Securities Exchange Act of 1934 -- Form10-Q
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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
---------------------- -----------------
(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 common stock, as of November 9, 1998: Common Stock,
par value $.01 per share, 24,194,386 shares.
1
CBL & ASSOCIATES PROPERTIES, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE NUMBER
ITEM 1: FINANCIAL INFORMATION 3
CONSOLIDATED BALANCE SHEETS - AS OF
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 4
CONSOLIDATED STATEMENTS OF OPERATIONS -
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1998 AND 1997 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30,
1997 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998 AND SEPTEMBER 30, 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 6: EXHIBITS AND REPORTS ON FORM 8-K 25
SIGNATURE 26
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 September 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 "REIT") 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.
3
CBL & ASSOCIATES PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(UNAUDITED)
September 30, December 31,
1998 1997
----------- ------------
ASSETS
Real estate assets:
Land . . . . . . . . . . . . . . . . . . . $ 258,234 $ 167,895
Buildings and improvements . . . . . . . . 1,609,231 1,019,283
---------- ----------
1,867,465 1,184,178
Less: Accumulated depreciation . . . . . . (174,921) (145,641)
---------- ----------
1,692,544 1,038,537
Developments in progress . . . . . . . . . 89,369 103,787
---------- ----------
Net investment in real estate assets . . . 1,781,913 1,142,324
Cash and cash equivalents. . . . . . . . . . 6,787 3,124
Cash in escrow . . . . . . . . . . . . . . . -- 66,108
Receivables:
Tenant . . . . . . . . . . . . . . . . . . 17,665 12,891
Other. . . . . . . . . . . . . . . . . . . 1,505 1,121
Mortgage notes receivable . . . . . . . . . 11,949 11,678
Other assets . . . . . . . . . . . . . . . . 14,648 7,779
---------- ----------
$1,834,467 $1,245,025
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage and other notes payable . . . . . . $1,184,967 $ 741,413
Accounts payable and accrued liabilities . . 41,020 41,978
---------- ----------
Total liabilities. . . . . . . . . . . . . 1,225,987 783,391
---------- ----------
Distributions and losses in excess of
investment in unconsolidated affiliates. . 6,996 6,884
---------- ----------
Minority interest . . . . . . . . . . . . . 193,420 123,897
---------- ----------
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, 24,172,155 and
24,063,963 shares issued and outstanding
in 1998 and 1997, respectively . . . . . 242 241
Excess stock, $.01 par value, 100,000,000
shares authorized, none issued . . . . . -- --
Additional paid - in capital . . . . . . . 431,716 359,541
Accumulated deficit. . . . . . . . . . . . (23,376) (28,433)
Deferred compensation. . . . . . . . . . . (547) (496)
---------- ----------
Total shareholders' equity . . . . . . . 408,064 330,853
---------- ----------
$1,834,467 $1,245,025
========== ==========
The accompanying notes are an integral part of these balance sheets.
4
CBL & ASSOCIATES PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
REVENUES:
Rentals:
Minimum . . . . . . . . . . . $44,525 $28,726 $118,545 $83,266
Percentage. . . . . . . . . . 1,146 770 3,975 2,677
Other . . . . . . . . . . . . 462 256 1,282 615
Tenant reimbursements. . . . . . 20,238 12,225 52,241 36,622
Management, development
and leasing fees . . . . . . . . 639 655 2,058 1,765
Interest and other . . . . . . . 703 611 2,067 1,998
------- ------- ------- -------
Total revenues . . . . . . . . 67,713 43,243 180,168 126,943
------- ------- ------- -------
EXPENSES:
Property operating . . . . . . . 11,187 7,568 29,511 22,038
Depreciation and amortization. . 11,659 8,029 30,534 23,639
Real estate taxes. . . . . . . . 6,355 3,515 16,607 10,450
Maintenance and repairs. . . . . 3,928 2,427 10,223 7,270
General and administrative . . . 2,775 1,849 8,506 6,352
Interest . . . . . . . . . . . . 19,019 9,146 47,836 27,081
Other. . . . . . . . . . . . . . 113 3 122 45
------- ------- ------- -------
Total expenses . . . . . . . . 55,036 35,537 143,339 96,875
------- ------- ------- -------
Income from operations . . . . . 12,677 10,706 36,829 30,068
Gain on sales of real
estate assets. . . . . . . . . . 398 774 2,910 4,156
Equity in earnings of
unconsolidated affiliates. . . . 521 301 1,689 1,514
Minority interest in
earnings:
Operating partnership. . . . . (3,499) (3,178) (11,276) (9,763)
Shopping center properties . . (101) (116) (409) (405)
------- ------- ------- -------
Income before extraordinary
item . . . . . . . . . . . . . 9,996 8,487 29,743 25,570
Extraordinary loss on
extinguishment of debt . . . . (676) (432) (676) (928)
------- ------- ------- -------
Net income . . . . . . . . . . . 9,320 8,055 29,067 24,642
Preferred dividend . . . . . . . (1,617) -- (1,617) --
------- ------- ------- -------
Net income available to common
shareholders . . . . . . . . . $ 7,703 $ 8,055 $27,450 $24,642
======= ======= ======= =======
Basic per share data:
Income before extraordinary
item . . . . . . . . . . . . $ 0.35 $ 0.35 $ 1.17 $ 1.07
======= ======= ======= =======
Net income . . . . . . . . . . $ 0.32 $ 0.34 $ 1.14 $ 1.03
======= ======= ======= =======
Weighted average common shares
outstanding. . . . . . . . . . 24,117 24,025 24,089 23,842
======= ======= ======= =======
Diluted per share data:
Income before extraordinary
item . . . . . . . . . . . . $ 0.34 $ 0.35 $ 1.16 $ 1.06
======= ======= ======= =======
Net income . . . . . . . . . . $ 0.32 $ 0.33 $ 1.13 $ 1.02
======= ======= ======= =======
Weighted average common and
dilutive potential common
shares outstanding . . . . . . 24,409 24,300 24,345 24,104
======= ======= ======= =======
The accompanying notes are an integral part of these statements.
5
CBL & ASSOCIATES PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Nine Months
Ended September 30,
----------------------
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . $29,067 $24,642
Adjustments to reconcile net income to net
cash provided by operating activities:
Minority interest in earnings. . . . . . . . . 11,685 10,168
Depreciation . . . . . . . . . . . . . . . . . 26,032 21,397
Amortization . . . . . . . . . . . . . . . . . 5,369 2,760
Extraordinary loss on extinguishment of debt . -- 62
Gain on sales of real estate assets. . . . . . (2,910) (4,156)
Issuance of stock under incentive plan . . . . 287 127
Equity in earnings of unconsolidated
affiliates . . . . . . . . . . . . . . . . . (1,689) (1,514)
Amortization of deferred compensation. . . . . 392 239
Write-off of development projects. . . . . . . 122 45
Distribution from unconsolidated
affiliates . . . . . . . . . . . . . . . . . 2,768 1,764
Distributions to minority investors. . . . . . (13,193) (12,647)
Changes in assets and liabilities -
Tenant and other receivables . . . . . . . (5,158) (293)
Other assets . . . . . . . . . . . . . . . (6,187) (769)
Accounts payable and accrued expenses. . . 12,833 6,207
-------- --------
Net cash provided by operating
activities . . . . . . . . . . . . . . . 59,418 48,032
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction of real estate and land
acquisitions, net of payables. . . . . . . . (81,290) (101,282)
Acquisition of real estate assets. . . . . . . (501,156) (36,207)
Capitalized interest . . . . . . . . . . . . . (3,858) (4,702)
Other capital expenditures . . . . . . . . . . (16,186) (6,580)
Deposits in escrow . . . . . . . . . . . . . . 66,108 --
Proceeds from sales of real estate
assets . . . . . . . . . . . . . . . . . . . 6,730 8,876
Additions to mortgage notes receivable . . . . (1,497) (3,252)
Payments received on mortgage notes
receivable . . . . . . . . . . . . . . . . . 1,435 1,472
Additional investments in and advances to
unconsolidated affiliates. . . . . . . . . . (967) (1,724)
-------- --------
Net cash used in investing activities. . . . (530,681) (143,399)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage and other notes
payable. . . . . . . . . . . . . . . . . . . 586,832 251,540
Principal payments on mortgage and
other notes payable. . . . . . . . . . . . . (143,278) (198,279)
Additions to deferred finance costs. . . . . . (2,025) (655)
Proceeds from issuance of preferred stock. . . 70,112 --
Proceeds from issuance of common stock . . . . 240 74,465
Proceeds from exercise of stock options. . . . 1,391 1,104
Purchase of minority interest. . . . . . . . . (3,012) --
Prepayment penalties on extinguishment
of debt. . . . . . . . . . . . . . . . . . . (676) (866)
Dividends paid . . . . . . . . . . . . . . . . (34,658) (30,038)
--------- --------
Net cash provided by financing activities. . 474,926 97,271
--------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS. . . . . 3,663 1,904
CASH AND CASH EQUIVALENTS, beginning of
period . . . . . . . . . . . . . . . . . . . . . 3,124 4,298
--------- --------
CASH AND CASH EQUIVALENTS, end of period . . . . . $ 6,787 $ 6,202
========= ========
Cash paid for interest, net of amounts
capitalized. . . . . . . . . . . . . . . . . . . $ 42,147 $ 22,660
========= ========
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 September 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):
Comapny's Share
Total For The For The
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
Revenues . . . . . . . . $ 2,597 $ 2,515 $ 8,125 $ 7,856
-------- -------- -------- --------
Depreciation and
amortization . . . . . 357 337 1,057 993
Interest expense . . . . 920 964 2,904 2,786
Other operating
expenses . . . . . . . 799 913 2,475 2,563
-------- -------- -------- --------
Net income . . . . . . . $ 521 $ 301 $ 1,689 $ 1,514
======== ======== ======== ========
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 that exposure, if any,
related to environmental cleanup will be immaterial to the financial
position and results of operations of the Company.
7
Note 3 - Credit Agreements
The Company has credit facilities of $230 million of which $95.6 million
is available at September 30, 1998. Outstanding amounts under the credit
facilities bear interest at a weighted average interest rate of 6.51% at
September 30, 1998. The Company's variable rate debt as of September 30,
1998 was $521.1 million with a weighted average interest rate of 6.61% as
compared to 6.98% as of September 30, 1997. Through the execution of
interest rate swap agreements, the Company has fixed the interest rates on
$314 million of variable rate debt on operating properties at a weighted
average interest rate of 6.61%. Of the Company's remaining variable rate
debt of $207.1 million, interest rate caps in place of $100.0 million and
conventional permanent loan commitments of $39.4 million, leave $67.7 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 September 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
80 5.49% 09/01/2001 09/01/98
In December 1997, the Company obtained two $100 million interest rate
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.
Note 4- Non-Cash Financing and Investing Activities
During the three months ended September 30, 1998 the Company issued
operating partnership units to finance acquisitions of real estate assets
with a value of $69.0 million.
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 the Company's
Consolidated Financial Statements and Notes thereto.
The 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 September 30,
1998 the operations of a portfolio of properties consisting of twenty-four
regional malls, thirteen associated centers, eighty-three 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, two community centers and one expansion currently under
construction and holds options to acquire certain shopping center
development sites. The consolidated financial statements also include the
accounts of CBL & Associates Management, Inc. (the "Management Company").
The Company classifies its regional malls into two categories: malls
which have completed their initial lease-up ("Stabilized Malls") and malls
which are in their initial lease-up phase ("New Malls"). The New Mall
category is presently comprised of the redeveloped and expanded Westgate
Mall in Spartanburg, South Carolina, Oak Hollow Mall in High Point, North
Carolina, Springdale Mall in Mobile, Alabama which is being redeveloped
and Bonita Lakes Mall in Meridian, Mississippi.
9
In July 1998, the Company acquired Hickory Hollow Mall, Rivergate Mall,
The Courtyard at Hickory Hollow, The Village at Rivergate and Lionshead
Village, all located in the metropolitan Nashville, Tennessee area. The
purchase price of $247.4 million was funded with 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.
In July 1998, the Company purchased 122,008 limited partnership units
valued at $3.0 million from a former executive and minority investor in
the Operating Partnership.
In August 1998, the Company acquired Meridian Mall in Lansing (Oskemos),
Michigan and Janesville Mall in Janesville, Wisconsin. The purchase price
of $138 million was funded with an acquisition loan of $80 million, 2,118,229
limited partnership units in the Operating Partnership with a value of $53
million and, the assumption of a $17.1 million mortgage loan. Excess loan
proceeds of $12.1 million were used to pay down the Company's credit lines.
In the third quarter of 1998, the Company closed the purchase of three
parcels of land from CBL & Associates, Inc., the predecessor company, for
an aggregate price of $1,538,157. The Operating Partnership issued limited
partnership interests equivalent to 62,100 common shares in exchange for
the property. The Company used the land to expand existing centers.
RESULTS OF OPERATIONS
Operational highlights for the nine months ended September 30, 1998 as
compared to the nine months ended September 30, 1997 are as follows:
SALES
Mall shop sales, for those tenants who have reported, in the
twenty-three Stabilized Malls in the Company's portfolio increased
by 4.6% on a comparable per square foot basis.
Nine Months Ended September 30,
-------------------------------
1998 1997
------------ -----------
Sales per square foot $176.76 $169.07
Total sales volume in the mall portfolio, including New Malls,
increased 11.1% to $871.4 million for the nine months ended September
30, 1998 from $784.2 million for the nine months ended September 30,
1997.
Occupancy costs as a percentage of sales was 12.2% for the nine
months ended September 30, 1998 and 13.1% for the nine months ended
September 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 September 30,
--------------------
1998 1997
-------- -------
Stabilized malls . . . . . . . . 91.7% 89.0%
New malls . . . . . . . . . . . . 92.0% 87.9%
Associated centers . . . . . . . 89.7% 83.1%
Community centers . . . . . . . . 96.5% 97.4%
Total Portfolio . . . . . . . . . 93.7% 92.6%
AVERAGE BASE RENT
Average base rents per square foot for the Company's three
portfolio categories were as follows:
At September 30,
--------------------
1998 1997
-------- -------
Malls . . . . . . . . . . . . . . $19.29 $19.02
Associated centers. . . . . . . . 9.41 9.46
Community centers . . . . . . . . 8.10 7.30
LEASE ROLLOVERS
On spaces previously occupied, the Company achieved the following
results from rollover leasing during the nine months ended September 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 . . . . . . . . . $20.18 $22.96 13.8%
Associated centers. . . 10.17 11.50 13.1%
Community centers . . . 7.79 8.70 11.7%
11
(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 nine months ended September 30, 1998, malls represented 74.0%
of total revenues from the Properties; revenues from associated centers
represented 3.9%; revenues from community centers represented 20.7%; and
revenues from mortgages and the office building represented 1.4%.
Accordingly, revenues and results of operations are disproportionately
impacted by the malls' results of operations. The Company's cost recovery
ratio increased to 92.7% for the nine months ended September 30, 1998 as
compared to 92.1% 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 September 30,
1998 to the Results of Operations for the three months ended September 30,
1997
Total revenues for the three months ended September 30, 1998 increased
by $24.5 million, or 56.7%, to $67.7 million as compared to $43.2 million
in 1997. Of this increase, minimum rents increased by $15.8 million, or
55.0%, to $44.5 million as compared to $28.7 million in 1997, and tenant
reimbursements increased by $8.0 million, or 65.5%, to $20.2 million in 1998
as compared to $12.2 million in 1997.
Improved occupancies and operations and increased rents in the Company's
operating portfolio generated approximately $1.4 million of the increase in
revenues. The majority of these increases were generated at Westgate Mall
in Spartanburg, South Carolina and St. Clair Square in Fairview Heights,
Illinois. New revenues of $23.1 million resulted from operations at the
twenty 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 289,000 New Development July, 1997
Strawbridge Marketplace Virginia Beach, Virginia 44,000 New Development August, 1997
Springhurst Towne Center Louisville, Kentucky 811,000 New Development August, 1997
Bonita Lakes Mall Meridian, Mississippi 633,000 New Development October, 1997
Bonita Lakes Crossing Meridian, Mississippi 110,000 New Development October, 1997/
March, 1998
12
Project Name Location Total GLA Type of Addition Opening Date
- ------------- -------- ---------- ----------------- ------------
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), 1,070,000 Acquisition January, 1998
Minnesota
Stroud Mall Stroudsburg, Pennsylvania 427,000 Acquisition April, 1998
Hickory Hollow Mall Nashville, Tennessee 1,096,000 Acquisition July, 1998
Rivergate Mall Nashville, Tennessee 1,014,000 Acquisition July, 1998
Courtyart at Hickory Nashville, Tennessee 77,000 Acquisition July, 1998
Hollow
Village at Rivergate Nashville, Tennessee 166,000 Acquisition July, 1998
Lionshead Nashville, Tennessee 93,000 Acquisition July, 1998
Meridian Mall Oskemos (Lansing), Michigan 777,000 Acquisition August, 1998
Janesville Mall Janesville, Wisconsin 615,000 Acquisition August, 1998
Interest and other income increased in the third quarter of 1998 by
$0.1 million, to $0.7 million from $0.6 million in 1997. This increase is
due to interest on advances to developers in the Company's co-development
program.
Property operating expenses, including real estate taxes and
maintenance and repairs, increased in the third quarter of 1998 by $8.0
million, or 58.9%, to $21.5 million as compared to $13.5 million in the third
quarter of 1997. This increase is primarily the result of the addition of the
twenty new centers referred to above.
Depreciation and amortization increased in the third quarter of 1998
by $3.6 million, or 45.2%, to $11.7 million as compared to $8.0 million in
the third quarter of 1997. This increase is primarily the result of the
addition of the twenty new centers referred to above.
Interest expense increased in the third quarter of 1998 by $9.9
million, or 107.9%, to $19.0 million as compared to $9.1 million in 1997.
This increase is primarily due to interest on debt related to the twenty new
centers opened or acquired during the last fifteen months.
The gain on sales of real estate assets decreased in the third quarter
of 1998 by $0.4 million, or 48.6%, to $0.4 million as compared to $0.8
million in 1997. The outparcel sale in the third quarter of 1998 was at Sand
Lake Corner in Orlando, Florida. The sales in the third quarter of 1997 were
for outparcels at Springhurst Towne Center in Louisville, Kentucky.
13
The extraordinary loss in the third quarter of 1998 was from the
refinancing of the loan on College Square Mall in Morristown, Tennessee. The
Company reduced the interest rate from 10% to 6.75% and extended the term to
fifteen years.
Comparison of Results of Operations for the nine months ended September 30,
1998 to the Results of Operations for the nine months ended September 30,
1997
Total revenues for the nine months ended September 30, 1998 increased
by $53.3 million, or 42.0%, to $180.2 million as compared to $126.9 million
in 1997. Of this increase, minimum rents increased by $35.2 million, or
42.3%, to $118.5 million as compared to $83.3 million in 1997, and tenant
reimbursements increased by $15.6 million, or 42.6%, to $52.2 million in 1998
as compared to $36.6 million in 1997.
Improved occupancies and operations and increased rents in the
Company's operating portfolio generated $5.5 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 $47.7 million resulted from operations at the twenty-five new
centers opened or acquired during the past twenty-one 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 July, 1997
Strawbridge Marketplace Virginia Beach, Virginia 44,000 New Development August, 1997
Springhurst Towne Center Louisville, Kentucky 811,000 New Development August, 1997
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
Hamilton Place Expansion Chattanooga, Tennessee 12,500 New Development April, 1998
Sterling Creek Commons Portsmouth, Virginia 65,500 New Development June, 1998
Governor's Plaza Clarksville, Tennessee 151,000 Acquisition June, 19978
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), 1,070,000 Acquisition January, 1998
Minnesota
Stroud Mall Stroudsburg, Pennsylvania 427,000 Acquisition April, 1998
Hickory Hollow Mall Nashville, Tennessee 1,095,946 Acquisition July, 1998
Rivergate Mall Nashville, Tennessee 1,013,970 Acquisition July, 1998
Courtyart at Hickory Nashville, Tennessee 77,460 Acquisition July, 1998
Hollow
14
Project Name Location Total GLA Type of Addition Opening Date
- ------------- -------- ---------- ----------------- ------------
Village at Rivergate Nashville, Tennessee 166,366 Acquisition July, 1998
Lionshead Nashville, Tennessee 93,290 Acquisition July, 1998
Meridian Mall Oskemos (Lansing), Michigan 776,960 Acquisition August, 1998
Janesville Mall Janesville, Wisconsin 615,000 Acquisition August, 1998
Management, leasing and development fees increased by $0.3 million to
$2.1 million in the first nine months of 1998 as compared to $1.8 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 nine months of 1998 by $16.6
million, or 41.7%, to $56.3 million as compared to $39.8 million in 1997.
This increase is primarily the result of the addition of the twenty-five new
centers referred to above.
Depreciation and amortization increased in the first nine months of
1998 by $6.9 million, or 29.2%, to $30.5 million as compared to $23.6 million
in 1997. This increase is primarily the result of the addition of the
twenty-five new centers referred to above.
Interest expense increased in the first nine months of 1998 by $20.8
million, or 76.6%, to $47.8 million as compared to $27.1 million in 1997.
This increase is primarily the result of interest on debt related to the
addition of the twenty-five new centers referred to above.
The gain on sales of real estate assets decreased for the first nine
months of 1998 by $1.3 million, or 30.0%, to $2.9 million as compared to
$4.2 million in 1997. Gain on sales in the first nine 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 nine months of 1997 were in connection with anchor pad
and outparcel sales at 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.
The extraordinary loss in the first nine months of 1998 was from the
refinancing of the loan on College Square Mall in Morristown, Tennessee. The
Company reduced the interest rate from 10% to 6.75% and extended the term to
fifteen years.
Liquidity and Capital Resources
The principal uses of the Company's liquidity and capital resources
have historically been for property development, acquisitions, expansion and
renovation programs, and debt repayment.
15
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 October 31, 1998, the Company had $75.2 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 October 31, 1998, the Company had obtained
revolving credit facilities totaling $230 million of which $83.8 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.
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. Ownership interest in the Operating
Partnership held by the Company's executive, former executive and senior
officers is 26.2% 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 30.4%. Ownership interests granted in exchange for acquired
properties may be exchanged for approximately 2.8 million shares of common
stock. The minority interest in the Operating Partnership from executive
ownership interest and ownership interest granted in exchange of acquired
properties is 33.7%. Assuming the exchange of all limited partnership
interests in the Operating Partnership for common stock, there would be
outstanding approximately 36.5 million shares of common stock with a market
value of approximately $938.8 million at September 30, 1998 (based on the
closing price of $25.75 per share on September 30, 1998). The Company's
total market equity is $1,010.7 million including 2.9 million shares of
preferred stock at $25.00 per share at September 30,1998. Company executive,
former executive and senior officers' ownership interests had a market value
of approximately $286.0 million at September 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
16
interest and are accounted for under the equity method of accounting. At
September 30, 1998, the Company's share of funded mortgage debt on its
consolidated properties adjusted for minority investors' interests in nine
properties was $1,163.4 million and its pro rata share of mortgage debt on
unconsolidated properties (accounted for under the equity method) was $41.4
million for total debt obligations of $1,204.8 million with a weighted
average interest rate of 7.13%.
The Company's total conventional fixed rate debt as of September 30,
1998 was $683.7 million with a weighted average interest rate of 7.52% as
compared to 8.1% as of September 30, 1997.
The Company's variable rate debt as of September 30, 1998 was $521.1
million with a weighted average interest rate of 6.61% as compared to 6.98%
as of September 30, 1997. Through the execution of interest rate swap
agreements, the Company has fixed the interest rates on $314 million of
variable rate debt on operating properties at a weighted average interest
rate of 6.61%. Of the Company's remaining variable rate debt of $207.1
million, interest rate caps in place of $100.0 million and conventional
permanent loan commitments of $39.4 million, leave $67.7 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 September 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
80 5.49% 09/01/2001 09/01/98
In December 1997, the Company obtained two $100 million interest rate
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 Reality 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 September 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 points over LIBOR. The note matures in equal
installments on November 15, 1998 and pays out over the next 60 days. The
weighted average interest rate on the Company's credit facilities is 6.52%
at September 30, 1998.
17
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 54.4% at September
30, 1998.
Development, Expansions And Acquisitions
In the third quarter of 1998, the Company opened a 12,000-square-foot
expansion to Coolsprings Crossing in Nashville, Tennessee. 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 non-owned 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. In July 1998, the Company
began sitework on a 92,000 square foot Sears expansion to Lakeshore Mall
in Sebring, Florida.
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, Proffitts and Sears. The
Company 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 Lionshead Village, a 93,000 square-foot community
center, all located in the metropolitan Nashville, Tennessee area. In
August 1998, the Company acquired Meridian Mall, a 767,000 square-foot
mall, in Lansing (Oskemos), Michigan and Janesville Mall, a 615,000 square-
foot mall, in Janesville, Wisconsin.
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 to a Developer to cover pre-development
costs. The outstanding amount on standby purchase agreements is $49.1
18
million and the committed amount on secured credit agreements is $2.7 million
of which $2.2 million is outstanding at September 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 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 nine months ended September 30, 1998, revenue generating
capital expenditures, or tenant allowances for improvements, were $4.9
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 $7.7 million for the
nine months ended September 30, 1998. Revenue neutral capital expenditures,
which are recovered from the tenants, were $3.5 million for the nine months
ended September 30, 1998.
19
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 nine months ended
September 30, 1998 increased by $11.4 million, or 23.7%, to $59.4 million
from $48.0 million in 1997. This increase was primarily due to the increases
in net income and depreciation and amortization related to the addition of
twenty-five new properties over the last twenty-one months. Cash flows used
in investing activities for the nine months ended September 30, 1998
increased by $387.3 million, or 270.1%, to $530.7 million compared to $143.4
million in 1997. This increase was due to the purchase of seven malls and
three other centers in 1998 and continuing development of new properties as
compared to 1997. Cash flows provided by financing activities for the nine
months ended September 30, 1998, increased by $377.6 million, or 388.1%, to
$474.9 million compared to $97.3 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 nine months ended
September 30, 1998 as compared to the same period in 1997.
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.
20
YEAR 2000 READINESS DISCLOSURES
The Year 2000 problem results from the use of a two digit year date
instead of a four digit date in the programs that operate computers
information processing technology and systems and other devices (i.e.
non-information processing systems such as elevators, utility monitoring
systems and time clocks that use computer chips). Systems with a Year 2000
problem have programs that were written to assume that the first two digits
for any date used in the program would always be "19". Unless corrected, this
assumption may result in problems when the century date occurs. On that date,
these computer programs likely will misinterpret the date January 1, 2000 as
January 1, 1900. This could cause systems to incorrectly process critical
financial and operational information, generate erroneous information or fail
altogether. The Year 2000 issue effects almost all companies and
organizations.
The Company has completed a program to identify both its information and
non-information processing applications that are not year 2000 compliant. As
a result of this identification program, the Company believes that its core
accounting application and the majority of non-information processing
applications are year 2000 compliant. Certain of its other information and
non-information processing applications are not yet year 2000 compliant. The
Company has undertaken to correct or replace all non-compliant systems and
applications including embedded systems and expects the task to be completed
by the end of 1998. 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 correct their year 2000
compliance issues. In addition, the Company has formed a Year 2000 Committee
that includes senior personnel from most areas of the Company. These people
are charged with the duty of determining the extent of the Company's exposure
and taking the appropriate action to minimize any impact on the Company's
operations.
Costs to Address the Company's Year 2000 Issue
As the Company's Year 2000 compliance issues have already been
addressed, which costs were not material, the Company does not expect to incur
any significant additional costs regarding the compliance of all non compliant
information processing systems and non-information processing systems
including embedded systems.
Risks Relating to The Year 2000 Issue And Contingency Plans
Although the Company is not currently aware of any specific
significant Year 2000 issues involving third-parties, the Company believes
that its most significant potential risk relating to the Year 2000 issue
is in regard to such third parties. For example, the Company believes there
could be failure in the information systems of certain service providers
that the Company relies upon for electrical, telephone and data
transmission and banking services. The Company believes that any service
disruption with respect to these providers due to a Year 2000 issue would
be of a short-term nature. The Company has existing back-up systems and
procedures, developed primarily for natural disasters, that could be
utilized on a short-term basis to address any service interruptions. In
addition, with respect to tenants, a failure of their information systems
could delay the payment of rents or even impair their ability to operate.
These tenant problems are likely to be isolated and would likely not impact
the operations of any particular mall or the Company as a whole. While it
is not possible at this time to determine the likely impact of any of these
potential problems, the Company will continue to evaluate these areas and
develop additional contingency plans, as appropriate. Therefore, although
the Company believes that its Year 2000 issues have been addressed and that
suitable remediation and/or contingency procedures will be in place by
December 31, 1999, there can be no assurance that Year 2000 issues will not
have a material adverse effect on the Company's results of operations or
financial condition.
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
does not expect to this to have a material impact on the Company's results
of operations.
21
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". 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. 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, SFAS No. 133 could increase
volatility in earnings and other comprehensive income.
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 $0.4 million and $2.6
million to FFO in the three months and nine months ended September 30, 1998,
respectively, and $0.8 million and $4.2 million in the same periods in 1997,
respectively. FFO for the third quarter and first nine months of 1997 has
been restated to include straight line rents.
22
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 September 30, 1998, FFO increased by $4.3
million, or 22.5%, to $23.2 million as compared to $19.0 million for the
same period in 1997. For the nine months ended September 30, 1998, FFO
increased by $12.2 million, or 22.1%, to $67.1 million as compared to $55.0
million for the same period in 1997. The increase in FFO for both periods
was primarily attributable to the new developments opened during 1997 and
1998, the properties acquired during 1997 and 1998 and improved operations
in the existing portfolio.
23
The REIT's calculation of FFO is as follows (in thousands):
Three Months Ended Nine Month Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
Income from operations. . . . . $ 12,677 $ 10,706 $ 36,829 $ 30,068
ADD:
Depreciation & amortization from
consolidated properties . . . 11,659 8,029 30,534 23,639
Income from operations of
unconsolidated affiliates . . 521 301 1,689 1,514
Depreciation & amortization from
unconsolidated affiliates . . 357 337 1,057 993
Write-off of development costs
charged to net income . . . . 113 3 122 45
SUBTRACT:
Minority investors' share of
income from operations in
nine properties . . . . . . . (101) (116) (409) (405)
Minority investors share of
depreciation and amortization
in nine properties. . . . . . (216) (199) (649) (582)
Depreciation and amortization
of non-real estate assets
and finance costs . . . . . . (168) (107) (446) (320)
Preferred Dividend. . . . . . . (1,617) -- (1,617) --
-------- -------- -------- --------
TOTAL FUNDS FROM OPERATIONS . . $ 22,225 $ 18,954 $ 67,110 $ 54,952
======== ======== ======== ========
Basic per share data:
Funds from operations . . . . $ 0.66 $ 0.57 $ 1.97 $ 1.65
======== ======== ======== ========
Weighted average common
shares outstanding with
operating partnership
units fully converted . . . 35,073 33,501 34,067 33,281
======== ======== ======== ========
Diluted per share data:
Funds from operations . . . . $ 0.66 $ 0.56 $ 1.96 $ 1.64
======== ======== ======== ========
Weighted average common
shares and dilutive
potential common shares
outstanding with operating
partnership units fully
converted . . . . . . . . . 35,365 33,776 34,323 33,543
======== ======== ======== ========
24
PART II - OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K
A. Exhibits
10 Second Amended and Restated Agreement of
Limited Partnership of CBL & Associates
Limited Partnership dated June 30, 1998
11.2 Amended and restated Loan Agreement between
CBL & Associates, Inc. Properties and First
Tennessee Bank National Association Dated
June 12, 1998
11.2 First Amendment To Third Amended And Restated
Credit Agreement and Third Amended And
Restated Credit Agreement between CBL &
Associates Properties, Inc. and Wells Fargo
Bank, National Association, dated August 4, 1998
B. Reports on Form 8-K
The following items were reported:
Information on the purchase of Meridian Mall in
Oskemos (Lansing), Michigan and Janesville Mall in
Janesville, Wisconsin (Item 2) was filed on
September 11, 1998.
The outline from the Company's October 29, 1998
conference call with analysts and investors
regarding earnings (Item 5) was filed on
October 29, 1998.
Additional information (Form 8-K/A) on the purchase
of Meridian Mall in Oskemos (Lansing), Michigan and
Janesville Mall in Janesville, Wisconsin (Item 2) was
filed on November 10, 1998.
25
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: November 13, 1998
26
EXHIBIT INDEX
Exhibit
No.
-------
10 Second Amended and Restated Agreement of
Limited Partnership of CBL & Associates
Limited Partnership dated June 30, 1998
11.2 Amended and restated Loan Agreement between
CBL & Associates, Inc. Properties and First
Tennessee Bank National Association Dated
June 12, 1998
11.2 First Amendment To Third Amended And Restated
Credit Agreement and Third Amended And
Restated Credit Agreement between CBL &
Associates Properties, Inc. and Wells Fargo
Bank, National Association, dated August 4, 1998
27 Financial Data Schedule
27