Securities Exchange Act of 1934 -- Form 10-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 June 30, 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 (IRS Employer
of incorporation or Identification
organization) 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
stock, as of August 11, 1998: Common Stock, par value $.01 per share,
24,106,609 shares and 9% Series A Commulative Redeemable Preferred Stock,
par value $.01 per share, 2,875,00 shares.
CBL & ASSOCIATES PROPERTIES, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE NUMBER
ITEM 1: FINANCIAL INFORMATION 3
CONSOLIDATED BALANCE SHEETS - AS OF
JUNE 30, 1998 AND DECEMBER 31, 1997 4
CONSOLIDATED STATEMENTS OF OPERATIONS -
FOR THE THREE MONTHS ENDED JUNE 30,
1998 AND 1997 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1997 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
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 24
ITEM 2: CHANGES IN SECURITIES 24
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 24
ITEM 4: SUBMISSION OF MATTERS TO HAVE A
VOTE OF SECURITY HOLDERS 24
ITEM 5: OTHER INFORMATION 24
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 24
SIGNATURE 25
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 periods ended June 30, 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 Company's
Form 10-K for the year ended December 31, 1997.
3
CBL & ASSOCIATES PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
ASSETS
Real estate assets:
Land $209,366 $164,895
Buildings and improvements 1,243,213 1,019,283
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1,452,579 1,184,178
Less: Accumulated depreciation (163,550) (145,641)
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1,289,029 1,038,537
Developments in progress 80,219 103,787
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Net investment in real estate assets 1,369,248 1,142,324
Cash and cash equivalents 6,417 3,124
Cash in escrow -- 66,108
Receivables:
Tenant 14,741 12,891
Other 1,157 1,121
Notes receivable 12,205 11,678
Other assets 9,291 7,779
----------- ------------
$1,413,059 $1,245,025
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage and other notes payable $841,929 $741,413
Accounts payable and accrued liabilities 25,799 41,978
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Total liabilities 867,728 783,391
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Distributions and losses in excess
of investment in unconsolidated affiliates 7,255 6,884
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Minority interest 128,264 123,897
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Commitments and contingencies
Shareholders' Equity:
Preferred stock, $.01 par value, 5,000,000
shares authorized, 2,875,000 issued in 1998,
none in 1997 29 __
Common stock, $.01 par value, 95,000,000
shares authorized, 24,081,500 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 429,834 359,541
Accumulated deficit (19,881) (28,433)
Deferred compensation (411) (496)
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Total shareholders' equity 409,812 330,853
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$1,413,059 $1,245,025
=========== ============
The accompanying notes are an integral part of these balance sheets.
4
CBL & ASSOCIATES PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
--------- -------- -------- --------
REVENUES:
Rentals:
Minimum $37,967 $27,978 $74,020 $54,540
Percentage 1,154 531 2,829 1,907
Other 387 139 820 359
Tenant reimbursements 16,552 12,681 32,003 24,397
Management, development
andleasing fees 723 431 1,420 1,110
Interest and other 616 698 1,363 1,387
--------- -------- -------- --------
Total revenues 57,399 42,458 112,455 83,700
EXPENSES:
Property operating 9,480 7,397 18,324 14,470
Depreciation and
amortization 9,720 7,922 18,875 15,610
Real estate taxes 5,290 3,570 10,252 6,935
Maintenance and repairs 3,295 2,484 6,295 4,843
General and administrative 2,730 2,286 5,731 4,503
Interest 15,042 8,995 28,817 17,935
Other 3 15 9 42
--------- -------- -------- --------
Total expenses 45,560 32,669 88,303 64,338
Income from operations 11,839 9,789 24,152 19,362
Gain on sales of real
estate assets 581 363 2,512 3,382
Equity in earnings of
unconsolidated affiliates 431 593 1,168 1,213
Minority interest in earnings:
Operating partnership (3,604) (2,991) (7,777) (6,585)
Shopping center properties (99) (147) (308) (289)
--------- -------- -------- --------
Income before extraordinary
item 9,148 7,607 19,747 17,083
Extraordinary loss on
extinguishment of debt -- -- -- (496)
--------- -------- -------- --------
NET INCOME $9,148 $7,607 $19,747 $16,587
========= ======== ======== ========
Basic per share data:
Income before extraordinary
item $0.38 $0.32 $0.82 $0.72
NET INCOME $0.38 $0.32 $0.82 $0.70
========= ======== ======== ========
Weighted average common
shares outstanding 24,079 23,988 24,075 23,749
========= ======== ======== ========
Diluted per share data:
Income before extraordinary
item $0.38 $0.31 $0.81 $0.71
NET INCOME $0.38 $0.31 $0.81 $0.69
========= ======== ======== ========
Weighted average common
shares and dilutive
potential common shares
outstanding 24,311 24,213 24,308 24,005
========= ======== ======== ========
The accompanying notes are an integral part of these statements.
5
CBL & ASSOCIATES PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS
ENDED JUNE 30,
----------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $19,747 $16,587
Adjustments to reconcile net income to
net cash provided by operating
activities:
Minority interest in earnings 8,085 6,874
Depreciation 15,985 14,093
Amortization 3,452 2,100
Gain on sales of real estate assets (2,512) (3,382)
Issuance of stock under incentive plan 265 104
Equity in earnings of unconsolidated
affiliates (1,168) (1,213)
Amortization of deferred compensation 222 160
Write-off of development projects 9 42
Distributions from unconsolidated
affiliates 2,182 1,218
Distributions to minority investors (8,754) (8,286)
Changes in assets and liabilities -
Tenant and other receivables (1,900) 947
Other assets (2,127) (504)
Accounts payable and accrued
expenses 624 (4,002)
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Net cash provided by
operating activities 34,110 24,738
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CASH FLOWS FROM INVESTING ACTIVITIES:
Construction of real estate assets
and land acquisitions, net of
payables (55,044) (64,651)
Acquisition of real estate assets (184,661 (5,716)
Capitalized interest (2,467) (3,192)
Other capital expenditures (8,485) (4,699)
Deposits in escrow 66,108 --
Proceeds from sales of real
estate assets 6,316 6,794
Additions to notes receivable (1,478) (1,789)
Payments received on notes receivable 1,234 489
Additional investments in and
advances to unconsolidated
affiliates (643) (286)
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Net cash used in investing
activities (179,120) (73,050)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage and other
notes payable 189,663 165,899
Principal payments on mortgage and
other notes payable (89,147) (172,368)
Additions to deferred finance costs (700) (901)
Proceeds from issuance of preferred
stock 70,175 --
Proceeds from issuance of common
stock 155 74,398
Proceeds from exercise of stock
options -- 533
Prepayment penalties on
extinguishment of debt -- (496)
Dividends paid (21,843) (19,414)
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Net cash provided by financing
activities 148,303 47,651
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NET CHANGE IN CASH AND CASH EQUIVALENTS 3,293 (661)
CASH AND CASH EQUIVALENTS, beginning
of period 3,124 4,298
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CASH AND CASH EQUIVALENTS, end
of period $6,417 $3,637
======= =======
Cash paid for interest, net of amounts
capitalized $27,751 $18,576
======= =======
The accompanying notes are an integral part of these statements.
6
CBL & ASSOCIATES PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - UNCONSOLIDATED AFFILIATES
At June 30, 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 as follows (in thousands):
COMPANY'S SHARE COMPANY'S SHARE
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
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1998 1997 1998 1997
------ ------ ------ ------
REVENUES $2,584 $2,612 $5,526 $5,342
------ ------ ------ ------
Depreciation and amortization 354 255 700 656
Interest expense 974 854 1,984 1,822
Other operating expenses 825 910 1,674 1,651
------ ------ ------ ------
Net income $ 431 $ 593 $1,168 $1,213
====== ====== ====== ======
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 be immaterial to the financial position
and results of operations of the Company.
7
NOTE 3 - CREDIT FACILITIES AND AGREEMENTS
The Company has credit facilities of $207.5 million of which $100.7
million is available at June 30, 1998. Outstanding amounts bear interest at
a weighted average interest rate of 94 basis points over LIBOR at June 30,
1998. The Company has swap agreements of $234 million in effect at June 30,
1998 as indicated in the table below:
Swap Amount Fixed LIBOR
(in millions) Component Expiration Date Effective Date
- --------------- ------------- --------------- --------------
$65 5.72% 01/07/2000 01/07/98
81 5.54% 02/04/2000 02/04/98
50 5.70% 06/15/2001 06/15/98
38 5.73% 06/30/2001 06/26/98
There were no fees related to the swap agreements. These swap agreements
did not have a significant impact on interest expense for the three or
six months ended June 30, 1998. The Company also has agreements capping
the interest rate on $100 million of variable rate debt at a LIBOR rate
no greater than 7% in 1998 and 7.5% in 1999.
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
Company's Consolidated Financial Statements and Notes thereto.
Information included herein contains "forward-looking statements"
within the meaning of the federal securities laws. Such statements are
inherently subject to risks and uncertainties, many of which cannot be
predicted with accuracy and some of which might not even be anticipated.
Future events and actual results, financial and otherwise, may differ
materially from the events and results discussed in the forward-looking
statements. We direct you to the Company's other filings with the
Securities and Exchange Commission, including without limitation the
Company's Annual Report on Form 10-K and the "Management's Discussion
and Analysis of Financial Condition and Results of Operations"
incorporated by reference therein, for a discussion of such risks and
uncertainties.
GENERAL BACKGROUND
The Company's Consolidated Financial Statements and Notes thereto reflect
the consolidated financial results of CBL & Associates Limited Partnership
(the "Operating Partnership") which includes at June 30, 1998, the operations
of a portfolio of properties consisting of twenty regional malls, eleven
associated centers, eighty-two 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, one power center,
and two community centers currently under construction, options to
acquire certain shopping center development sites and contingent
contracts for the purchase of certain operating properties. 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, Oak Hollow Mall
in High Point, North Carolina, the redeveloped Springdale Mall in
Mobile, Alabama and the recently opened Bonita Lakes Mall in Meridian,
Mississippi.
9
In April 1998, the Company acquired Stroud Mall in Stroudsburg,
Pennsylvania for $38 million which was funded from the proceeds of a $33
million acquisition loan and the balance from the Company's credit
lines.
In June 1998, the Company completed a public offering of 2,875,000 shares
of 9% Series A Cumulative Redeemable Preferred Stock at a price to the public of
$25 per share. Wells Fargo & Company purchased 715,875 shares of 9% Series A
Cumulative Redeemable Preferred Stock from the Company at a price of $25 per
share. The net proceeds of $70 million were used to repay variable rate
indebtedness incurred in the Company's development and acquisition program.
In July 1998, the Company acquired Hickory Hollow Mall, Rivergate
Mall, The Courtyard at Hickory Hollow, The Village at Rivergate and
Lions Head Village all located in the metropolitan Nashville, Tennessee
area. The purchase price of $247.4 million was funded from a ten-year
fixed-rate loan in the amount of $182.7 million, 631,016 operating
partnership units in the Operating Partnership with a value of $15.3
million and the balance funded from the Company's credit lines.
RESULTS OF OPERATIONS
Operational highlights for the six months ended June 30, 1998 as
compared to June 30, 1997 are as follows:
SALES
Mall shop sales, for those tenants who have reported, in the
nineteen Stabilized Malls in the Company's portfolio increased by
5.8% on a comparable per square foot basis.
Six Months Ended June 30,
-------------------------
1998 1997
------------ ----------
Sales per square foot $113.48 $107.27
Total sales volume in the mall portfolio, including New Malls,
increased 11.4% to $480.9 million for the six months ended June
30, 1998 from $431.7 million for the six months ended June 30,
1997.
Occupancy costs as a percentage of sales was 12.6% for the six
months ended June 30, 1998 and 13.1% for the six months ended June
30, 1997 for the Stabilized Malls. 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.
10
OCCUPANCY
Occupancy for the Company's overall portfolio is as follows:
At June 30,
----------------
1998 1997
------- -------
Stabilized malls 91.9% 89.0%
New malls 90.5% 88.7%
Associated centers* 88.8% 91.4%
Community centers 97.6% 96.6%
------- -------
Total Portfolio 94.2% 92.9%
======= =======
* The Associated centers occupancy decreased
due to the acquisition of Westgate Crossing
in Spartanburg, South Carolina in August 1997
and the ongoing redevelopment of that center.
AVERAGE BASE RENT
Average base rents for the Company's three portfolio categories
were as follows:
At June 30,
----------------
1998 1997
------- -------
Malls $19.01 $19.10
Associated centers 9.62 9.85
Community centers 8.00 7.11
LEASE ROLLOVERS
On spaces previously occupied, the Company achieved the following
results from rollover leasing during the six months ended June 30,
1998, over and above the base and percentage rent paid by the
previous tenant:
Per Square Per Square
Foot Rent Foot Rent Percentage
Prior Lease(1) New Lease(2) Increase
-------------- ------------ ----------
Malls $19.81 $21.89 10.5%
Associated centers 10.23 11.60 13.4%
Community centers 7.87 8.49 7.9%
(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.
11
For the six months ended June 30, 1998, malls represented 73.3% of
total revenues from the Properties; revenues from associated centers
represented 3.6%; revenues from community centers represented 21.3%; and
revenues from mortgages and the office building represented 1.8%.
Accordingly, revenues and results of operations are disproportionately
impacted by the malls' achievements. The Company's cost recovery ratio
decreased to 91.8% for the six months ended June, 30 1998 as compared
to 92.9% in 1997.
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 JUNE 30,
1998 TO THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30,
1997
Total revenues for the three months ended June 30, 1998 increased
by $14.9 million, or 35.2%, to $57.4 million as compared to $42.5
million in 1997. Of this increase, minimum rents increased by $10.0
million, or 35.7%, to $38.0 million as compared to $28.0 million in
1997, and tenant reimbursements increased by $3.9 million, or 30.5%, to
$16.6 million in 1998 as compared to $12.7 million in 1997.
Improved occupancies and operations and increased rents in the
Company's operating portfolio generated approximately $2.1 million of
the increase in revenues. The majority of these increases were generated
at Westgate Mall in Spartanburg, South Carolina and Turtle Creek Mall
in Hattiesburg, Mississippi. New revenues of $12.8 million resulted from
operations at the thirteen new centers opened or acquired during the
past fifteen months as follows:
Project Name Location Total GLA Type of Addition Opening Date
_______________________ __________________________________ _________ ________________ ________________________
Salem Crossing Virginia Beach, Virginia 289,305 New Development April, 1997
Strawbridge Marketplace Virginia Beach, Virginia 43,570 New Development August, 1997
Springhurst TowneCenter 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
Sterling Creek Commons Portsmouth, Virginia 65,500 New Development June, 1998
Westgate Crossing Spartanburg, South Carolina 151,489 Acquisition August, 1997
12
Project Name Location Total GLA Type of Addition Opening Date
_______________________ __________________________________ _________ ________________ ________________________
Springdale Mall Mobile, Alabama 926,376 Acquisition September, 1997
Asheville Mall Asheville, North Carolina 823,916 Acquisition January, 1998
Burnsville Center Burnsville (Minneapolis),Minnesota 1,078,568 Acquisition January, 1998
Stroud Mall Stroudsburg, Pennsylvania 427,000 Acquisition April, 1998
Management, leasing and development fees increased by $0.3 million
to $0.7 million in the second quarter of 1998 as compared to $0.4
million in the second quarter of 1997. This increase is primarily due
to fees earned in the Company's co-development program and increases in
management fees on managed properties. Interest and other decreased in
the second quarter of 1998 by $0.1 million, to $0.6 million from $0.7
million in 1997. This decrease is due to reductions in mortgage
note receivable balances.
Property operating expenses, including real estate taxes and
maintenance and repairs, increased in the second quarter of 1998 by $4.6
million, or 34.3%, to $18.1 million as compared to $13.5 million in the
second quarter of 1997. This increase is primarily the result of the
addition of the thirteen new centers referred to above.
Depreciation and amortization increased in the second quarter of
1998 by $1.8 million, or 22.7%, to $9.7 million as compared to $7.9
million in the second quarter of 1997. This increase is primarily the
result of the addition of the thirteen new centers referred to above.
Interest expense increased in the second quarter of 1998 by $6.0
million, or 67.2%, to $15.0 million as compared to $9.0 million in 1997.
This increase is primarily due to interest on debt related to the thirteen
new centers opened or acquired during the last fifteen months.
The gain on sales of real estate assets increased in the second
quarter of 1998 by $0.2 million, or 60.1%, to $0.6 million as compared
to $0.4 million in 1997. The outparcel sales in the second quarter of
1998 were at Sterling Creek Commons in Portsmouth, Virginia and at
Georgia Square Mall in Athens, Georgia. The sales in the second quarter
of 1997 were for out parcels at Springhurst Towne Center in Louisville,
Kentucky offset by a loss on land sold at Kingston Overlook in
Knoxville, Tennessee.
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30,
1998 TO THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997
Total revenues for the six months ended June 30, 1998 increased by
$28.8 million, or 34.4%, to $112.5 million as compared to $83.7 million
in 1997. Of this increase, minimum rents increased by $19.5 million,
or 35.7%, to $74.0 million as compared to $54.5 million in 1997, and
13
tenant reimbursements increased by $7.6 million, or 31.2%, to $32.0
million in 1998 as compared to $24.4 million in 1997.
Improved occupancies, operations and increased rents in the
Company's operating portfolio generated $4.6 million of increased
revenues. The majority of these increases were generated at Westgate
Mall in Spartanburg, South Carolina and Coolsprings Galleria in
Nashville, Tennessee. New revenues of $24.2 resulted from operations
at the sixteen new centers opened or acquired during the past eighteen
months. These centers are as follows:
Project Name Location Total GLA Type of Addition Opening Date
_______________________ __________________________________ _________ ________________ ________________________
Northpark Center Richmond, Virginia 61,000 New Development March, 1997
The Terrace Chattanooga, Tennessee 156,000 New Development February/March, 1997
Massard Crossing Fort Smith, Arkansas 291,000 New Development March, 1997
Salem Crossing Virginia Beach, Virginia 289,000 New Development April, 1997
Strawbridge Marketplace Virginia Beach, Virginia 44,000 New Development August, 1997
Springhurst Towne Center Louisville, Kentucky 811,000 New Development August, 1997/April 1998
Bonita Lakes Mall Meridian, Mississippi 633,000 New Development October, 1997
Bonita Lakes Crossing Meridian, Mississippi 62,300 New Development October, 1997/March 1998
Cortlandt Town Center Cortlandt, New York 772,000 New Development November, 1997
Chester Plaza Richmond, Virginia 10,000 New Development October, 1997
Sterling Creek Commons Portsmouth, Virginia 65,500 New Development June, 1998
Westgate Crossing Spartanburg, South Carolina 151,000 Acquisition August, 1997
Springdale Mall Mobile, Alabama 926,000 Acquisition September, 1997
Asheville Mall Asheville, North Carolina 817,000 Acquisition January, 1998
Burnsville Center Burnsville (Minneapolis),Minnesota 1,070,000 Acquisition January, 1998
Stroud Mall Stroudsburg, Pennsylvania 427,000 Acquisition April, 1998
Management, leasing and development fees increased by $0.3 million
to $1.4 million in the first six months of 1998 as compared to $1.1
million in 1997. This increase was primarily due to fees earned in the
Company's co-development program and increases in management fees on
managed properties.
Property operating expenses, including real estate taxes and
maintenance and repairs, increased in the first six months of 1998 by
$8.6 million, or 32.9%, to $34.9 million as compared to $26.2 million
in 1997. This increase is primarily the result of the addition of the
sixteen new centers referred to above.
14
Depreciation and amortization increased in the first six months of
1998 by $3.3 million, or 20.9%, to $18.9 million as compared to $15.6
million in 1997. This increase is primarily the result of the addition
of the sixteen new centers referred to above.
Interest expense increased in the first six months of 1998 by $10.9
million, or 60.7%, to $28.8 million as compared to $17.9 million in
1997. This increase is primarily the result of the addition of interest on
debt related to the sixteen new centers referred to above.
The gain on sales of real estate assets decreased for the six
months ended June 30, 1998 by $0.9 million, or 25.7%, to $2.5 million
as compared to $3.4 million in 1997. Gain on sales in the first six
months of 1998 were for outparcel sales at the Company's developments
in Springhurst Towne Center in Louisville, Kentucky and Sterling Creek
Commons in Portsmouth, Virginia. The sales in the first six months of
1997 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 Springhurst Towne Center in
Louisville, Kentucky off-set by a loss on sale at 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, acquisition, 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 August 6, 1998, the Company had $79.9 million available in
unfunded construction loans to be used for completion of construction
projects and replenishment of working capital previously used for
construction. Additionally, as of August 6, 1998, the Company had
obtained revolving credit facilities totaling $242.5 million of which
$79.1 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 $350 million, with $278 million remaining after
the Company's preferred stock offering on June 30, 1998. The Company
at this time thinks 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.
15
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, credit facilities,
preferred stock, common stock and a minority interest in the Operating
Partnership. The minority interest in the Operating Partnership
represents the 28.3% ownership interest in the Operating Partnership
held by the Company's executive, former 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 33.3%. 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 $886.4 million at June 30, 1998 (based on
the closing price of $24.25 per share on June 30, 1998). Company
executive, former executive and senior officers' ownership interests
had a market value of approximately $230.6 million at June 30, 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 are accounted for under the equity method of
accounting. At June 30, 1998, the Company's share of funded mortgage
debt on its consolidated properties adjusted for minority investors'
interests in nine properties was $819.5 million and its pro rata share
of mortgage debt on unconsolidated properties (accounted for under the
equity method) was $42.4 million for total debt obligations of $861.9
million with a weighted average interest rate of 7.36%.
The Company's total conventional fixed rate debt as of June 30,
1998 was $406.4 million with a weighted average interest rate of 8.07%
as compared to 8.17% as of June 30, 1997.
The Company's variable rate debt as of June 30, 1998 was $455.5
million with a weighted average interest rate of 6.73% as compared to
6.85% as of June 30, 1997. Through the execution of swap agreements,
the Company has fixed the interest rates on $234 million of variable
rate debt on operating properties at a weighted average interest rate
of 6.77%. Of the Company's remaining variable rate debt of $221.5
million, interest rate caps in place of $100.0 million and conventional
permanent loan commitments of $117.4 million leaving $4.1 million of
debt subject to variable rates on construction properties and no debt
subject to variable rates on operating properties. There were no fees
charged to the Company related to these swap agreements. The Company's
swap agreements in place at June 30, 1998 are as follows:
Swap Amount Fixed LIBOR
(in millions) Component Expiration Date Effective Date
- --------------- ------------ --------------- --------------
$65 5.72% 01/07/2000 01/07/98
81 5.54% 02/04/2000 02/04/98
50 5.70% 06/15/2001 06/15/98
38 5.73% 06/30/2001 06/26/98
16
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 August 1998, Wells Fargo Realty Advisors Funding, Inc., the agent
for the Company's largest credit facility, increased the Company's credit
facility to $120 million from $85 million. In July 1998, the Company
extended a short term loan with Compass Bank in the amount of $12.5 million
at an interest rate of 50 basis point over LIBOR. The note matures on
September 15, 1998. The weighted average interest rate on the Company's
credit facilities is 95 basis points over LIBOR at August 6, 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 49.3% at June
30, 1998.
DEVELOPMENT, EXPANSIONS AND ACQUISITIONS
In the second quarter of 1998 the Company opened in June a 65,500-
square-foot community center Sterling Creek Commons in Portsmouth, Virginia,
in April a 14,000-square-foot expansion to Hamilton Crossing in Chattanooga,
Tennessee and in May a 15,000-square-foot expansion to Girvin Plaza in
Jacksonville, Florida. A 12,000-square-foot expansion to Coolsprings
Crossing in Nashville, Tennessee is expected to open in August 1998. The
Company's other development project under construction and scheduled to
open during 1998 is 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. Projects scheduled to open in
1999 are Fiddler's Run in Morganton, North Carolina, a 203,000-square-foot
community center scheduled to open in March 1999 and Arbor Place Mall in
Douglasville, Georgia, a suburb of Atlanta. This 983,000-square-foot mall
is scheduled to open in October 1999 with an additional 250,000-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. In the second quarter of 1998 the Company began
construction on an 83,000-square-foot Regal Cinema in Jacksonville, Florida
scheduled to open in the fall of 1999.
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.
In April 1998 the Company purchased Stroud Mall in Stroudsburg, Pennsylvania,
a 427,000-square-foot mall anchored by Sears, The Bon-Ton and JCPenney. In
July 1998 the Company acquired Hickory Hollow Mall, a 1,096,000 square foot
mall, and Rivergate Mall, a 1,074,000 square foot mall both of which are
located in the metropolitan Nashville, Tennessee area. Both malls are
anchored by Dillard's, JC Penney, Castner-Knott and Sears. The Company
17
also acquired The Courtyard at Hickory Hollow, a 77,000-square-foot
associated center, The Village at Rivergate a 166,000-square-foot associated
center and Lions Head Village a 93,000 square foot community center all
located in the metropolitan Nashville, Tennessee area.
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 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 Developer 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 $2.7 million of which $2.2 million is outstanding at June 30, 1998.
The Company has entered into a number of option agreements for the
development of future regional malls and community centers as well as
contingent contracts for the purchase of certain properties. 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
18
Company intends to distribute approximately 70% - 80% of its funds from
operations with the remaining 20% - 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 both tenant finish
costs associated with the renewal or replacement of current tenant leases
as their leases expire and capital expenditures which will not be
reimbursed by tenants. Major tenant finish costs for currently vacant
space are expected to be funded with working capital, operating reserves,
or the credit facilities.
For the six months ended June 30, 1998, revenue generating capital
expenditures, or tenant allowances for improvements, were $3.7 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 $4.6 million for the six months
ended June 30, 1998. Revenue neutral capital expenditures, which are
recovered from the tenants, were $1.1 million for the six months ended
June 30, 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 six months
ended June 30, 1998 increased by $9.4 million, or 37.9%, to $34.1
million from $24.7 million in 1997. This increase was primarily due to
the increases in net income and depreciation and amortization related
to the addition of sixteen new properties over the last eighteen
months. Cash flows used in investing activities for the six months
ended June 30, 1998 increased by $106.1 million, or 145.2%, to $179.1
million compared to $73.1 million in 1997. This increase was due
primarily to the purchase of three malls in 1998 and continuing
development of new properties as compared to 1997. Cash flows provided
by financing activities for the six months ended June 30, 1998,
increased by $100.6 million, or 211.2%, to $148.3 million compared to
$47.7 million in 1997. The increase was primarily due to increased
borrowings related to the development and acquisition program and a
decrease in the amount of debt repaid in the six months ended June 30,
1998 as compared to the same period in 1997.
19
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 assets
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. 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 $0.5 million and $2.5
million to FFO in the three months and six months ended June 30, 1998
respectively and $0.6 million and $3.4 million in the same periods in
1997, respectively. FFO for the second quarter and six months of 1997
has been restated to include straight line rents.
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 for purposes of evaluating the Company's operating performance
or to cash flows as a measure of liquidity.
For the three months ended June 30, 1998, FFO increased by $3.8
million, or 20.8%, to $21.9 million as compared to $18.1 million for the
same period in 1997. For the six months ended June 30, 1998, FFO increased
by $7.9 million, or 21.9%, to $43.9 million as compared to $36.0 million
for the same period in 1997. The increase in FFO for both periods was
primarily attributable to the new developments opened during 1997, the
acquisitions during 1997 and 1998 and improved operations in the existing
portfolio.
20
The Company's calculation of FFO is as follows: (in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
-------- -------- -------- -------
Income from operations $11,839 $9,789 $24,152 $19,362
ADD:
Depreciation & amortization from 9,720 7,922 18,875 15,610
consolidated properties
Income from operations of 431 593 1,168 1,213
unconsolidated affiliates
Depreciation & amortization from
unconsolidated affiliates 354 255 700 656
Write-off of development costs
charged to net income 3 15 9 42
SUBTRACT:
Minority investors' share of
income from operations in
nine properties (99) (147) (308) (289)
Minority investors share of
depreciation and amortization
in nine properties (227) (205) (433) (383)
Depreciation and amortization of
non-real estate assetsand
finance costs (149) (119) (278) (213)
-------- -------- -------- -------
TOTAL FUNDS FROM OPERATIONS $21,872 $18,103 $43,885 $35,998
======== ======== ======== =======
Basic per share data:
Funds from operations $0.65 $0.54 $1.31 $1.09
======== ======== ======== =======
Weighted average common
shares outstanding with
operating partnership
unitsfully converted 33,420 33,556 33,169 33,565
======== ======== ======== =======
Diluted per share data:
Funds from operations $0.65 $0.54 $1.30 $1.08
======== ======== ======== =======
Weighted average common
shares and dilutive
potential common shares
outstanding with
operating partnership
units fully converted 33,797 33,645 33,789 33,425
======== ======== ======== =======
21
IMPACT OF INFLATION
In the last four 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.
YEAR 2000 ISSUES
The Company has certain existing computer programs that were written
using two digits rather than four to define the applicable year. As a
result, those computer programs have time sensitive software that recognizes
a date using 00 as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send orders and invoices, or engage in similar normal business
activities.
The Company has completed a program to identify its applications that
are not year 2000 compliant. As a result of this identification program,
the Company believes that while its core accounting application is year 2000
compliant, certain of its other applications are not yet year 2000
compliant. The Company has undertaken to correct or replace all non-
compliant systems and applications. Given the information known at this
time about the Company's systems that are noncompliant and the Company's
ongoing efforts to correct or replace all non-compliant systems, Management
does not expect the year 2000 compliance of the Company's systems to have
a material effect on the Company's future liquidity or results of
operations. No assurance can be given, however, that all of the Company's
systems will be year 2000 compliant or that compliance costs or the impact
of a failure by the Company to achieve substantial year 2000 compliance
will not have a material adverse effect on the Company's future liquidity
or results of operations.
The Company has initiated communications with its significant
suppliers and tenants to determine the extent to which the Company is
vulnerable to the failure of such parties to remediate their year 2000
compliance issues. No assurance can be given, however, that the systems
of these outside parties will be made year 2000 compliant in a timely
manner or thatthe noncompliance of the systems of any of these parties
would not have a materially affect on the Company's liquidity or results
of operations.
NEW ACCOUNTING PRONOUNCEMENTS
In May 1998, the Emerging Issues Task Force ("EITF") issued EITF
98-9 "Reporting Contingent Rents" in which it reached a consensus
regarding the accounting for contingent rent in interim financial
periods. The Company already accounts for contingent rents in accordance
with EITF 98-9.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities". The SFAS No. 133
establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded
in other contracts) be recorded in the balance sheet as either an asset
or liability measured at its fair value. The SFAS No. 133 requires that
changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June
15, 1999. A company may also implement SFAS No. 133 as of the
beginning of any fiscal quarter after issuance (that is, fiscal quarters
beginning June 16, 1998 and thereafter). SFAS No. 133 cannot be
applied retroactively. SFAS No. 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired, or substantively modified after
December 31, 1997 (and, at the company's election, before January 1,
1998).
The Company has not yet quantified the impact of adopting SFAS
No. 133 on its financial statements and has not determined the timing
of or method of adoption of SFAS No. 133. However, the SFAS No. 133
could increase volatility in earnings and other comprehensive income.
22
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None
ITEM 2: CHANGES IN SECURITIES
None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
25.2 Loan agreement between Rivergate Mall Limited
Partnership, The Village at Rivergate Limited
Partnership, Hickory Hollow Mall Limited
Partnership, and The Courtyard at Hickory Hollow
Limited Partnership and Midland Loan Services,
Inc. Dated July 1, 1998.
27 Financial Data Schedule
B. Reports on Form 8-K
The following items were reported:
Underwriting agreement for the issue of 2,875,000
shares of 9% Series A Cummulative Redeemable Preferred
Stock (Item 5) was filed on June 24, 1998.
Information on the purchase of two malls and three
community centers in Nashville Tennessee (Item 2)
was filed on June 25, 1998.
The outline from the Company's July 30, 1998
conference call with analysts and investors
regarding earnings (Item 5) was filed on
July 30, 1998.
23
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: August 14, 1998
24
EXHIBIT INDEX
EXHIBIT
NO.
-------
25.2 Loan agreement between Rivergate Mall Limited
Partnership, The Village at Rivergate Limited
Partnership, Hickory Hollow Mall Limited
Partnership, and The Courtyard at Hickory Hollow
Limited Partnership and Midland Loan Services,
Inc. Dated July 1, 1998.
27 Financial Data Schedule
25