARE DATA:
INCOME BEFORE EXTRAORDINARY ITEM $ 0.44 $ 0.40
======== ========
NET INCOME $ 0.44 $ 0.38
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 24,070 23,507
DILUTED PER SHARE DATA:
INCOME BEFORE EXTRAORDINARY ITEM $ 0.44 $ 0.40
======== ========
NET INCOME $ 0.44 $ 0.38
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING
ASSUMING DILUTION 24,304 23,784
======== ========
The accompanying notes are an integral part of these statements.
Page 5
CBL & ASSOCIATES PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
-------------------
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,599 $ 8,980
Adjustments to reconcile net income to
net cash provided by operating activities:
Minority interest in earnings 4,382 3,736
Depreciation 7,786 6,941
Amortization 1,645 916
Gain on sales of real estate assets (1,931) (3,019)
Equity in earnings of unconsolidated affiliates (737) (620)
Distributions from unconsolidated affiliates 1,334 1,053
Issuance of stock under incentive plan 104 83
Amortization of deferred compensation 94 88
Write-off of development projects 6 27
Distributions to minority investors (4,348) (4,122)
Changes in assets and liabilities -
Tenant and other receivables (1,534) (139)
Other assets (1,475) (486)
Accounts payable and accrued expenses 61 (6,397)
-------- --------
Net cash provided by operating activities 15,986 7,041
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction of real estate assets and
land acquisition (28,673) (34,659)
Acquisition of real estate assets (146,140) (5,716)
Capitalized interest (1,161) (1,676)
Other capital expenditures (2,842) (2,741)
Deposits in escrow 66,108 --
Proceeds from sales of real estate assets 5,111 5,556
Additions to notes receivable -- (232)
Payments received on notes receivable 118 478
Advances and investments in unconsolidated
affiliates (160) (765)
-------- --------
Net cash used in investing activities (107,639) (39,755)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage and other notes payable 111,066 94,755
Principal payments on mortgage and other
notes payable (2,634) (127,324)
Additions to deferred finance costs (316) (824)
Dividends paid (10,648) (8,806)
Proceeds from issuance of common stock 69 74,352
Proceeds from exercise of stock options -- 54
Prepayment penalties on extinguishment
of debt -- (496)
-------- --------
Net cash provided by financing activities 97,537 31,711
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 5,884 (1,003)
CASH AND CASH EQUIVALENTS, beginning of period 3,124 4,298
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 9,008 $ 3,295
======== ========
Cash paid for Interest Net of amounts capitalized $ 12,954 $ 10,174
======== ========
The accompanying notes are an integral part of these statements.
Page 6
CBL & ASSOCIATES PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - UNCONSOLIDATED AFFILIATES
At March 31, 1998, the Company had investments in four 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,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
REVENUES $ 5,992 $ 5,564 $ 2,942 $ 2,770
-------- -------- -------- --------
Depreciation and amortization 707 673 400 401
Interest expense 2,058 1,969 1,010 893
Other operating expenses 1,722 1,645 795 856
-------- -------- -------- --------
Net income $ 1,505 $ 1,277 $ 737 $ 620
-------- -------- -------- --------
NOTE 2 - CONTINGENCIES
The Company is currently involved in certain litigation arising in the
ordinary course of business. In the opinion of management, the pending
litigation will not materially affect the financial statements of the
Company. Additionally, based on environmental studies completed to date on
the real estate properties, management believes any exposure related to
environmental cleanup will not be significant to the financial position and
results of operations of the Company.
NOTE 3 - CREDIT AGREEMENTS
In March 1998, the Company closed on a $20 million credit facility with
SouthTrust Bank. The total available under the Company's credit facilities
was $55.4 million at March 31, 1998 and $37.4 million at May 1, 1998. The
Company's weighted average interest rate on its credit facilities at
March 31, 1998 is 6.60%.
In June 1995, the Company executed a $50.0 million interest rate swap
agreement with NationsBank N.A. which fixes the LIBOR component of $50
million of LIBOR-based variable rate debt at 5.52% for a term of three
years. There was no fee for this transaction. In December 1997, the
Company obtained two $100 million caps on LIBOR-based variable rate debt,
one at 7.0% for 1998 and one at 7.5% for 1999. There was a fee paid to
obtain these caps. In January 1998, the Company executed an interest rate
swap agreement which fixes the LIBOR component of $65 million of the
Company's LIBOR-based variable rate debt at 5.72% for a term of two years.
In February 1998, the Company executed an interest rate swap agreement which
fixes the LIBOR component of $81 million of the Company's LIBOR-based
variable rate debt at 5.54% for a term of two years.
NOTE 4 - RECLASSIFICATIONS
Certain reclassifications have been made in the 1997 financial
statements to conform with the 1998 presentation.
Page 8
CBL & ASSOCIATES PROPERTIES, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations should be read in conjunction with CBL & Associates
Properties, Inc. Consolidated Financial Statements and Notes thereto.
Information included herein contains "forwarding-looking statements"
within the meaning of the federal securities laws. Such statements are
inherently subject to risks and uncertainties, many of which cannot be
predicted with accuracy and some of which might not even be anticipated.
Future events and actual results, financial and otherwise, may differ
materially from the events and results discussed in the forward-looking
statements. We direct you to the Company's other filings with the
Securities and Exchange Commission, including without limitation the Company's
Annual Report on Form 10-K and the "Management's Discussion and Analysis
of Financial Condition and Results of Operations" incorporated by reference
therein, for a discussion of such risks and uncertainties.
GENERAL BACKGROUND
CBL & Associates Properties, Inc.(the "Company") Consolidated Financial
Statements and Notes thereto reflect the consolidated financial results of
CBL & Associates Limited Partnership (the" Operating Partnership") which
includes at March 31, 1998, the operations of a portfolio of properties
consisting of nineteen regional malls, eleven associated centers, eighty-one
community centers, an office building, joint venture investments in three
regional malls and one associated center, and income from six mortgages,
("the Properties"). The Operating Partnership also has one mall, one
associated center and three community centers 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"). Beginning with
this quarter Turtle Creek Mall in Hattiesburg, Mississippi is classified
as a stabilized mall as it has attained initial maturity and lease up. The
New Mall category is presently comprised of the redeveloped and expanded
Westgate Mall in Spartanburg, South Carolina, Oak Hollow Mall in High
Point, North Carolina, the redevelopment Springdale Mall in Mobile, Alabama
nd the recently opened Bonita Lakes Mall in Meridian, Mississippi.
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 follow-on offering of 3,000,000
shares of its Common Stock at $26.125 per share, including 55,000 shares
purchased by management. The
Page 9
net proceeds of $74.3 million were used to repay variable rate indebtedness
incurred in the Company's development and acquisition program.
RESULTS OF OPERATIONS
Operational highlights for the three months ended March 31, 1998 as
compared to March 31, 1997 are as follows:
SALES
Mall shop sales, for those tenants who have reported, in the
eighteen Stabilized Malls in the Company's portfolio increased
by 5.5% on a comparable per square foot basis.
Three Months Ended March 31,
----------------------------
1998 1997
------------ ------------
Sales per square foot $55.35 $52.48
Total sales volume in the mall portfolio, including New Malls,
increased 11.0% to $229.0 million for the three months ended
March 31, 1998 from $206.3 million for the three months ended
March 31, 1997.
Occupancy costs as a percentage of sales for the three months
ended March 31, 1998 and 1997 for the Stabilized Malls were 12.9%
and 14.6%, respectively. Occupancy costs were 11.2%, 11.5% and
12.3% for the years ended December 31, 1997, 1996, and 1995,
respectively. Occupancy costs as a percentage of sales are
generally higher in the first three quarters of the year as
compared to the fourth quarter due to the seasonality of retail
sales.
OCCUPANCY
Occupancy for the Company's overall portfolio was as follows:
At March 31,
----------------------------
1998 1997
------------ ------------
Stabilized malls 91.6% 88.1%
New malls 87.1 88.2
Associated centers 84.1 91.1
Community centers 97.3 96.6
------------ ------------
Total Portfolio 93.4% 92.5%
============ ============
Page 10
The Company's associated center occupancy at March 31, 1998
decreased to 84.1% primarily due to the acquisition and
redevelopment of Westgate Crossing in Spartanburg, South
Carolina. The Company's associated center occupancy would
have increased to 93.0% excluding this redevelopment center.
AVERAGE BASE RENT
Average base rents for the Company's three portfolio categories
were as follows:
At March 31,
----------------------------
1998 1997
------------ ------------
Malls $18.65 $18.99
Associated centers 9.69 9.65
Community centers 7.85 7.12
LEASE ROLLOVERS
On spaces previously occupied, the Company achieved the
following results from rollover leasing for the three months
ended March 31, 1998 compared to the base and percentage
rent previously paid:
Per Square Per Square
Foot Rent Foot Rent Percentage
Prior Lease(1) New Lease(2) Increase
-------------- ------------ ----------
Malls $19.01 $20.11 5.80%
Associated centers 13.28 15.93 19.95%
Community centers 8.03 8.40 4.60%
(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, 1998, malls represented 72.5% of
total revenues from the properties; revenues from associated centers
represented 3.8%; revenues from community centers represented 21.4%; and
revenues from mortgages and the office building represented 2.3%.
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,
Page 11
occupancy levels and revenue production are generally the highest in the
fourth quarter of each year. Results of operations realized in any one
quarter may not be indicative of the results likely to be experienced over
the course of the fiscal year.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31,
1998 TO THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997
Total revenues for the three months ended March 31, 1998 increased by
$13.8 million, or 33.5%, to $55.1 million as compared to $41.2 million in
1997. Minimum rents increased by $9.5 million, or 35.7% to $36.1 million
as compared to $26.6 million in 1997, and tenant reimbursements increased
by $3.7 million, or 31.9%, to $15.5 million in 1998 as compared to $11.7
million in 1997.
Approximately $10.1 million of the increase in revenues resulted from
operations at the fourteen new centers opened or acquired during the past
fifteen months. These centers consist of:
Project Name Location Total GLA Type of Addition Opening Date
- ------------------------- --------------------------- ---------- ---------------- ------------------------
Northpark Center Richmond, Virginia 62,500 New Development March, 1997
The Terrace Chattanooga, Tennessee 156,317 New Development February/March, 1997
Massard Crossing Fort Smith, Arkansas 290,717 New Development March, 1997
Salem Crossing Virginia Beach, Virginia 289,305 New Development April, 1997
Strawbridge Marketplace Virginia Beach, Virginia 43,570 New Development August, 1997
Springhurst Towne Center Louisville, Kentucky 798,736 New Development August, 1997/April 1998
Bonita Lakes Mall Meridian, Mississippi 631,555 New Development October, 1997
Bonita Lakes Crossing Meridian, Mississippi 110,500 New Development October, 1997/March 1998
Cortlandt Town Center Cortlandt, New York 772,451 New Development November, 1997
Chester Plaza Richmond, Virginia 10,000 New Development October, 1997
Westgate Crossing Spartanburg, South Carolina 151,489 Acquisition August, 1997
Springdale Mall Mobile, Alabama 926,376 Acquisition September, 1997
Asheville Mall Asheville, North Carolina 823,916 Acquisition January, 1998
Burnsville Center Burnsville (Minneapolis), 1,078,568 Acquisition January, 1998
Minnesota
Approximately $3.8 million of the increase in revenues resulted from
improved operations and occupancies in the existing centers.
Property operating expense, including real estate taxes, maintenance
and repairs, and ground rent increased in the first quarter of 1998 by
$4.0 million or 31.3% to $16.8 million as compared to $12.8 million in the
first quarter of 1997. This increase is primarily the result of the addition
of the fourteen new centers referred to above.
Page 12
Depreciation and amortization increased in the first quarter of 1998 by
$1.5 million or 19.1% to $9.2 million as compared to $7.7 million in the
first quarter of 1997. This increase is primarily due to the addition of
the fourteen new centers referred to above.
Interest expense increased in the first quarter of 1998 by $4.8 million,
or 54.1% to $13.8 million as compared to $8.9 million in 1997. This increase
is primarily due to the additional interest on the fourteen centers opened
during the last fifteen months.
The gain on sales of real estate assets decreased in the first quarter
of 1998 by $1.1 million, to $1.9 million as compared to $3.0 million in
1997. The gains in the first quarter of 1998 were in connection with
outparcel sales at our development at Springhurst Towne Center in
Louisville, Kentucky. Gain on sales in the first quarter of 1997 was for
various outparcel sales and included $1.6 million of gain on sale from a
pad sale at Cortlandt Towne Center in Cortlandt, New York.
Equity in earnings of unconsolidated affiliates increased in the first
quarter of 1998 by $0.1 million to $0.7 million from $0.6 million in the
first quarter of 1997 due to the acquisition of a 49% interest in Governor's
Plaza in Clarksville, Tennessee and improved operations at existing equity
centers.
LIQUIDITY AND CAPITAL RESOURCES
The principal uses of the Company's liquidity and capital resources have
historically been for property development, expansion and renovation
programs, acquisitions and debt repayment. To maintain its qualification
as a real estate investment trust under the Internal Revenue Code, 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, 1998, the Company had $13.8 million available in unfunded
construction and redevelopment loans to be used for completion of the
construction and redevelopment projects and replenishment of working
capital previously used for construction. Additionally, as of May 1, 1998,
the Company had obtained revolving credit lines and term loans totaling
$207.5 million of which $37.4 million was available. As a publicly traded
company, the Company has access to capital through both the public equity
and debt markets. The Company has filed a Shelf Registration authorizing
shares of the Company's preferred stock and common stock and warrants to
purchase shares of the Company's common stock with an aggregate public
offering price of up to $350 million. 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.
Page 13
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 9.5 million shares of common stock. Additionally, Company
executive officers and directors own approximately 1.7 million shares of
the outstanding common stock of the Company, for a combined total interest
in the Operating Partnership of approximately 33.2%. Assuming the exchange
of all limited partnership interests in the Operating Partnership for common
stock, there would be outstanding approximately 33.6 million shares of
common stock with a market value of approximately $822.0 million at
March 31, 1998 (based on the closing price of $24.50 per share on March 31,
1998). Company executive and senior officers' ownership interests had a
market value of approximately $272.8 million at March 31, 1998.
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, 1998, the Company's share of funded mortgage debt on its
consolidated properties adjusted for minority investors' interests in nine
properties was $827.3 million and its pro rata share of mortgage debt on
unconsolidated properties (accounted for under the equity method) was $42.5
million for total debt obligations of $869.8 million with a weighted average
interest rate of 7.32%.
The Company's total conventional fixed rate debt as of March 31, 1998
was $409.1 million with a weighted average interest rate of 8.07% as
compared to 8.17% as of March 31, 1997.
The Company's variable rate debt as of March 31, 1998 was $264.7 million
with a weighted average interest rate of 6.66% as compared to 6.85% as of
March 31, 1997. Through the execution of swap agreements, the Company has
fixed the interest rates on $196 million of debt on operating properties at
a weighted average interest rate of 6.52%.
Of the Company's remaining variable rate debt of $264.7 million,
interest rate caps in place of $100.0 million and conventional permanent
loan commitments of $78.0 million leave only $86.7 million of debt subject
to variable rates. Interest on $57.1 million of this remainder is
capitalized to projects currently under construction leaving $29.6 million
of variable rate debt exposure on operating properties as of March 31, 1998.
In June 1995, the Company executed a $50.0 million interest rate swap
agreement with NationsBank N.A., which fixes the LIBOR component of $50
million of LIBOR-based variable rate debt at 5.52%. This agreement
effectively fixes $50.0 million of the Company's variable rate debt at a
rate no greater than 6.77% for a term of three years. There were no fees
charged to the Company related to this transaction. In December 1997, the
Company obtained two $100 million caps on LIBOR-based variable rate debt,
one at 7% for 1998 and one at 7.5% for 1999. There was a fee paid to obtain
these caps. In January 1998, the Company executed an interest rate swap
agreement which effectively fixes the LIBOR component of $65 million of
the company's LIBOR-based variable rate debt at 5.72% for a term
Page 14
of two years. In February 1998, the Company executed an interest rate
swap agreement which effectively fixes the LIBOR component of $81 million of
the company's LIBOR-based variable rate debt at 5.54% for a term of two
years.
In March 1998, the Company closed on a $20 million credit facility with
SouthTrust Bank at an interest rate of 100 basis points over LIBOR. The
weighted average interest rate on the Company's credit facilities and term
loans is 97 basis points over LIBOR. In September 1996, the Company closed
a short term loan with Compass Bank in the amount of $12.5 million at an
interest rate of 50 basis point over LIBOR. This note matures on July 15,
1998.
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 51.4% at March 31, 1998.
DEVELOPMENT, EXPANSIONS AND ACQUISITIONS
Development projects under construction and scheduled to open during
1998 are: Sterling Creek Commons in Portsmouth, Virginia, a 65,000-square-
foot community center scheduled to open in June 1998 and Sand Lake Corners
in Orlando, Florida, a 594,000-square-foot community center, the first phase
of which will open in November 1998 with the remainder to open by April 1999.
In the first quarter of 1998, the Company began construction on Fiddler's
Run in Morganton, North Carolina, a 203,000-square-foot community center
scheduled to open in March 1999. Other projects currently under construction
are Arbor Place Mall in Douglasville, Georgia, a suburb of Atlanta. This
860,000-square-foot mall is scheduled to open in October 1999 with an
additional 550,000-square-feet planned. Preliminary grading work has
already begun for the construction of an adjacent 165,000-square-foot
associated center to be called The Landing at Arbor Place.
During April 1998 the Company opened a 14,000-square-foot expansion to
Hamilton Crossing in Chattanooga, Tennessee. The Company will open a 15,000-
square-foot expansion to Girvin Plaza in Jacksonville, Florida in May 1998
and a 12,000-square-foot expansion to CoolSprings Crossing in Nashville,
Tennessee in August, 1998.
During the first quarter of 1998, the Company acquired Asheville Mall in
Asheville, North Carolina, an 820,000-square-foot mall anchored by Belk,
Dillard's, JCPenney, Montgomery Ward and Sears. The company also acquired
Burnsville Center in Burnsville (Minneapolis), Minnesota, a 1,079,000-square-
foot super regional mall anchored by Dayton's, JCPenney, Mervyn's and Sears.
Subsequent to the end of the quarter, the Company purchased Stroud Mall in
Stroudsburg, Pennsylvania, a 427,000-square-foot mall anchored by Sears,
The Bon-Ton and JCPenney.
The Company has entered into standby purchase agreements with third-
party developers (the "Developers") for the construction, development and
potential ownership of two community centers in Georgia and Texas (the "Co-
Development Projects"). The Developers have utilized these standby
Page 15
purchase agreements to assist in obtaining financing to fund the construction
of the Co-Development Projects. The standby purchase agreements, which
expire in 1999, are dependent upon certain completion requirements, rental
levels, the inability of the Developers to obtain adequate permanent
financing and the inability to sell the Co-Development Project before the
Company becomes obligated to fund its equity contribution or purchase the
Co-Development Project. In return for its commitment to purchase a Co-
Development Project pursuant to a standby purchase agreement, the Company
receives a fee as well as a participation interest in either the cash flow
or gains from sale on each Co-Development Project. In addition to the
standby purchase agreements, the Company has extended credit on a secured
basis to each of the Developers to cover pre-development costs. The
outstanding amount on standby purchase agreements is $49.1 million and the
committed amount on secured credit agreements is $3.7 million of which $1.8
million is outstanding at March 31, 1998.
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 and
non-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 70% - 90%
of its funds from operations with the remaining 10% - 30% 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, and a return on the funds so invested is expected to be earned.
Page 16
For the first quarter of 1998, revenue generating capital expenditures
or tenant allowances for improvements were $2.3 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 $1.0 million for the first quarter of 1998. Revenue
neutral capital expenditures, which are recovered from the tenants, were
$0.5 million for the first quarter of 1998.
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.
The Company has not recorded in its financial statements any material
liability in connection with environmental matters.
CASH FLOWS
Cash flows provided by operating activities for the first quarter of
1998, increased by $8.9 million, or 127%, to $16.0 million from $7.0
million in 1997. This increase was primarily due to the fifteen centers
opened or acquired over the last fifteen months, improved operations
in the existing centers and the timing of the payment of real estate taxes.
Cash flows used in investing activities for the first quarter of 1998,
increased by $67.9 million, to $107.6 million compared to $39.8 million in
1997. This increase was due primarily to an increase of $140.4 million of
acquisitions offset by the reduction of cash deposited in escrow of $66.1
million and increased investment in capital and development for the first
quarter of 1998, as compared to the first quarter of 1997. Cash flows
provided by financing activities for the first quarter of 1998, increased
by $65.8 million, compared to the first quarter of 1997 primarily due to
increased borrowings related to the development and acquisition program.
IMPACT OF INFLATION
In the last three years, inflation has not had a significant impact on
the Company because of the relatively low inflation rate. Substantially all
tenant leases do, however, contain provisions designed to protect the
Company from the impact of inflation. Such provisions include clauses
enabling the Company to receive percentage rentals based on 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.
Page 17
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 (including 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. The FFO for the first quarter of 1997 has
been restated to include straight line rents. Beginning with the first
quarter of 1998 the Company includes straight line rent in its FFO
calculation. However, the Company continues to exclude gains or losses
on outparcel sales, even though NAREIT permits their inclusion when
calculating FFO. Gains or losses on outparcel sales would have added
$1.9 million in the first quarter of 1998 and $3.0 million in 1997.
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, 1998, FFO increased by $4.1
million, or 23.0%, to $22.0 million as compared to $17.9 million for the
same period in 1997. The increase in FFO was primarily attributable to the
new developments opened during 1997, the acquisitions during 1997 and the
first quarter of 1998 and improved operations in the existing portfolio.
Page 18
The Company's calculation of FFO is as follows: (dollars in thousands)
Three Months Ended
March 31,
-------------------
1998 1997
--------- --------
Income from operations $ 12,313 $ 9,573
ADD:
Depreciation & amortization from 9,155 7,688
consolidated properties
Income from operations of 737 620
unconsolidated affiliates
Depreciation & amortization from 346 401
unconsolidated affiliates
Write-off of development costs charged 6 27
to net income
SUBTRACT:
Minority investors' share of income
from operations in nine properties (209) (142)
Minority investors share of depreciation
and amortization in nine properties (206) (178)
Depreciation and amortization of non-real
estate assets and finance costs (129) (94)
--------- --------
TOTAL FUNDS FROM OPERATIONS $ 22,013 $ 17,895
========= ========
DILUTED WEIGHTED AVERAGE SHARES WITH
OPERATING PARTNERSHIP UNITS FULLY CONVERTED 33,780 33,192
========= ========
Page 19
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None
ITEM 2: CHANGES IN SECURITIES
None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on April 30,
1998. At the meeting, shareholders re-elected as directors
Stephen D. Lebovitz (24,487,182 votes for and 227,978 votes
against or withheld), and Winston W. Walker (20,462,108 votes for
and 253,052 votes against or withheld), to three-year terms
expiring in 2001. Other continuing directors of the Company are,
Charles B. Lebovitz, Claude M. Ballard, and Leo Fields whose terms
expire in 1999 and John N. Foy and William J. Poorvu whose terms
expire in 2000.
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, 1998 (20,694,083
votes for, 21,077 votes against or withheld).
ITEM 5: OTHER INFORMATION
None
Page 20
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
25.1 Loan agreement with South Trust Bank dated
January 15, 1998.
27 Financial Data Schedule
B. Reports on Form 8-K
The following items were reported:
Additional information on the acquisition of Burnsville Center
in Burnsville (Minneapolis), Minnesota (Item 2) was reported
in an 8-K/A dated April 15, 1998.
The outline from the Company's April 30, 1998 conference call
with analysts and investors regarding earnings (Item 5) was
filed on April 30, 1998.
Page 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CBL & ASSOCIATES PROPERTIES, INC.
/s/ John N. Foy
------------------------------------
John N. Foy
Executive Vice President,
Chief Financial Officer and Secretary
(Authorized Officer of the Registrant,
Principal Financial Officer and
Principal Accounting Officer)
Date: May 14, 1998
Page 22
EXHIBIT INDEX
EXHIBIT
NO.
- -------
25.1 Loan agreement with South Trust Bank dated January 15, 1998.
27 Financial Data Schedule
Page 23