ITEM
1. Financial Statements
CBL & Associates Properties, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
|
|
September 30,
2007
|
|
December 31,
2006
|
|
ASSETS
|
|
|
|
|
|
|
|
Real estate assets:
|
|
|
|
|
|
|
|
Land
|
|
$
|
828,905
|
|
$
|
779,727
|
|
Buildings and improvements
|
|
|
6,239,802
|
|
|
5,944,476
|
|
|
|
|
7,068,707
|
|
|
6,724,203
|
|
Less accumulated depreciation
|
|
|
(1,053,459
|
)
|
|
(924,297
|
)
|
|
|
|
6,015,248
|
|
|
5,799,906
|
|
Developments in progress
|
|
|
271,331
|
|
|
294,345
|
|
Net investment in real estate assets
|
|
|
6,286,579
|
|
|
6,094,251
|
|
Cash and cash equivalents
|
|
|
48,880
|
|
|
28,700
|
|
Cash held in escrow
|
|
|
33,202
|
|
|
—
|
|
Receivables:
|
|
|
|
|
|
|
|
Tenant, net of allowance for doubtful accounts of $1,175
in
2007 and $1,128 in 2006
|
|
|
70,121
|
|
|
71,573
|
|
Other
|
|
|
13,734
|
|
|
9,656
|
|
Mortgage and other notes receivable
|
|
|
34,851
|
|
|
21,559
|
|
Investments in unconsolidated affiliates
|
|
|
99,212
|
|
|
78,826
|
|
Intangible lease assets and other assets
|
|
|
228,417
|
|
|
214,245
|
|
|
|
$
|
6,814,996
|
|
$
|
6,518,810
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
Mortgage and other notes payable
|
|
$
|
5,052,266
|
|
$
|
4,564,535
|
|
Accounts payable and accrued liabilities
|
|
|
324,711
|
|
|
309,969
|
|
Total liabilities
|
|
|
5,376,977
|
|
|
4,874,504
|
|
Commitments and contingencies (Notes 3 and 8)
|
|
|
|
|
|
|
|
Minority interests
|
|
|
505,104
|
|
|
559,450
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value, 15,000,000 shares
authorized:
|
|
|
|
|
|
|
|
8.75% Series B cumulative redeemable preferred
stock,
2,000,000 shares outstanding in 2006
|
|
|
—
|
|
|
20
|
|
7.75% Series C cumulative redeemable preferred
stock,
460,000 shares outstanding in 2007 and 2006
|
|
|
5
|
|
|
5
|
|
7.375% Series D cumulative redeemable preferred
stock,
700,000 shares outstanding in 2007 and 2006
|
|
|
7
|
|
|
7
|
|
Common stock, $.01 par value, 180,000,000 shares
authorized,
65,710,828 and 65,421,311 shares issued and
oustanding
in 2007 and 2006, respectively
|
|
|
657
|
|
|
654
|
|
Additional paid-in capital
|
|
|
984,323
|
|
|
1,074,450
|
|
Accumulated other comprehensive income (loss)
|
|
|
(4,707
|
)
|
|
19
|
|
Retained earnings (accumulated deficit)
|
|
|
(47,370
|
)
|
|
9,701
|
|
Total shareholders’ equity
|
|
|
932,915
|
|
|
1,084,856
|
|
|
|
$
|
6,814,996
|
|
$
|
6,518,810
|
|
The
accompanying notes are an integral part of these balance sheets.
3
CBL & Associates Properties, Inc.
Condensed Consolidated Statements of Operations
(In
thousands, except per share data)
(Unaudited)
|
|
Three Months Ended
September 30,
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
2007
|
|
2006
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum rents
|
|
$
|
155,814
|
|
$
|
155,095
|
|
|
|
$
|
465,223
|
|
$
|
454,661
|
|
Percentage rents
|
|
|
3,506
|
|
|
3,447
|
|
|
|
|
11,840
|
|
|
11,554
|
|
Other rents
|
|
|
3,580
|
|
|
3,041
|
|
|
|
|
11,942
|
|
|
10,438
|
|
Tenant reimbursements
|
|
|
83,095
|
|
|
76,602
|
|
|
|
|
235,810
|
|
|
226,536
|
|
Management, development and leasing fees
|
|
|
1,390
|
|
|
1,181
|
|
|
|
|
6,565
|
|
|
3,945
|
|
Other
|
|
|
3,837
|
|
|
5,678
|
|
|
|
|
15,507
|
|
|
17,096
|
|
Total revenues
|
|
|
251,222
|
|
|
245,044
|
|
|
|
|
746,887
|
|
|
724,230
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating
|
|
|
42,080
|
|
|
40,965
|
|
|
|
|
123,997
|
|
|
117,914
|
|
Depreciation and amortization
|
|
|
58,893
|
|
|
62,142
|
|
|
|
|
176,067
|
|
|
170,546
|
|
Real estate taxes
|
|
|
24,527
|
|
|
20,098
|
|
|
|
|
65,039
|
|
|
59,548
|
|
Maintenance and repairs
|
|
|
12,544
|
|
|
13,715
|
|
|
|
|
41,856
|
|
|
39,716
|
|
General and administrative
|
|
|
8,305
|
|
|
9,402
|
|
|
|
|
29,072
|
|
|
28,051
|
|
Loss on impairment of real estate assets
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
274
|
|
Other
|
|
|
3,647
|
|
|
5,127
|
|
|
|
|
12,088
|
|
|
13,815
|
|
Total expenses
|
|
|
149,996
|
|
|
151,449
|
|
|
|
|
448,119
|
|
|
429,864
|
|
Income from operations
|
|
|
101,226
|
|
|
93,595
|
|
|
|
|
298,768
|
|
|
294,366
|
|
Interest income
|
|
|
1,990
|
|
|
2,009
|
|
|
|
|
7,618
|
|
|
5,687
|
|
Interest expense
|
|
|
(72,789
|
)
|
|
(63,884
|
)
|
|
|
|
(207,730
|
)
|
|
(191,474
|
)
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
(935
|
)
|
|
|
|
(227
|
)
|
|
(935
|
)
|
Gain on sales of real estate assets
|
|
|
4,337
|
|
|
3,901
|
|
|
|
|
10,565
|
|
|
6,831
|
|
Equity in earnings of unconsolidated
affiliates
|
|
|
1,086
|
|
|
621
|
|
|
|
|
2,768
|
|
|
3,807
|
|
Income tax provision
|
|
|
(2,609
|
)
|
|
—
|
|
|
|
|
(4,360
|
)
|
|
—
|
|
Minority interest in earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating partnership
|
|
|
(13,288
|
)
|
|
(12,075
|
)
|
|
|
|
(35,886
|
)
|
|
(47,930
|
)
|
Shopping center properties
|
|
|
(2,121
|
)
|
|
(1,402
|
)
|
|
|
|
(6,418
|
)
|
|
(2,663
|
)
|
Income from continuing operations
|
|
|
17,832
|
|
|
21,830
|
|
|
|
|
65,098
|
|
|
67,689
|
|
Operating income from discontinued operations
|
|
|
754
|
|
|
147
|
|
|
|
|
1,274
|
|
|
3,898
|
|
Gain on disposal of discontinued operations
|
|
|
3,957
|
|
|
2
|
|
|
|
|
3,902
|
|
|
7,217
|
|
Net income
|
|
|
22,543
|
|
|
21,979
|
|
|
|
|
70,274
|
|
|
78,804
|
|
Preferred dividends
|
|
|
(5,455
|
)
|
|
(7,642
|
)
|
|
|
|
(24,320
|
)
|
|
(22,926
|
)
|
Net income available to common
shareholders
|
|
$
|
17,088
|
|
$
|
14,337
|
|
|
|
$
|
45,954
|
|
$
|
55,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of preferred
dividends
|
|
$
|
0.19
|
|
$
|
0.22
|
|
|
|
$
|
0.63
|
|
$
|
0.70
|
|
Discontinued operations
|
|
|
0.07
|
|
|
—
|
|
|
|
|
0.07
|
|
|
0.18
|
|
Net income available to common shareholders
|
|
$
|
0.26
|
|
$
|
0.22
|
|
|
|
$
|
0.70
|
|
$
|
0.88
|
|
Weighted average common shares outstanding
|
|
|
65,343
|
|
|
64,174
|
|
|
|
|
65,233
|
|
|
63,616
|
|
Diluted per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of preferred
dividends
|
|
$
|
0.19
|
|
$
|
0.22
|
|
|
|
$
|
0.62
|
|
$
|
0.69
|
|
Discontinued operations
|
|
|
0.07
|
|
|
—
|
|
|
|
|
0.08
|
|
|
0.17
|
|
Net income available to common shareholders
|
|
$
|
0.26
|
|
$
|
0.22
|
|
|
|
$
|
0.70
|
|
$
|
0.86
|
|
Weighted average common and potential dilutive common
shares outstanding
|
|
|
65,876
|
|
|
65,496
|
|
|
|
|
65,900
|
|
|
65,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
0.5050
|
|
$
|
0.4575
|
|
|
|
$
|
1.5150
|
|
$
|
1.3725
|
|
The
accompanying notes are an integral part of these statements.
4
CBL & Associates Properties, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net income
|
|
$
|
70,274
|
|
$
|
78,804
|
|
Adjustments to reconcile net income to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
116,256
|
|
|
104,610
|
|
Amortization
|
|
|
66,135
|
|
|
73,212
|
|
Amortization of debt premiums
|
|
|
(5,779
|
)
|
|
(5,599
|
)
|
Net amortization of above and below market
leases
|
|
|
(8,280
|
)
|
|
(9,739
|
)
|
Gain on sales of real estate assets
|
|
|
(10,565
|
)
|
|
(6,831
|
)
|
Gain on disposal of discontinued operations
|
|
|
(3,902
|
)
|
|
(7,217
|
)
|
Abandoned development projects
|
|
|
955
|
|
|
294
|
|
Share-based compensation expense
|
|
|
4,527
|
|
|
4,934
|
|
Income tax benefit from stock options
|
|
|
4,139
|
|
|
—
|
|
Loss on extinguishment of debt
|
|
|
227
|
|
|
935
|
|
Equity in earnings of unconsolidated
affiliates
|
|
|
(2,768
|
)
|
|
(3,807
|
)
|
Distributions of earnings from unconsolidated
affiliates
|
|
|
6,924
|
|
|
6,517
|
|
Loss on impairment of real estate assets
|
|
|
—
|
|
|
274
|
|
Minority interest in earnings
|
|
|
42,304
|
|
|
50,593
|
|
Changes in:
|
|
|
|
|
|
|
|
Tenant and other receivables
|
|
|
(1,631
|
)
|
|
(9,226
|
)
|
Other assets
|
|
|
(4,359
|
)
|
|
(4,682
|
)
|
Accounts payable and accrued liabilities
|
|
|
35,319
|
|
|
(4,423
|
)
|
Net cash provided by operating activities
|
|
|
309,776
|
|
|
268,649
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Additions to real estate assets
|
|
|
(415,019
|
)
|
|
(288,569
|
)
|
Acquisitions of real estate assets and other
assets
|
|
|
(11,506
|
)
|
|
—
|
|
Purchase of available-for-sale securities
|
|
|
(24,325
|
)
|
|
—
|
|
Cash placed in escrow
|
|
|
(33,202
|
)
|
|
—
|
|
Changes in other assets
|
|
|
(2,493
|
)
|
|
(8,975
|
)
|
Proceeds from sales of real estate assets
|
|
|
52,923
|
|
|
113,834
|
|
Additions to mortgage notes receivable
|
|
|
(2,613
|
)
|
|
(300
|
)
|
Payments received on mortgage notes
receivable
|
|
|
4,584
|
|
|
155
|
|
Additional investments in and advances to unconsolidated
affiliates
|
|
|
(34,934
|
)
|
|
(14,524
|
)
|
Distributions in excess of equity in earnings of
unconsolidated affiliates
|
|
|
10,636
|
|
|
8,132
|
|
Purchase of minority interest in the Operating
Partnership
|
|
|
(17,429
|
)
|
|
(3,610
|
)
|
Net cash used in investing activities
|
|
|
(473,378
|
)
|
|
(193,857
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Proceeds from mortgage and other notes
payable
|
|
|
825,294
|
|
|
742,082
|
|
Principal payments on mortgage and other notes
payable
|
|
|
(331,784
|
)
|
|
(613,122
|
)
|
Additions to deferred financing costs
|
|
|
(4,960
|
)
|
|
(5,365
|
)
|
Prepayment fees on extinguishment of debt
|
|
|
(227
|
)
|
|
(557
|
)
|
Proceeds from issuance of common stock
|
|
|
246
|
|
|
291
|
|
Proceeds from exercises of stock options
|
|
|
5,656
|
|
|
6,987
|
|
Income tax benefit from stock options
|
|
|
(4,139
|
)
|
|
—
|
|
Purchase of common stock for retirement
|
|
|
(1,393
|
)
|
|
—
|
|
Redemption of preferred stock
|
|
|
(100,000
|
)
|
|
—
|
|
Contributions from minority partners
|
|
|
1,822
|
|
|
—
|
|
Distributions to minority interests
|
|
|
(86,721
|
)
|
|
(84,187
|
)
|
Dividends paid to holders of preferred stock
|
|
|
(20,690
|
)
|
|
(22,927
|
)
|
Dividends paid to common shareholders
|
|
|
(99,322
|
)
|
|
(93,272
|
)
|
Net cash provided by (used in) financing
activities
|
|
|
185,093
|
|
|
(70,070
|
)
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
20,180
|
|
|
4,722
|
|
CASH AND CASH EQUIVALENTS, beginning of
period
|
|
|
28,700
|
|
|
28,838
|
|
CASH AND CASH EQUIVALENTS, end of period
|
|
$
|
48,880
|
|
$
|
33,560
|
|
SUPPLEMENTAL INFORMATION:
|
|
|
|
|
|
|
|
Cash paid for interest, net of amounts
capitalized
|
|
$
|
208,300
|
|
$
|
189,512
|
|
The
accompanying notes are an integral part of these
statements.
5
CBL & Associates Properties, Inc.
Notes to Unaudited Condensed Consolidated Financial
Statements
(In
thousands, except per share data)
Note
1 – Organization and Basis of Presentation
CBL & Associates Properties, Inc. (“CBL”), a Delaware
corporation, is a self-managed, self-administered, fully integrated real estate
investment trust (“REIT”) that is engaged in the ownership, development,
acquisition, leasing, management and operation of regional shopping malls, open-air
centers and community centers. CBL’s shopping center properties are located in 26
states, but primarily in the southeastern and midwestern United States.
CBL conducts substantially all of its business through CBL &
Associates Limited Partnership (the “Operating Partnership”). At September
30, 2007 the Operating Partnership owned controlling interests in 72 regional
malls/open-air centers, 28 associated centers (each adjacent to a regional shopping
mall), four community centers and CBL’s corporate office building. The Operating
Partnership consolidates the financial statements of all entities in which it has a
controlling financial interest or where it is the primary beneficiary of a variable
interest entity. The Operating Partnership owned non-controlling interests in seven
regional malls, four associated centers and two community centers. Because one or more
of the other partners have substantive participating rights, the Operating Partnership
does not control these partnerships and, accordingly, accounts for these investments
using the equity method. The Operating Partnership had five mall expansions, three
associated/lifestyle centers, one mixed-use center, three community centers and an
office building under construction at September 30, 2007. The Operating Partnership
also holds options to acquire certain development properties owned by third
parties.
CBL is the 100% owner of two qualified REIT subsidiaries, CBL Holdings
I, Inc. and CBL Holdings II, Inc. At September 30, 2007, CBL Holdings I, Inc., the sole
general partner of the Operating Partnership, owned a 1.6% general partner interest in
the Operating Partnership and CBL Holdings II, Inc. owned a 54.9% limited partner
interest for a combined interest held by CBL of 56.5%.
The minority interest in the Operating Partnership is held primarily by
CBL & Associates, Inc. and its affiliates (collectively “CBL’s
Predecessor”) and by affiliates of The Richard E. Jacobs Group, Inc.
(“Jacobs”). CBL’s Predecessor contributed their interests in certain
real estate properties and joint ventures to the Operating Partnership in exchange for
a limited partner interest when the Operating Partnership was formed in November 1993.
Jacobs contributed their interests in certain real estate properties and joint ventures
to the Operating Partnership in exchange for limited partner interests when the
Operating Partnership acquired the majority of Jacobs’ interests in 23 properties
in January 2001 and the balance of such interests in February 2002. At September 30,
2007, CBL’s Predecessor owned a 15.0% limited partner interest, Jacobs owned a
19.7% limited partner interest and various third parties owned an 8.8% limited partner
interest in the Operating Partnership. CBL’s Predecessor also owned 6.5 million
shares of CBL’s common stock at September 30, 2007, for a total combined
effective interest of 20.6% in the Operating Partnership.
The Operating Partnership conducts CBL’s property management and
development activities through CBL & Associates Management, Inc. (the
“Management Company”) to comply with certain requirements of the Internal
Revenue Code of 1986, as amended (the “Code”). The Operating Partnership
owns 100% of the Management Company’s preferred stock and common
stock.
CBL, the Operating Partnership and the Management Company are
collectively referred to herein as “the Company”.
The accompanying condensed consolidated financial statements are
unaudited; however, they have been prepared in accordance with accounting principles
generally accepted in the United States of America 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
accounting
6
principles generally accepted in the United States of America 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, 2007, are not necessarily indicative of the
results to be obtained for the full fiscal year. Certain prior year amounts have been
reclassified for discontinued operations. See Note 11 for further
discussion.
These condensed consolidated financial statements should be read in
conjunction with CBL’s audited consolidated financial statements and notes
thereto included in its Annual Report on Form 10-K for the year ended December 31,
2006.
Note
2 – Joint Ventures
Equity Method Investments
At September 30, 2007, the Company had investments in the following 13
partnerships and joint ventures, which are accounted for using the equity method of
accounting:
Joint
Venture
|
|
Property
Owned
|
|
Company's
Interest
|
|
Governor’s Square
IB
|
|
Governor’s Plaza
|
|
50.0
|
%
|
Governor’s Square
Company
|
|
Governor’s Square
|
|
47.5
|
%
|
High Pointe Commons,
LP
|
|
High Pointe Commons
|
|
50.0
|
%
|
Imperial Valley Mall
L.P.
|
|
Imperial Valley Mall
|
|
60.0
|
%
|
Imperial Valley Peripheral
L.P.
|
|
Imperial Valley Mall (vacant land)
|
|
60.0
|
%
|
Imperial Valley Commons
L.P.
|
|
Imperial Valley Commons
|
|
60.0
|
%
|
Kentucky Oaks Mall
Company
|
|
Kentucky Oaks Mall
|
|
50.0
|
%
|
Mall of South Carolina
L.P.
|
|
Coastal Grand—Myrtle Beach
|
|
50.0
|
%
|
Mall of South Carolina Outparcel
L.P.
|
|
Coastal Grand—Myrtle Beach (vacant
land)
|
|
50.0
|
%
|
Mall Shopping Center
Company
|
|
Plaza del Sol
|
|
50.6
|
%
|
Parkway Place
L.P.
|
|
Parkway Place
|
|
45.0
|
%
|
Triangle Town Member LLC
|
|
Triangle Town Center, Triangle Town Commons and Triangle
Town Place
|
|
50.0
|
%
|
York Town Center,
LP
|
|
York Town Center
|
|
50.0
|
%
|
Condensed combined financial statement information for the
unconsolidated affiliates is as follows:
|
|
Total for the Three
Months Ended September 30,
|
|
|
|
Company's Share for the Three
Months Ended September 30
|
|
|
|
2007
|
|
2006
|
|
|
|
2007
|
|
|
|
2006
|
|
Revenues
|
|
$
|
24,248
|
|
$
|
22,578
|
|
|
|
$
|
12,260
|
|
|
|
$
|
11,429
|
|
Depreciation and amortization expense
|
|
|
(6,800
|
)
|
|
(6,684
|
)
|
|
|
|
(3,425
|
)
|
|
|
|
(3,377
|
)
|
Interest expense
|
|
|
(8,364
|
)
|
|
(8,880
|
)
|
|
|
|
(4,178
|
)
|
|
|
|
(4,485
|
)
|
Other operating expenses
|
|
|
(7,535
|
)
|
|
(7,332
|
)
|
|
|
|
(3,866
|
)
|
|
|
|
(3,741
|
)
|
Gain on sales of real estate assets
|
|
|
490
|
|
|
1,470
|
|
|
|
|
295
|
|
|
|
|
795
|
|
Net income
|
|
$
|
2,039
|
|
$
|
1,152
|
|
|
|
$
|
1,086
|
|
|
|
$
|
621
|
|
7
|
|
Total for the Nine Months Ended September
30,
|
|
|
|
Company's Share for the Nine Months Ended September
30,
|
|
|
|
2007
|
|
2006
|
|
|
|
2007
|
|
2006
|
|
Revenues
|
|
$
|
71,417
|
|
$
|
69,573
|
|
|
|
$
|
36,067
|
|
$
|
35,075
|
|
Depreciation and amortization expense
|
|
|
(20,832
|
)
|
|
(19,807
|
)
|
|
|
|
(10,550
|
)
|
|
(10,020
|
)
|
Interest expense
|
|
|
(25,027
|
)
|
|
(25,987
|
)
|
|
|
|
(12,576
|
)
|
|
(13,154
|
)
|
Other operating expenses
|
|
|
(22,360
|
)
|
|
(20,456
|
)
|
|
|
|
(11,391
|
)
|
|
(10,396
|
)
|
Gain on sales of real estate assets
|
|
|
2,281
|
|
|
4,283
|
|
|
|
|
1,218
|
|
|
2,302
|
|
Net income
|
|
$
|
5,479
|
|
$
|
7,606
|
|
|
|
$
|
2,768
|
|
$
|
3,807
|
|
Cost Method Investments
In February 2007, the Company acquired a 6.2% minority interest in
subsidiaries of Jinsheng Group (“Jinsheng”), an established mall operating
and real estate development company located in Nanjing, China, for $10,125. As of
September 30, 2007, Jinsheng owns controlling interests in four home decor shopping
malls and two general retail shopping centers.
Jinsheng also issued to the Company a secured convertible promissory
note in exchange for cash of $4,875. The note is secured by 16,565,534 Series 2
Ordinary Shares of Jinsheng. The secured note is non-interest bearing and matures upon
the earlier to occur of (i) January 22, 2012, (ii) the closing of the sale, transfer or
other disposition of substantially all of Jinsheng’s assets, (iii) the closing of
a merger or consolidation of Jinsheng or (iv) an event of default, as defined in the
secured note. In lieu of the Company’s right to demand payment on the maturity
date, at any time commencing upon the earlier to occur of January 22, 2010 or the
occurrence of a Final Trigger Event, as defined in the secured note, the Company may,
at its sole option, convert the outstanding amount of the secured note into 16,565,534
Series A-2 Preferred Shares of Jinsheng (which equates to a 2.275% ownership
interest).
Jinsheng also granted the Company a warrant to acquire 5,461,165 Series
A-3 Preferred Shares for $1,875. The warrant expires upon the earlier of January 22,
2010 or the date that Jinsheng distributes, as a dividend, shares of Jinsheng’s
successor should Jinsheng complete an initial public offering.
The Company accounts for its minority interest in Jinsheng using the
cost method because the Company does not exercise significant influence over Jinsheng
and there is no readily determinable market value of Jinsheng’s shares since they
are not publicly traded. The Company recorded the secured note at its estimated fair
value of $4,513, which reflects a discount of $362 due to the fact that it is
non-interest bearing. The discount is amortized to interest income over the term of the
secured note using the effective interest method. The minority interest and the secured
note are reflected as investment in unconsolidated affiliates in the accompanying
consolidated balance sheet. The Company recorded the warrant at its estimated fair
value of $362, which is included in other assets in the accompanying consolidated
balance sheet. There have been no significant changes to the fair values of the secured
note and warrant.
Variable Interest Entities
In August 2007, the Company entered into a joint venture agreement with
a third party to develop and operate Statesboro Crossing, an open-air shopping center
in Statesboro, GA. The Company holds a 50% ownership interest in the joint venture. The
Company determined that its investment represents a variable interest in a variable
interest entity and that the Company is the primary beneficiary. As a result, the joint
venture is presented in the accompanying financial statements as of September 30, 2007
on a consolidated basis, with the interests of the third party reflected as minority
interest.
8
In May 2007, the Company entered into a joint venture agreement with
certain third parties to develop and operate The Village at Orchard Hills, a lifestyle
center in Grand Rapids Township, MI. The Company holds a 50% ownership interest in the
joint venture. The Company determined that its investment represents a variable
interest in a variable interest entity and that the Company is the primary beneficiary.
As a result, the joint venture is presented in the accompanying financial statements as
of September 30, 2007 on a consolidated basis, with the interests of the third parties
reflected as minority interest.
In March 2007, the Company entered into an amended and restated joint
venture agreement with a third party to develop and operate Settlers Ridge, an open-air
shopping center in Robinson Township, PA. The Company holds a 60% ownership interest in
the joint venture. The Company determined that its investment represents a variable
interest in a variable interest entity and that the Company is the primary beneficiary.
The joint venture is presented in the accompanying financial statements on a
consolidated basis, with the interests of the third party reflected as minority
interest.
In October 2006, the Company entered into a loan agreement with a third
party to loan the third party up to $7,300 to fund land acquisition costs and certain
predevelopment expenses for the purpose of developing a shopping center. The loan
agreement provides that, in certain circumstances, the Company may convert the loan to
a 25% ownership interest in the third party. As of December 31, 2006, the Company
determined that its loan to the third party was a variable interest in a variable
interest entity and that the Company was the primary beneficiary. As a result, the
Company consolidated this entity as of December 31, 2006. During the first quarter of
2007, the Company reconsidered its status as the primary beneficiary of this variable
interest entity and determined that it no longer was the primary beneficiary.
Therefore, the Company ceased consolidating this variable interest entity and has
recorded the loan as a mortgage note receivable. The loan bears interest at 9.0% and
originally was to mature on October 31, 2007. The Company has received notice from the
third party that it has exercised its option to extend the loan for an additional
year.
Note 3 – Mortgage and Other Notes Payable
Mortgage and other notes payable consisted of the following at September
30, 2007 and December 31, 2006, respectively:
|
|
September 30, 2007
|
|
|
|
December 31, 2006
|
|
|
|
Amount
|
|
Weighted
Average
Interest
Rate(1)
|
|
|
|
Amount
|
|
Weighted
Average
Interest
Rate(1)
|
|
Fixed-rate debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-recourse loans on operating properties
|
|
$
|
4,049,524
|
|
5.93
|
%
|
|
|
$
|
3,517,710
|
|
5.99
|
%
|
Variable-rate debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recourse term loans on operating properties
|
|
|
75,221
|
|
6.75
|
%
|
|
|
|
101,464
|
|
6.48
|
%
|
Construction loans
|
|
|
34,589
|
|
6.78
|
%
|
|
|
|
114,429
|
|
6.61
|
%
|
Lines of credit
|
|
|
892,932
|
|
6.28
|
%
|
|
|
|
830,932
|
|
6.19
|
%
|
Total variable-rate debt
|
|
|
1,002,742
|
|
6.33
|
%
|
|
|
|
1,046,825
|
|
6.26
|
%
|
Total
|
|
$
|
5,052,266
|
|
6.01
|
%
|
|
|
$
|
4,564,535
|
|
6.06
|
%
|
(1) Weighted-average interest rate including the effect of debt
premiums, but excluding amortization of deferred financing
costs
.
During the second quarter of 2007, the Company obtained two separate
ten-year, non-recourse loans totaling $207,520 that bear interest at fixed rates
ranging from 5.60% to 5.66%, with a weighted average of 5.61%. The loans are secured by
Gulf Coast Town Center and Eastgate Crossing. The proceeds were used to retire two
variable rate loans totaling $143,258 and to reduce outstanding balances on the
Company’s credit facilities.
9
During the first quarter of 2007, the Company obtained six separate
ten-year, non-recourse loans totaling $417,040 that bear interest at fixed rates
ranging from 5.67% to 5.68%, with a weighted average of 5.67%. The loans are secured by
Mall of Acadiana, Citadel Mall, The Plaza at Fayette Mall, Layton Hills Mall and its
associated center, Hamilton Corner and The Shoppes at St. Clair Square. The proceeds
were used to retire $92,050 of mortgage notes payable that were scheduled to mature
during the next twelve months and to reduce outstanding balances on the Company’s
credit facilities. The mortgage notes payable that were retired consisted of two
variable rate term loans totaling $51,825 and three fixed rate loans totaling $40,225.
The Company recorded a loss on extinguishment of debt of $227 in the nine months ended
September 30, 2007, related to prepayment fees and the write-off of unamortized
deferred financing costs associated with the loans that were retired.
Unsecured Line of Credit
The Company has one unsecured credit facility that is used for
construction, acquisition and working capital purposes, as well as issuances of letters
of credit. The unsecured credit facility has total availability of $560,000 that bears
interest at the London Interbank Offered Rate (“LIBOR”) plus a margin of
0.75% to 1.20% based on the Company’s leverage, as defined in the agreement. The
credit facility matures in August 2008 and has three one-year extension options, which
are at the Company’s election. At September 30, 2007, the outstanding borrowings
of $283,232 under the unsecured credit facility had a weighted average interest rate of
6.53%. Additionally, the Company pays an annual fee equal to 0.1% of the amount of
total availability under the unsecured credit facility.
Secured Lines of Credit
The Company has four secured lines of credit that are used for
construction, acquisition, and working capital purposes, as well as issuances of
letters of credit. Each of these lines is secured by mortgages on certain of the
Company’s operating properties. Borrowings under the secured lines of credit bear
interest at a rate of LIBOR plus a margin ranging from 0.80% to 0.90% and had a
weighted average interest rate of 6.16% at September 30, 2007. The Company also pays a
fee based on the amount of unused availability under its largest secured credit
facility at a rate of 0.125% or 0.250%, depending on the level of unused availability.
The following summarizes certain information about the secured lines of credit as of
September 30, 2007:
Total
Available
|
|
Total
Outstanding
|
|
Maturity Date
|
$
|
525,000
|
|
$
|
525,000
|
|
February 2009
|
|
100,000
|
|
|
47,500
|
|
June 2009
|
|
20,000
|
|
|
20,000
|
|
March 2010
|
|
17,200
|
|
|
17,200
|
|
April 2008
|
$
|
662,200
|
|
$
|
609,700
|
|
|
In September 2007, the Company amended the largest secured credit
facility to increase the maximum availability from $476,000 to $525,000 and to
substitute certain collateral under the facility.
Letters of Credit
At September 30, 2007, the Company had additional secured and unsecured
lines of credit with a total commitment of $40,523 that are used only for issuing
letters of credit. The letters of credit outstanding under these lines of credit
totaled $31,231 at September 30, 2007.
Covenants and Restrictions
Thirty-nine malls/open-air centers, nine associated centers, three
community centers and the corporate office building are owned by special purpose
entities that are included in the Company’s
10
consolidated financial statements. The sole business purpose of the
special purpose entities is to own and operate these properties, each of which is
encumbered by a commercial-mortgage-backed-securities loan. The real estate and other
assets owned by these special purpose entities are restricted under the loan agreements
in that they are not available to settle other debts of the Company. However, so long
as the loans are not under an event of default, as defined in the loan agreements, the
cash flows from these properties, after payments of debt service, operating expenses
and reserves, are available for distribution to the Company.
Maturities
The weighted average remaining term of the Company’s consolidated
debt was 4.9 years at September 30, 2007 and 4.8 years at December 31, 2006. The
Company has six loans and two lines of credit with amounts outstanding totaling
$597,734 that are scheduled to mature before September 30, 2008. The Company expects to
retire or refinance these borrowings.
Note
4 – Shareholders’ Equity and Minority Interests
On August 2, 2007, the Company’s Board of Directors approved a
$100,000 common stock repurchase plan effective for twelve months. Under the August
2007 plan, purchases of shares of the Company’s common stock may be made from
time to time, subject to market conditions and at prevailing market prices, through
open market purchases. Any stock repurchases are to be funded through the
Company’s available cash and credit facilities. The Company is not obligated to
repurchase any shares of stock under the plan and the Company may terminate the plan at
any time. Repurchased shares are deemed retired and are, accordingly, cancelled and no
longer considered issued. During the three and nine months ended September 30, 2007,
the Company repurchased 148,500 shares at a cost of approximately $5,169. The cost of
repurchased shares is recorded as a reduction in the respective components of
shareholders’ equity.
On June 28, 2007, the Company redeemed its 2,000,000 outstanding shares
of 8.75% Series B Cumulative Redeemable Stock (the “Series B Preferred
Stock”) for $100,000, representing a liquidation preference of $50.00 per share,
plus accrued and unpaid dividends of $2,139. In connection with the redemption of the
Series B Preferred Stock, the Company incurred a charge of $3,630 to write off direct
issuance costs that were recorded as a reduction of additional paid-in capital when the
Series B Preferred Stock was issued. The charge is included in preferred dividends in
the accompanying consolidated statement of operations for the nine months ended
September 30, 2007.
During the nine months ended September 30, 2007, holders of 220,670
special common units of limited partnership interest in the Operating Partnership
exercised their conversion rights. The Company elected to pay cash of $9,423 in
exchange for the special common units. All of these units were redeemed during the
first six months of 2007.
Note
5 – Segment Information
The Company measures performance and allocates resources according to
property type, which is determined based on certain criteria such as type of tenants,
capital requirements, economic risks, leasing terms, and short and long-term returns on
capital. Rental income and tenant reimbursements from tenant leases provide the
majority of revenues from all segments. Information on the Company’s reportable
segments is presented as follows:
11
Three Months Ended September 30, 2007
|
|
Malls
|
|
Associated
Centers
|
|
Community
Centers
|
|
All
Other
|
|
Total
|
|
Revenues
|
|
$
|
230,812
|
|
$
|
11,320
|
|
$
|
3,272
|
|
$
|
5,818
|
|
$
|
251,222
|
|
Property operating expenses (1)
|
|
|
(84,377
|
)
|
|
(2,795
|
)
|
|
(1,021
|
)
|
|
9,042
|
|
|
(79,151
|
)
|
Interest expense
|
|
|
(59,002
|
)
|
|
(2,336
|
)
|
|
(1,665
|
)
|
|
(9,786
|
)
|
|
(72,789
|
)
|
Other expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,647
|
)
|
|
(3,647
|
)
|
Gain (loss) on sales of real estate assets
|
|
|
1,668
|
|
|
(1
|
)
|
|
1,569
|
|
|
1,101
|
|
|
4,337
|
|
Segment profit and loss
|
|
$
|
89,101
|
|
$
|
6,188
|
|
$
|
2,155
|
|
$
|
2,528
|
|
|
99,972
|
|
Depreciation and amortization expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58,893
|
)
|
General and administrative expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,305
|
)
|
Interest and other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,990
|
|
Equity in earnings of unconsolidated
affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,086
|
|
Income tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,609
|
)
|
Minority interest in earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,409
|
)
|
Income before discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,832
|
|
Capital expenditures (2)
|
|
$
|
66,508
|
|
$
|
6,298
|
|
$
|
39
|
|
$
|
81,468
|
|
$
|
154,313
|
|
Three Months Ended September 30, 2006
|
|
Malls
|
|
Associated
Centers
|
|
Community
Centers
|
|
All
Other
|
|
Total
|
|
Revenues
|
|
$
|
226,294
|
|
$
|
9,696
|
|
$
|
1,895
|
|
$
|
7,159
|
|
$
|
245,044
|
|
Property operating expenses (1)
|
|
|
(77,455
|
)
|
|
(2,443
|
)
|
|
(774
|
)
|
|
5,894
|
|
|
(74,778
|
)
|
Interest expense
|
|
|
(53,526
|
)
|
|
(1,121
|
)
|
|
(712
|
)
|
|
(8,525
|
)
|
|
(63,884
|
)
|
Other expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,127
|
)
|
|
(5,127
|
)
|
Gain (loss) on sales of real estate assets
|
|
|
2,229
|
|
|
(5
|
)
|
|
(15
|
)
|
|
1,692
|
|
|
3,901
|
|
Segment profit and loss
|
|
$
|
97,542
|
|
$
|
6,127
|
|
$
|
394
|
|
$
|
1,093
|
|
|
105,156
|
|
Depreciation and amortization expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(62,142
|
)
|
General and administrative expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,402
|
)
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(935
|
)
|
Interest and other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,009
|
|
Equity in earnings of unconsolidated
affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
621
|
|
Minority interest in earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,477
|
)
|
Income before discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,830
|
|
Capital expenditures (2)
|
|
$
|
100,566
|
|
$
|
14,015
|
|
$
|
1,110
|
|
$
|
36,305
|
|
$
|
151,996
|
|
Nine Months Ended September 30, 2007
|
|
Malls
|
|
Associated
Centers
|
|
Community
Centers
|
|
All
Other
|
|
Total
|
|
Revenues
|
|
$
|
685,776
|
|
$
|
31,933
|
|
$
|
7,610
|
|
$
|
21,568
|
|
$
|
746,887
|
|
Property operating expenses (1)
|
|
|
(243,934
|
)
|
|
(7,196
|
)
|
|
(2,419
|
)
|
|
22,657
|
|
|
(230,892
|
)
|
Interest expense
|
|
|
(171,865
|
)
|
|
(6,465
|
)
|
|
(3,655
|
)
|
|
(25,745
|
)
|
|
(207,730
|
)
|
Other expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12,088
|
)
|
|
(12,088
|
)
|
Gain (loss) on sales of real estate assets
|
|
|
1,496
|
|
|
(11
|
)
|
|
1,558
|
|
|
7,522
|
|
|
10,565
|
|
Segment profit and loss
|
|
$
|
271,473
|
|
$
|
18,261
|
|
$
|
3,094
|
|
$
|
13,914
|
|
|
306,742
|
|
Depreciation and amortization expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(176,067
|
)
|
General and administrative expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,072
|
)
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(227
|
)
|
Interest and other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,618
|
|
Equity in earnings of unconsolidated
affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,768
|
|
Income tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,360
|
)
|
Minority interest in earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42,304
|
)
|
Income before discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
65,098
|
|
Total assets
|
|
$
|
5,880,107
|
|
$
|
350,597
|
|
$
|
175,467
|
|
$
|
408,825
|
|
$
|
6,814,996
|
|
Capital expenditures (2)
|
|
$
|
210,193
|
|
$
|
21,964
|
|
$
|
9,794
|
|
$
|
188,606
|
|
$
|
430,557
|
|
12
Nine Months Ended September 30, 2006
|
|
Malls
|
|
Associated
Centers
|
|
Community
Centers
|
|
All
Other
|
|
Total
|
|
Revenues
|
|
$
|
669,811
|
|
$
|
28,109
|
|
$
|
5,772
|
|
$
|
20,538
|
|
$
|
724,230
|
|
Property operating expenses (1)
|
|
|
(226,835
|
)
|
|
(6,718
|
)
|
|
(2,033
|
)
|
|
18,408
|
|
|
(217,178
|
)
|
Interest expense
|
|
|
(161,435
|
)
|
|
(3,425
|
)
|
|
(2,117
|
)
|
|
(24,497
|
)
|
|
(191,474
|
)
|
Other expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(13,815
|
)
|
|
(13,815
|
)
|
Gain on sales of real estate assets
|
|
|
2,224
|
|
|
1,054
|
|
|
33
|
|
|
3,520
|
|
|
6,831
|
|
Segment profit and loss
|
|
$
|
283,765
|
|
$
|
19,020
|
|
$
|
1,655
|
|
$
|
4,154
|
|
|
308,594
|
|
Depreciation and amortization expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(170,546
|
)
|
General and administrative expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,051
|
)
|
Loss on impairment of real estate assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(274
|
)
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(935
|
)
|
Interest and other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,687
|
|
Equity in earnings of unconsolidated
affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,807
|
|
Minority interest in earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,593
|
)
|
Income before discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
67,689
|
|
Total assets
|
|
$
|
5,805,546
|
|
$
|
279,228
|
|
$
|
54,670
|
|
$
|
276,767
|
|
$
|
6,416,211
|
|
Capital expenditures (2)
|
|
$
|
198,165
|
|
$
|
37,862
|
|
$
|
1,632
|
|
$
|
88,838
|
|
$
|
326,497
|
|
(1)
|
Property operating expenses include property operating
expenses, real estate taxes and maintenance and repairs.
|
(2)
|
Amounts include acquisitions of real estate assets and
investments in unconsolidated affiliates. Developments in progress are
included in the All Other category.
|
Note 6 – Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing net
income available to common shareholders by the weighted-average number of unrestricted
common shares outstanding for the period. Diluted EPS assumes the issuance of common
stock for all potential dilutive common shares outstanding. The limited partners’
rights to convert their minority interest in the Operating Partnership into shares of
common stock are not dilutive. The following summarizes the impact of potential
dilutive common shares on the denominator used to compute earnings per
share:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Weighted average shares outstanding
|
|
65,682
|
|
64,656
|
|
65,641
|
|
63,968
|
|
Effect of nonvested stock awards
|
|
(339
|
)
|
(482
|
)
|
(408
|
)
|
(352
|
)
|
Denominator – basic earnings per share
|
|
65,343
|
|
64,174
|
|
65,233
|
|
63,616
|
|
Dilutive effect of:
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
431
|
|
1,136
|
|
516
|
|
1,245
|
|
Nonvested stock awards
|
|
60
|
|
138
|
|
112
|
|
165
|
|
Deemed shares related to deferred compensation
arrangements
|
|
42
|
|
48
|
|
39
|
|
60
|
|
Denominator – diluted earnings per
share
|
|
65,876
|
|
65,496
|
|
65,900
|
|
65,086
|
|
Note
7 – Comprehensive Income
Comprehensive income includes all changes in shareholders’ equity
during a period, except those resulting from investments by and distributions to
shareholders. Comprehensive income includes other comprehensive income (loss) of
$(2,254) and $458 in the three months ended September 30, 2007 and 2006, respectively,
and $(4,726) and $619 in the nine months ended September 30, 2007 and 2006,
respectively. Other comprehensive income (loss) for all periods presented represents
unrealized gain (loss) on marketable securities that are classified as available for
sale. Comprehensive income was $20,289 and $22,437 for the three months ended September
30, 2007 and 2006, respectively, and $65,548 and $79,423 for the nine months ended
September 30, 2007 and 2006, respectively.
13
Note
8 – Contingencies
The Company is currently involved in certain litigation that arises in
the ordinary course of business. It is management’s opinion that the pending
litigation will not materially affect the financial position or results of operations
of the Company.
The Company owns a parcel of land that it is ground leasing to a third
party developer for the purpose of developing a shopping center. The Company has
guaranteed 27% of the third party’s construction loan and bond line of credit
(the “loans”) of which the maximum guaranteed amount is $31,554. The total
amount outstanding at September 30, 2007 on the loans was $15,616 of which the Company
has guaranteed $4,216. The Company has recorded an obligation of $315 in the
accompanying consolidated balance sheet as of September 30, 2007 to reflect the
estimated fair value of the guaranty.
The Company has guaranteed 50% of the debt of Parkway Place L.P., an
unconsolidated affiliate in which the Company owns a 45% interest, which owns Parkway
Place in Huntsville, AL. The total amount outstanding at September 30, 2007 was $53,200
of which the Company has guaranteed $26,600. The guaranty will expire when the related
debt matures in June 2008. The Company has not recorded an obligation for this guaranty
because it has determined that the fair value of the guaranty is not
material.
The Company has guaranteed the performance of York Town Center, LP
(“YTC”), an unconsolidated affiliate in which the Company owns a 50%
interest, under the terms of an agreement with a third party that will own property
adjacent to York Town Center. Under the terms of that agreement, YTC is obligated to
cause performance of the third party’s obligations as landlord under its lease
with its sole tenant, including, but not limited to, provisions such as co-tenancy and
exclusivity requirements. Should YTC fail to cause performance, then the tenant under
the third party landlord’s lease may pursue certain remedies ranging from rights
to terminate its lease to receiving reductions in rent. The Company has guaranteed
YTC’s performance under this agreement up to a maximum of $22,000, which
decreases by $800 annually until the guaranteed amount is reduced to $10,000. The
guaranty expires on December 31, 2020. The maximum guaranteed obligation was $21,200 as
of September 30, 2007. The Company has entered into an agreement with its joint venture
partner under which the joint venture partner has agreed to reimburse the Company 50%
of any amounts the Company is obligated to fund under the guaranty. The Company has not
recorded an obligation for this guaranty because it has determined that the fair value
of the guaranty is not material.
The Company has issued various bonds that it would have to satisfy in
the event of non-performance. At September 30, 2007, the total amount outstanding on
these bonds was $23,997.
Note
9 – Share-Based Compensation
The share-based compensation cost that was charged against income was
$1,278 and $1,470 for the three months ended September 30, 2007 and 2006, respectively,
and $3,476 and $5,235 for the nine months ended September 30, 2007 and 2006,
respectively. Compensation cost capitalized as part of real estate assets was $206 and
$248 for the three months ended September 30, 2007 and 2006, respectively, and $597 and
$461 for the nine months ended September 30, 2007 and 2006, respectively.
14
The Company’s stock option activity for the nine months ended
September 30, 2007 is summarized as follows:
|
|
Shares
|
|
Weighted
Average
Exercise Price
|
|
Outstanding at January 1, 2007
|
|
1,502,720
|
|
$
|
14.40
|
|
Exercised
|
|
(423,545
|
)
|
|
13.35
|
|
Cancelled
|
|
(1,000
|
)
|
|
18.27
|
|
Expired
|
|
(1,000
|
)
|
|
12.81
|
|
Outstanding at September 30, 2007
|
|
1,077,175
|
|
|
14.81
|
|
Vested or expected to vest at September 30,
2007
|
|
1,077,175
|
|
|
14.81
|
|
Options exercisable at September 30, 2007
|
|
1,077,175
|
|
|
14.81
|
|
A summary of the status of the Company’s stock awards as of
September 30, 2007, and changes during the nine months ended September 30, 2007, is
presented below:
|
|
Shares
|
|
Weighted
Average Grant-
Date Fair Value
|
|
Nonvested at January 1, 2007
|
|
457,344
|
|
$
|
34.35
|
|
Granted
|
|
48,722
|
|
|
40.61
|
|
Vested
|
|
(170,654
|
)
|
|
34.57
|
|
Forfeited
|
|
(8,544
|
)
|
|
35.95
|
|
Nonvested at September 30, 2007
|
|
326,868
|
|
|
35.33
|
|
As of September 30, 2007, there was $9,103 of total unrecognized
compensation cost related to nonvested stock options and stock awards granted under the
plan, which is expected to be recognized over a weighted average period of 3.0
years.
Note
10 – Noncash Investing and Financing Activities
The Company’s noncash investing and financing activities were as
follows for the nine months ended September 30, 2007 and 2006:
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
Additions to real estate assets accrued but not yet
paid
|
|
$
|
28,149
|
|
$
|
40,637
|
|
Conversion of minority interest into common
stock
|
|
|
—
|
|
|
16,486
|
|
Reclassification of developments in progress to mortgage
notes receivable
|
|
|
6,528
|
|
|
—
|
|
Note receivable received on sale of land
|
|
|
8,735
|
|
|
1,110
|
|
Minority interest issued in acquisition of real estate
assets
|
|
|
330
|
|
|
—
|
|
Payable for repurchase of Company's common
stock
|
|
|
3,775
|
|
|
—
|
|
Note
11 – Discontinued Operations
During August 2007, the Company sold Twin Peaks Mall in Longmont, CO to
a third party buyer for an aggregate sales price of $33,600 and recognized a gain on
the sale of $3,971. The net proceeds received from the sale are being held in escrow
for intended use in a like-kind exchange. The results of operations of the property and
the related gain on the sale are included in discontinued operations for all periods
presented in the accompanying consolidated financial statements.
15
During May 2006, the Company sold three community centers for an
aggregate sales price of $42,280 and recognized a gain of $7,215. The Company also sold
two community centers in May 2006 for an aggregate sales price of $63,000 and
recognized a loss on impairment of real estate assets of $274.
Total revenues for the properties included in discontinued operations in
the accompanying consolidated statements of operations were $1,303 and $4,304 for the
three and nine month periods ended September 30, 2007, respectively, and $1,449 and
$9,469 for the three and nine month periods ended September 30, 2006,
respectively.
Note 12 – Income Taxes
The Company has elected taxable REIT subsidiary status for some of its
subsidiaries. This enables the Company to receive income and provide services that
would otherwise be impermissible for REITs. For these entities, deferred tax assets and
liabilities are established for temporary differences between the financial reporting
basis and the tax basis of assets and liabilities at the enacted tax rates expected to
be in effect when the temporary differences reverse. A valuation allowance for deferred
tax assets is provided if the Company believes all or some portion of the deferred tax
asset may not be realized. An increase or decrease in the valuation allowance resulting
from changes in circumstances that may affect the realizability of the related deferred
tax asset is included in income.
The Company recorded an income tax provision of $2,609 and $4,360 for
the three and nine months ended September 30, 2007, respectively. The provision
consists of current tax expense of $3,240 and a deferred tax benefit of $631,
respectively, for the three months ended September 30, 2007, and a current and deferred
tax provision of $4,135 and $225, respectively, for the nine months ended September 30,
2007. There was no income tax provision recorded in the three and nine months ended
September 30, 2006.
The Company had a net deferred tax asset of $4,070 at September 30, 2007
and $4,291 at December 31, 2006. The net deferred tax asset at September 30, 2007 and
December 31, 2006 primarily consisted of operating expense accruals and differences
between book and tax depreciation.
The Company reports any income tax penalties attributable to its
properties as property operating expenses and any corporate-related income tax
penalties as general and administrative expenses in its statement of operations. In
addition, any interest incurred on tax assessments are reported as interest expense.
The Company reported nominal interest and penalty amounts for the three months ended
September 30, 2007 and 2006, respectively, and the nine months ended September 30, 2007
and 2006, respectively.
Note 13 – Recent Accounting Pronouncements
On July 13, 2006, the Financial Accounting Standards Board
(“FASB”) issued Interpretation No. 48,
Accounting
for Uncertainty in Income Taxes
(“FIN 48”), which
is effective for fiscal years beginning after December 15, 2006. FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in the financial statements
in accordance with SFAS No.109,
Accounting for Income
Taxes
, by prescribing the minimum recognition threshold a tax
position is required to meet before being recognized in the financial statements. FIN
48 also provides guidance on derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and transition.
The Company adopted FIN 48 as of January 1, 2007 and has analyzed its
various federal and state filing positions. Based on this evaluation, the Company
believes that its accruals for income tax liabilities are adequate and, therefore, no
reserves for uncertain income tax positions have been recorded pursuant to FIN 48.
Additionally, the Company did not record a cumulative effect adjustment related to the
adoption of FIN 48.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
. SFAS No. 157
defines fair value, establishes a framework that clarifies the fair value measurement
objective within
16
GAAP
and its application under the various pronouncements that require or permit fair value
measurements, and expands disclosures about fair value measurements. It is intended to
increase consistency and comparability among fair value estimates used in financial
reporting. SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years.
The transition adjustment, which is measured as the difference between the carrying
amount and the fair value of those financial instruments at the date SFAS No. 157 is
initially applied, should be recognized as a cumulative effect adjustment to the
opening balance of retained earnings for the fiscal year in which SFAS No. 157 is
initially applied. The provisions of SFAS No. 157 are effective for the Company
beginning January 1, 2008. The Company is currently evaluating the impact of
adopting SFAS No. 157 on its financial position and results of
operations.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities
. SFAS No. 159 permits entities to choose to
measure many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. SFAS No. 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons between
entities that choose different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, although early application is allowed. The Company
is currently evaluating the impact of adopting SFAS No. 159 on its financial
position and results of operations.
Note
14 – Subsequent Events
The Company closed on two separate transactions with the Westfield Group
(“Westfield”) on October 16, 2007, involving four malls located in the St.
Louis, MO area. In the first transaction, Westfield contributed three malls to a
Company-controlled joint venture (the “JV”), and the Company contributed
six malls and three associated centers. In the second transaction, the Company directly
acquired the fourth mall, Chesterfield Mall, from Westfield. The total value of the
three malls contributed to the JV by Westfield plus the mall that was directly acquired
by the Company is approximately $1,031,765. The Company, either independently or
through the JV, assumed total debt of approximately $458,182 with a weighted average
fixed interest rate of 5.73% secured by the four Westfield malls and paid approximately
$161,791 in cash, excluding closing costs. In addition, Westfield received
approximately $404,112 of perpetual preferred joint venture units (“PJV
units”) of the JV.
The PJV units of the JV pay an annual preferred distribution at a rate
of 5.0%. The Company will have the right, but not the obligation, to purchase the PJV
units following the fifth anniversary of the closing at liquidation value, plus accrued
and unpaid distributions. The Company is responsible for management and leasing of the
JV’s properties and owns all of the common units of the JV, entitling it to
receive 100% of the JV’s cash flow after operating expenses, debt service
payments and PJV unit distributions.
In 2003, the Company formed Galileo America, a joint venture with
Galileo America, Inc., the U.S. affiliate of Australia-based Galileo America Shopping
Trust, to invest in community centers throughout the United States. In 2005, the
Company transferred all of its ownership interest in the joint venture to Galileo
America. In conjunction with this transfer, the Company sold its management and
advisory contracts with Galileo America to New Plan Excel Realty Trust, Inc.
(“New Plan”). New Plan retained the Company to manage nine properties that
Galileo America had recently acquired from a third party for a term of 17 years
beginning on August 10, 2008 and agreed to pay the Company a management fee of $1,000
per year. In October 2007, the Company received notification that New Plan had
determined to exercise its right to terminate the management agreement by paying the
Company a termination fee of $7,000, payable on August 10, 2008. The Company will
recognize the $7,000 as income, which will be offset by related income tax expense of
approximately $2,660, in the fourth quarter of 2007.
In November 2007, the Company announced that it has agreed to form a
joint venture with Tenco Realty (“Tenco”), a retail owner, operator and
developer based in Belo Horizonte, Brazil, to develop, redevelop and
17
acquire
shopping center properties in Brazil. The Company will initially invest a total of
approximately $15,332 to acquire a 60% interest in a new retail development in
Macaé, Brazil. The 220,000-square-foot project, Plaza Macaé, is currently
under construction with a grand opening scheduled for summer 2008. Tenco will develop
and manage the center. Cash flows will be distributed on a pari passu basis between the
partners. In addition, CBL will have the opportunity to purchase a minimum 51% interest
in any future Tenco Realty developments.
ITEM
2: Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis of financial condition and results
of operations should be read in conjunction with the consolidated financial statements
and accompanying notes that are included in this Form 10-Q. In this discussion, the
terms “we”, “us”, “our”, and the
“Company” refer to CBL & Associates Properties, Inc. and its
subsidiaries.
Certain statements made in this section or elsewhere in this report may
be deemed “forward looking statements” within the meaning of the federal
securities laws. Although we believe the expectations reflected in any forward-looking
statements are based on reasonable assumptions, we can give no assurance that these
expectations will be attained, and it is possible that actual results may differ
materially from those indicated by these forward-looking statements due to a variety of
risks and uncertainties. In addition to the risk factors described in Part II, Item 1A.
of this report, such risks and uncertainties include, without limitation, general
industry, economic and business conditions, interest rate fluctuations, costs of
capital and capital requirements, availability of real estate properties, inability to
consummate acquisition opportunities, competition from other companies and retail
formats, changes in retail rental rates in the Company’s markets, shifts in
customer demands, tenant bankruptcies or store closings, changes in vacancy rates at
our properties, changes in operating expenses, changes in applicable laws, rules and
regulations, the ability to obtain suitable equity and/or debt financing and the
continued availability of financing in the amounts and on the terms necessary to
support our future business. We disclaim any obligation to update or revise any
forward-looking statements to reflect actual results or changes in the factors
affecting the forward-looking information.
EXECUTIVE OVERVIEW
We are a self-managed, self-administered, fully integrated real estate
investment trust (“REIT”) that is engaged in the ownership, development,
acquisition, leasing, management and operation of regional shopping malls, open-air
centers and community centers. Our shopping center properties are located in 26 states,
but primarily in the southeastern and midwestern United States.
As of September 30, 2007, we owned controlling interests in 72 regional
malls/open-air centers, 28 associated centers (each adjacent to a regional shopping
mall), four community centers and our corporate office building. We consolidate the
financial statements of all entities in which we have a controlling financial interest
or where we are the primary beneficiary of a variable interest entity. As of September
30, 2007, we owned non-controlling interests in seven regional malls, four associated
centers and two community centers. Because one or more of the other partners have
substantive participating rights we do not control these partnerships and joint
ventures and, accordingly, account for these investments using the equity method. We
had five mall expansions, three associated/lifestyle centers, one mixed-use center,
three community centers and an office building under construction at September 30,
2007. We also hold options to acquire certain development properties owned by third
parties.
The majority of our revenues is derived from leases with retail tenants
and generally includes base minimum rents, percentage rents based on tenants’
sales volumes and reimbursements from tenants for expenditures, including property
operating expenses, real estate taxes and maintenance and repairs, as well as certain
capital expenditures. We also generate revenues from sales of outparcel land at the
properties and from sales of operating real estate assets when it is determined that we
can realize the maximum value of the assets. Proceeds from such sales are generally
used to pay off related construction
18
loans
or reduce borrowings on our credit facilities.
RESULTS OF OPERATIONS
The following significant transactions impact the comparison of the
results of operations for the three months and nine months ended September 30, 2007 to
the results of operations for the comparable periods ended September 30,
2006:
|
•
|
We have opened two associated centers and five community
centers since January 1, 2006 (collectively referred to as the
“New Properties”). We do not consider a property to be one
of the Comparable Properties (defined below) until the property has
been owned or open for one complete calendar year. The New Properties
are as follows:
|
Property
|
|
Location
|
|
Date
Opened
|
|
The Plaza at Fayette Mall
|
|
Lexington, KY
|
|
October 2006
|
|
High Pointe Commons (50/50 joint venture)
|
|
Harrisburg, PA
|
|
October 2006
|
|
Lakeview Pointe
|
|
Stillwater, OK
|
|
October 2006
|
|
The Shops at Pineda Ridge
|
|
Melbourne, FL
|
|
November 2006
|
|
The Shoppes at St. Clair Square
|
|
Fairview Heights, IL
|
|
March 2007
|
|
Alamance Crossing East
|
|
Burlington, NC
|
|
August 2007
|
|
York Town Center (50/50 joint venture)
|
|
York, PA
|
|
September 2007
|
|
|
•
|
Properties that were in operation as of January 1, 2006
and September 30, 2007 are referred to as the “Comparable
Properties.”
|
Comparison of the Three Months Ended September 30, 2007 to the Three
Months Ended September 30, 2006
Revenues
The $6.2 million increase in revenues resulted from an increase of $5.2
million attributable to the revenues from the Comparable Properties, an increase of
$2.6 million in revenues from the New Properties, an increase in management,
development and leasing fees of $0.2 million and a decrease in other revenues of $1.8
million related to the Company’s subsidiary that provides security and
maintenance services to third parties.
The increase in revenues of the Comparable Properties is attributable to
increases in rental income and tenant reimbursements for real estate taxes and common
area maintenance. The increase was offset by a reduction of $4.8 million in lease
termination fee income as compared to the prior year quarter. Additionally, as a result
of revisions that were made in the prior year quarter to the depreciable lives of
certain acquired assets, revenues for the three months ended September 30, 2007 related
to the amortization of above and below market leases was $1.7 million less than the
corresponding amount for the prior year quarter.
Our cost recovery ratio increased to 105.0% compared to 102.4% for the
prior year period. As we continue to convert more tenants to fixed common area
maintenance arrangements, fluctuations in tenant reimbursements will not correlate as
closely with fluctuations in the corresponding expenses as they do with pro rata common
area maintenance charges. As a result, there may be more variability in our cost
recovery ratio from period to period.
Although we experienced an increase in rental income and tenant
reimbursements as compared to the prior year quarter, the amount of the increase was
less than we had anticipated for both the Comparable Properties and the New Properties.
This was due to tenants not opening at several expansions of Comparable Properties and
at New Properties as early as we had expected during the three months
19
ended
September 30, 2007. Additionally, at Alamance Crossing East, which is one of the New
Properties, certain tenants are not yet paying full rent as the co-tenancy requirements
of their leases will not be met until early 2008.
Expenses
The $4.4 million increase in property operating expenses, including real
estate taxes and maintenance and repairs, resulted from increases of $3.7 million from
the Comparable Properties and $0.7 million attributable to the New Properties. The
increase in property operating expenses is primarily attributable to increases in real
estate taxes as a result of prior year tax settlements and increased assessments on
certain properties.
The $3.2 million decrease in depreciation and amortization expense
resulted from a decrease of $4.4 million from the Comparable Properties, partially
offset by an increase of $1.2 million from the New Properties. The decrease in
depreciation and amortization of the Comparable Properties is due to revisions in the
prior year quarter to the depreciable lives of certain acquired assets which resulted
in an increase in depreciation and amortization expense in the prior year
quarter.
General and administrative expenses decreased $1.1 million due to a $0.7
million increase in capitalized overhead and a decrease in current federal tax expense
of $0.4 million.
Other Income and Expenses
Interest and other income was $2.0 million for each of the three months
ended September 30, 2007 and 2006.
Interest expense increased by $8.9 million due to additional debt
associated with the New Properties, the refinancing of certain existing properties with
increased principal amounts and borrowings used to redeem our Series B preferred stock
on June 28, 2007. In addition, we experienced an increase in the weighted average
interest rate of our variable-rate debt as compared to the prior year
quarter.
We recorded a loss on extinguishment of debt of $0.9 million during the
three months ended September 30, 2006, as a result of retiring two loans prior to their
scheduled maturity dates. The loss on extinguishment consisted of prepayment fees of
$0.6 million and the write-off of unamortized deferred financing costs of $0.3 million.
There was no loss on extinguishment of debt for the three months ended September 30,
2007.
Gain
on Sales
Gain on sales of real estate assets of $4.4 million in the three months
ended September 30, 2007 relates to the sale of four parcels of land. Gain on sales of
real estate assets of $3.9 million in the three months ended September 30, 2006 relates
to the sale of three parcels of land.
Equity in Earnings of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliates increased $0.5 million
during the three months ended September 30, 3007 as compared to the prior year quarter
primarily due to improved operating performance of certain unconsolidated joint venture
properties.
Income Tax Provision
The income tax provision of $2.6 million for the three months ended
September 30, 2007 relates to the earnings of our taxable REIT subsidiary and consists
of a provision for current income taxes of $3.3 million, which is partially offset by a
deferred income tax benefit of $0.7 million. There was no income
20
tax
provision for the three months ended September 30, 2006.
Discontinued Operations
We recognized gain and income from discontinued operations of $4.7
million for the three months ended September 30, 2007, compared to $0.1 million of gain
and income from discontinued operations for the three months ended September 30, 2006.
Discontinued operations in the three months ended September 30, 2007 and 2006 reflects
the results of operations of Twin Peaks Mall in Longmont, CO, which was sold during the
third quarter of 2007, plus the true up of estimated expenses to actual amounts for
properties sold during previous periods.
Comparison of the Nine Months Ended September 30, 2007 to the Nine
Months Ended September 30, 2006
Revenues
The $22.7 million increase in revenues resulted from an increase of
$16.1 million attributable to the revenues from the Comparable Properties, an increase
of $6.5 million in revenues from the New Properties, and an increase in management,
development and leasing fees of $2.6 million. Partially offsetting these increases was
a decrease in other income of $2.5 million related to the Company’s subsidiary
that provides security and maintenance services to third parties.
The increase in revenues of the Comparable Properties is primarily
attributable to increases in rental income and tenant reimbursements for real estate
taxes and common area maintenance. The increase was offset by a reduction of $7.1
million in lease termination fee income as compared to the prior year quarter.
Additionally, as a result of revisions that were made in the prior year quarter to the
depreciable lives of certain acquired assets, revenues for the nine months ended
September 30, 2007 related to the amortization of above and below-market leases was
$1.7 million less than the corresponding amount for the prior year period.
Our cost recovery ratio declined to 102.1% compared to 104.3% for the
prior year period. As we continue to convert more and more tenants to fixed common area
maintenance arrangements, fluctuations in tenant reimbursements will not correlate as
closely with fluctuations in the corresponding expenses as they do with pro rata common
area maintenance charges. As a result, there may be more variability in our cost
recovery ratio from period to period. In addition, the year-to-date decline is
partially due to higher than expected snow removal costs incurred by the Company in the
first quarter of 2007 and increases in bad debt expense.
Although we experienced an increase in rental income and tenant
reimbursements as compared to the prior year period, the amount of the increase was
less than we had anticipated for both the Comparable Properties and the New Properties.
This was due to tenants not opening at several expansions of Comparable Properties and
at New Properties as early as we had expected. Additionally, at Alamance Crossing East,
which is one of the New Properties, certain tenants are not yet paying full rent as the
co-tenancy requirements of their leases will not be met until early 2008.
Expenses
The $13.7 million increase in property operating expenses, including
real estate taxes and maintenance and repairs, resulted from increases of $12.3 million
from the Comparable Properties and $1.4 million attributable to the New Properties. The
increase in property operating expenses includes a $2.3 million increase in bad debt
expense that resulted from bad debt expense of $1.3 million in the nine months ended
September 30, 2007 compared to a net recovery of $1.0 million in the nine months ended
September 30, 2006. We also incurred increased real estate taxes of $5.5 million as a
result of prior year
21
tax
settlements and increased assessments on certain properties and increased snow removal
costs of $1.3 million during the nine months ended September 30, 2007 as compared to
the prior year period.
The $5.5 million increase in depreciation and amortization expense
resulted from increases of $3.1 million from the Comparable Properties and $2.4 million
from the New Properties. The increase in depreciation and amortization of the
Comparable Properties is due to ongoing capital expenditures for renovations,
expansions, tenant allowances and deferred maintenance and for the write-off of certain
tenant allowances related to early lease terminations.
General and administrative expenses increased $1.0 million due to annual
increases in salaries and benefits of existing personnel and the addition of new
personnel to support our growth.
Other Income and Expenses
Interest and other income for the nine months ended September 30, 2007
increased primarily due to a fee of $1.0 million related to the grant of an access and
utilities easement at one of our properties.
Interest expense increased by $16.3 million due to the additional debt
associated with the New Properties, the refinancing of certain existing properties with
increased principal amounts and borrowings used to redeem our Series B preferred stock
on June 28, 2007. In addition, the weighted average interest rate of our variable-rate
debt increased to 6.33% as of September 30, 2007 compared to 6.25% as of September 30,
2006.
During the nine months ended September 30, 2007, we recorded a loss on
extinguishment of debt of $0.2 million as a result of prepayment fees related to a loan
that we retired prior to its scheduled maturity date. We recorded a loss on
extinguishment of debt of $0.9 million during the nine months ended September 30, 2006,
as a result of retiring two loans prior to their scheduled maturity dates. The loss on
extinguishment consisted of prepayment fees of $0.6 million and the write-off of
unamortized deferred financing costs of $0.3 million.
Gain
on Sales
Gain on sales of real estate assets of $10.6 million in the nine months
ended September 30, 2007 relates to the sale of ten parcels of land, while the gain of
$6.8 million in the nine months ended September 30, 2006 relates to the sale of six
outparcels.
Equity in Earnings of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliates decreased $1.0 million
to $2.8 million for the three months ended September 30, 2007 as compared to $3.8
million for the prior year period. The decrease is primarily due to a lower level of
outparcel sales at certain unconsolidated affiliates as compared to the prior year
period.
Income Tax Provision
The income tax provision of $4.4 million for the nine months ended
September 30, 2007, relates to the earnings of our taxable REIT subsidiary and consists
of provisions for current and deferred income taxes of $4.2 million and $0.2 million,
respectively. We have cumulative stock-based compensation deductions that may be used
to offset the current income tax payable of $4.2 million; therefore, we reduced the
payable for current period income taxes to zero by recognizing a portion of the benefit
of the cumulative stock-based compensation deductions. There was no income tax
provision for the nine months ended September 30, 2006.
22
Discontinued Operations
We recognized gain and income from discontinued operations of $5.2
million for the nine months ended September 30, 2007, which represents a decline of
$5.9 million from the $11.1 million of gain and income from discontinued operations
that we recognized during the nine months ended September 30, 2006. Discontinued
operations in the nine months ended September 30, 2007 and 2006 reflects the results of
operations of Twin Peaks Mall which was sold in the third quarter of 2007, plus the
true up of estimated expenses to actual amounts for properties sold during previous
periods. Discontinued operations in the nine months ended September 30, 2006 also
reflects the results of operations and gain on disposal of five community centers that
were sold in May 2006.
Operational Review
The shopping center business is, to some extent, seasonal in nature with
tenants achieving the highest levels of sales during the fourth quarter because of the
holiday season. Additionally, the malls earn most of their “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 fiscal year.
We classify our regional malls into two categories – malls that
have completed their initial lease-up are referred to as stabilized malls and malls
that are in their initial lease-up phase and have not been open for three calendar
years are referred to as non-stabilized malls. The non-stabilized malls currently
include Coastal Grand-Myrtle Beach in Myrtle Beach, SC, which opened in March 2004;
Imperial Valley Mall in El Centro, CA, which opened in March 2005; Southaven Towne
Center in Southaven, MS, which opened in October 2005; and Gulf Coast Town Center in
Ft. Myers, FL, which opened in November 2005.
We derive a significant amount of our revenues from the mall properties.
The sources of our revenues by property type were as follows:
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
Malls
|
|
91.8
|
%
|
92.5
|
%
|
Associated centers
|
|
4.3
|
%
|
3.9
|
%
|
Community centers
|
|
1.0
|
%
|
0.8
|
%
|
Mortgages, office building and other
|
|
2.9
|
%
|
2.8
|
%
|
Sales and Occupancy Costs
Same store sales (for those tenants who occupy 10,000 square feet or
less and have reported sales) increased 1.2% for the nine months ended September 30,
2007 compared to the prior year period. For the trailing twelve months ended September
30, 2007, same store sales increased 1.5% to $345 per square foot compared with $340
per square foot for the prior year period.
Occupancy costs as a percentage of sales for the stabilized malls were
13.7% for the nine months ended September 30, 2007 compared to 13.4% for the nine
months ended September 30, 2006.
23
Occupancy
The occupancy of the portfolio was as follows:
|
|
At September 30,
|
|
|
|
2007
|
|
2006
|
|
Total portfolio
|
|
92.4
|
%
|
92.6
|
%
|
Total mall portfolio
|
|
92.8
|
%
|
92.3
|
%
|
Stabilized malls
|
|
93.2
|
%
|
92.4
|
%
|
Non-stabilized malls
|
|
85.8
|
%
|
90.7
|
%
|
Associated centers
|
|
92.0
|
%
|
94.9
|
%
|
Community centers
|
|
85.5
|
%
|
88.3
|
%
|
Timing delays at some of the New Properties have impacted occupancy for
the non-stabilized malls and the community centers, which has affected total occupancy.
At High Pointe Commons, the anchors have opened but many of the stores are still in the
process of taking occupancy. At Gulf Coast Town Center, several stores have encountered
delays in receiving building permits due to the lengthy process time involved in that
geographic area. Occupancy for these two properties was approximately 80.4% and 74.0%,
respectively, as of September 30, 2007. Alamance Crossing opened in August 2007 with
occupancy of 69.4% at September 30, 2007; however, it is 95% leased and committed.
Although York Town Center is over 98% leased and committed, it opened in September 2007
with occupancy of 67.9%. In addition, the lifestyle center developments generally
open in staggered phases, reflecting initial lower occupancy rates, as compared to mall
properties in which a greater number of tenants are typically open as of a mall’s
grand opening date.
Leasing
During the second quarter of 2007, the Company revised its lease
reporting focus to small shop spaces less than 10,000 square feet in comparison to the
previous reporting on spaces less than 20,000 square feet. This change allows for
greater consistency and comparability with the data reported by our peers in the retail
real estate industry.
Average annual base rents per square foot for small shop spaces less
than 10,000 square feet were as follows for each property type:
|
|
At September 30,
|
|
|
|
2007
|
|
2006
|
|
Stabilized malls
|
|
$
|
27.99
|
|
$
|
27.53
|
|
Non-stabilized malls
|
|
|
26.88
|
|
|
27.75
|
|
Associated centers
|
|
|
11.74
|
|
|
10.78
|
|
Community centers
|
|
|
14.47
|
|
|
16.68
|
|
Office
|
|
|
19.53
|
|
|
19.47
|
|
The following table presents the results we achieved in new and renewal
leasing during the three and nine months ended September 30, 2007 for same small shop
spaces less than 10,000 square feet:
24
|
|
Square Feet
|
|
Prior Gross
Rent Per
Square
Foot (1)
|
|
New Initial
Gross Rent
Per Square
Foot (2)
|
|
% Change Initial
|
|
New
Average
Gross Rent
Per Square
Foot (3)
|
|
% Change Average
|
|
Quarter:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Property Types
|
|
557,025
|
|
$
|
35.76
|
|
$
|
37.35
|
|
4.4
|
%
|
$
|
38.34
|
|
7.2
|
%
|
Stabilized malls
|
|
513,303
|
|
|
37.28
|
|
|
38.90
|
|
4.3
|
%
|
|
39.91
|
|
7.1
|
%
|
New leases
|
|
214,293
|
|
|
40.08
|
|
|
43.07
|
|
7.5
|
%
|
|
44.42
|
|
10.8
|
%
|
Renewal leases
|
|
299,010
|
|
|
35.27
|
|
|
35.92
|
|
1.8
|
%
|
|
36.68
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year to Date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Property Types
|
|
2,092,954
|
|
$
|
34.09
|
|
$
|
36.56
|
|
7.2
|
%
|
$
|
37.32
|
|
9.5
|
%
|
Stabilized malls
|
|
1,947,202
|
|
|
35.30
|
|
|
37.93
|
|
7.5
|
%
|
|
38.68
|
|
9.6
|
%
|
New leases
|
|
736,242
|
|
|
37.36
|
|
|
44.22
|
|
18.4
|
%
|
|
45.51
|
|
21.8
|
%
|
Renewal leases
|
|
1,210,960
|
|
|
34.05
|
|
|
34.10
|
|
0.1
|
%
|
|
34.54
|
|
1.4
|
%
|
|
(1)
|
Represents the gross rent that was in place at the end
of the lease term.
|
|
(2)
|
Represents the gross rent in place at beginning of the
lease term.
|
|
(3)
|
Average gross rent over the term of the new lease. Does
not incorporate future annual increases for common area maintenance
expense reimbursements.
|
During the third quarter of 2007, on an overall leasing basis, we signed
leases totaling approximately 1.2 million square feet, including approximately 0.6
million square feet of development leasing and 0.6 million square feet of leases in our
operating portfolio. The 0.6 million square feet was comprised of 0.3 million square
feet of new leases and 0.3 million square feet of renewal leases. This compares with a
total of 1.0 million square feet of leases signed in the third quarter of 2006,
including 0.3 million square feet of development leasing and 0.7 million square feet
completed in the operating portfolio. Of the 0.7 million square feet in the operating
portfolio, 0.3 million square feet were new leases and 0.4 million square feet were
renewals.
LIQUIDITY AND CAPITAL RESOURCES
There was $48.9 million of cash and cash equivalents and $33.2 million
cash held in escrow as of September 30, 2007, an aggregate increase of $53.4 million
compared to cash and cash equivalents of $28.7 million at December 31, 2006. The cash
held in escrow as of September 30, 2007, represents the proceeds from the sale of Twin
Peaks Mall in August 2007 and is intended for use in a like-kind exchange. There was no
cash held in escrow as of December 31, 2006. Cash flows from operations are used to
fund short-term liquidity and capital needs such as tenant construction allowances,
capital expenditures and payments of dividends and distributions. For longer-term
liquidity needs such as acquisitions, new developments, renovations and expansions, we
typically rely on property specific mortgages (which are generally non-recourse),
construction and term loans, revolving lines of credit, common stock, preferred stock,
joint venture investments and a minority interest in the Operating
Partnership.
Cash
Flows
Cash provided by operating activities during the nine months ended
September 30, 2007, increased by $41.2 million to $309.8 million from $268.6 million
during the nine months ended September 30, 2006. This increase is primarily due to the
timing of amounts that were retained in accounts payable at September 30, 2007, in
addition to the timing of cash receipts from collections of tenant and other
receivables prior to the end of the third quarter.
Debt
During the nine months ended September 30, 2007, we borrowed $825.3
million under mortgage and other notes payable and paid $331.8 million to reduce
outstanding borrowings under our lines of
25
credit
and repay certain mortgage notes payable. We paid $5.0 million of costs directly
related to borrowings and our credit facilities, as well as $0.2 million in prepayment
fees related to the retirement of a loan before its scheduled maturity date.
The following tables summarize debt based on our pro rata ownership
share (including our pro rata share of unconsolidated affiliates and excluding minority
investors’ share of shopping center properties) because we believe this provides
investors a clearer understanding of our total debt obligations (in
thousands):
|
|
Consolidated
|
|
Minority
Interests
|
|
Unconsolidated
Affiliates
|
|
Total
|
|
Weighted
Average
Interest
Rate(1)
|
|
|
September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-recourse loans on operating properties
|
|
$
|
4,049,524
|
|
$
|
(119,797
|
)
|
$
|
219,032
|
|
$
|
4,148,759
|
|
5.92
|
%
|
|
Variable-rate debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recourse term loans on operating properties
|
|
|
75,221
|
|
|
(288
|
)
|
|
42,074
|
|
|
117,007
|
|
6.58
|
%
|
|
Construction loans
|
|
|
34,589
|
|
|
—
|
|
|
—
|
|
|
34,589
|
|
6.78
|
%
|
|
Lines of credit
|
|
|
892,932
|
|
|
—
|
|
|
—
|
|
|
892,932
|
|
6.28
|
%
|
|
Total variable-rate debt
|
|
|
1,002,742
|
|
|
(288
|
)
|
|
42,074
|
|
|
1,044,528
|
|
6.33
|
%
|
|
Total
|
|
$
|
5,052,266
|
|
$
|
(120,085
|
)
|
$
|
261,106
|
|
$
|
5,193,287
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-recourse loans on operating properties
|
|
$
|
3,517,710
|
|
$
|
(56,612
|
)
|
$
|
218,203
|
|
$
|
3,679,301
|
|
5.97
|
%
|
Variable-rate debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recourse term loans on operating properties
|
|
|
101,464
|
|
|
—
|
|
|
27,816
|
|
|
129,280
|
|
6.46
|
%
|
Construction loans
|
|
|
114,429
|
|
|
—
|
|
|
—
|
|
|
114,429
|
|
6.61
|
%
|
Lines of credit
|
|
|
830,932
|
|
|
—
|
|
|
—
|
|
|
830,932
|
|
6.19
|
%
|
Total variable-rate debt
|
|
|
1,046,825
|
|
|
—
|
|
|
27,816
|
|
|
1,074,641
|
|
6.27
|
%
|
Total
|
|
$
|
4,564,535
|
|
$
|
(56,612
|
)
|
$
|
246,019
|
|
$
|
4,753,942
|
|
6.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Weighted average interest rate including the effect of debt premiums, but excluding
amortization of deferred financing costs.
We have four secured credit facilities with total availability of $662.2
million, of which $609.7 million was outstanding as of September 30, 2007. The secured
credit facilities bear interest at a rate of LIBOR plus a margin ranging from 0.80% to
0.90%. Borrowings under the secured lines of credit had a weighted average interest
rate of 6.16% at September 30, 2007.
In September 2007, we amended the largest secured credit facility to
increase the maximum availability from $476.0 million to $525.0 million and to
substitute certain collateral under the facility. We also pay a fee based on the amount
of unused availability under this secured credit facility at a rate of 0.125% or
0.250%, depending on the level of unused availability.
We have an unsecured credit facility with total availability of $560.0
million, of which $283.2 million was outstanding as of September 30, 2007. The
unsecured credit facility bears interest at LIBOR plus a margin of 0.75% to 1.20% based
on our leverage. The credit facility matures in August 2008 and has three one-year
extension options, which are at our election. At September 30, 2007, the outstanding
borrowings under the unsecured credit facility had a weighted average interest rate of
6.53%. Additionally, the Company pays an annual fee equal to 0.1% of the amount of
total availability under the unsecured credit facility.
We also have secured and unsecured lines of credit with total
availability of $40.5 million that are used only to issue letters of credit. There was
$31.2 million outstanding under these lines at September 30, 2007.
26
During the second quarter of 2007, we obtained two separate ten-year,
non-recourse loans totaling $207.5 million that bear interest at fixed rates ranging
from 5.60% to 5.66%, with a weighted average of 5.61%. The loans are secured by Gulf
Coast Town Center and Eastgate Crossing. The proceeds were used to retire two variable
rate loans totaling $143.3 million and to reduce outstanding balances on the
Company’s credit facilities.
During the first quarter of 2007, we obtained six separate ten-year,
non-recourse loans totaling $417.0 million that bear interest at fixed rates ranging
from 5.67% to 5.68%, with a weighted average of 5.67%. The loans are secured by Mall of
Acadiana, Citadel Mall, The Plaza at Fayette Mall, Layton Hills Mall and its associated
center, Hamilton Corner and The Shoppes at St. Clair Square. The proceeds were used to
retire $92.1 million of mortgage notes payable that were scheduled to mature during the
next twelve months and to pay outstanding balances on our credit facilities. The
mortgage notes payable that were retired consisted of two variable rate term loans
totaling $51.8 million and three fixed rate loans totaling $40.3 million. The Company
recorded a loss on extinguishment of debt of $0.2 million related to prepayment fees
and the write-off of unamortized deferred financing costs associated with the loans
that were retired.
The refinancings described in the preceding paragraph enabled us to
significantly reduce our exposure to variable-rate debt. As of September 30, 2007, our
share of consolidated and unconsolidated variable-rate debt represented 20.1% of our
total share of debt, which was down from 22.6% as of December 31, 2006. As of September
30, 2007, our share of consolidated and unconsolidated variable-rate debt represented
10.9% of our total market capitalization (see Equity below) as compared to 10.6% as of
December 31, 2006.
The secured and unsecured credit facilities contain, among other
restrictions, certain financial covenants including the maintenance of certain coverage
ratios, minimum net worth requirements, and limitations on cash flow distributions. We
were in compliance with all financial covenants and restrictions under our credit
facilities at September 30, 2007.
We expect to refinance the majority of mortgage and other notes payable
maturing over the next five years with replacement loans. Based on our pro rata share
of total debt, there are seven loans and two lines of credit totaling $624.3 million
that are scheduled to mature before September 30, 2008. We expect to retire or
refinance these loans.
On August 2, 2007, the Company’s Board of Directors approved a
$100 million common stock repurchase plan effective for twelve months. Under the August
2007 plan, purchases of shares of the Company’s common stock may be made from
time to time, subject to market conditions and at prevailing market prices, through
open market purchases. Any stock repurchases are to be funded through the
Company’s available cash and credit facilities. The Company is not obligated to
repurchase any shares of stock under the plan and the Company may terminate the plan at
any time. Repurchased shares are deemed retired and are, accordingly, cancelled and no
longer considered issued. During the three months ended September 30, 2007, the Company
repurchased 148,500 shares at a cost of approximately $5,169. The cost of repurchased
shares is recorded as a reduction in the respective components of shareholders’
equity.
On June 28, 2007, we redeemed the 2,000,000 outstanding shares of our
8.75% Series B Cumulative Redeemable Stock (the “Series B Preferred Stock”)
for $100.0 million, representing a liquidation preference of $50.00 per share, plus
accrued and unpaid dividends of $2.1 million. In connection with the redemption of the
Series B Preferred Stock, we recorded a charge of $3.6 million to write off direct
issuance costs that were recorded as a reduction of additional paid-in capital when
the
27
Series
B Preferred Stock was issued. The charge is included in preferred dividends in the
accompanying consolidated statements of operations for the nine month period ended
September 30, 2007.
During the nine months ended September 30, 2007, we received $5.9
million in proceeds from issuances of common stock related to exercises of employee
stock options and from our dividend reinvestment plan. In addition, we paid dividends
of $120.0 million to holders of our common stock and our preferred stock, as well as
$86.7 million in distributions to the minority interest investors in our Operating
Partnership and certain shopping center properties.
During the nine months ended September 30, 2007, holders of 220,670
special common units of limited partnership interest in the Operating Partnership
exercised their conversion rights. We elected to pay cash of $9,423 in exchange for the
special common units. All of these units were redeemed during the first six months of
2007.
As a publicly traded company, we have access to capital through both the
public equity and debt markets. We currently have a shelf registration statement on
file with the Securities and Exchange Commission authorizing us to publicly issue
shares of preferred stock, common stock and warrants to purchase shares of common
stock. There is no limit to the offering price or number of shares that we may issue
under this shelf registration statement.
We anticipate that the combination of equity and debt sources will, for
the foreseeable future, provide adequate liquidity to continue our capital programs
substantially as in the past and make distributions to our shareholders in accordance
with the requirements applicable to real estate investment trusts.
Our strategy is to maintain a conservative debt-to-total-market
capitalization ratio in order to enhance our access to the broadest range of capital
markets, both public and private. Based on our share of total consolidated and
unconsolidated debt and the market value of equity, our debt-to-total-market
capitalization (debt plus market value equity) ratio was as follows at September 30,
2007 (in thousands, except stock prices):
|
|
Shares
Outstanding
|
|
Stock
Price (1)
|
|
Value
|
|
Common stock and operating partnership units
|
|
116,348
|
|
$
|
35.05
|
|
$
|
4,077,997
|
|
7.75% Series C cumulative redeemable preferred
stock
|
|
460
|
|
|
250.00
|
|
|
115,000
|
|
7.375% Series D cumulative redeemable preferred
stock
|
|
700
|
|
|
250.00
|
|
|
175,000
|
|
Total market equity
|
|
|
|
|
|
|
|
4,367,997
|
|
Company’s share of total debt
|
|
|
|
|
|
|
|
5,193,287
|
|
Total market capitalization
|
|
|
|
|
|
|
$
|
9,561,284
|
|
Debt-to-total-market capitalization ratio
|
|
|
|
|
|
|
|
54.3
|
%
|
|
(1)
|
Stock price for common stock and operating partnership
units equals the closing price of the common stock on September 28,
2007. The stock price for the preferred stock represents the
liquidation preference of each respective series of preferred
stock.
|
Capital Expenditures
We expect to continue to have access to the capital resources necessary
to expand and develop our business. Future development and acquisition activities will
be undertaken as suitable opportunities arise. We do not expect to pursue these
opportunities unless adequate sources of funding are available and a satisfactory
budget with targeted returns on investment has been internally approved.
An annual capital expenditures budget is prepared for each property that
is intended to provide for all necessary recurring and non-recurring capital
expenditures. We believe that property operating cash flows, which include
reimbursements from tenants for certain expenses, will provide the necessary funding
for these expenditures.
28
The following tables summarize our development projects as of September
30, 2007 (dollars in thousands):
Properties Opened Year-to-date
Property
|
|
Location
|
|
Total
Project
Square
Feet
|
|
CBL’s
Share
of
|
|
Date
Opened
|
|
Initial
Yield
(d)
|
|
Total
Cost
|
|
Cost
To
Date
|
Mall
Expansion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brookfield Square - Mitchell’s Fish
Market
|
|
Brookfield, WI
|
|
7,500
|
|
$
|
3,044
|
|
$
|
2,964
|
|
April 2007
|
|
8.4
|
%
|
Southpark Mall - Regal
Cinema
|
|
Colonial Heights, VA
|
|
68,242
|
|
|
11,322
|
|
|
11,322
|
|
July 2007
|
|
11.0
|
%
|
The District at Valley View -
shops
|
|
Roanoke, VA
|
|
61,200
|
|
|
18,026
|
|
|
16,576
|
|
July 2007
|
|
7.6
|
%
|
Brookfield Square - Fresh
Market
|
|
Brookfield, WI
|
|
22,400
|
|
|
4,960
|
|
|
4,960
|
|
August 2007
|
|
7.6
|
%
|
Harford Mall - lifestyle
expansion
|
|
Bel Air, MD
|
|
39,222
|
(b)
|
|
9,736
|
|
|
7,119
|
|
September 2007
|
|
6.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community/Open-Air
Centers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alamance Crossing
East
|
|
Burlington, NC
|
|
655,630
|
|
|
79,950
|
|
|
79,939
|
|
August 2007
|
|
8.4
|
%
|
York Town Center
(c)
|
|
York, PA
|
|
274,495
|
|
|
21,085
|
|
|
16,518
|
|
September 2007
|
|
9.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Open-Air Center
Expansion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gulf Coast Town Center -Phase II-shops/Costco
(a)
|
|
Ft. Myers, FL
|
|
595,990
|
|
|
83,286
|
|
|
83,286
|
|
Spring 2007
|
|
9.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Associated
Center:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Shoppes at St. Clair
Square
|
|
Fairview Heights, IL
|
|
84,080
|
|
|
27,487
|
|
|
31,746
|
|
March 2007
|
|
7.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Associated Center
Renovation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Madison Plaza
|
|
Huntsville, AL
|
|
153,085
|
|
|
1,320
|
|
|
1,320
|
|
June 2007
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redevelopments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mall del Norte -
Theater
|
|
Laredo, TX
|
|
82,500
|
|
|
14,403
|
|
|
10,299
|
|
Spring 2007
|
|
7.4
|
%
|
Westgate Mall - Former
Proffits
|
|
Spartanburg, SC
|
|
153,000
|
|
|
N/A
|
|
|
N/A
|
|
August 2007
|
|
N/A
|
|
|
|
|
|
2,177,184
|
|
$
|
274,619
|
|
$
|
237,477
|
|
|
|
|
|
Announced Property Renovations and Redevelopments
Property
|
|
Location
|
|
Total
Project
Square
Feet
|
|
CBL’s
Share
of
|
|
Date
Opened
|
|
Initial
Yield
(d)
|
|
Total
Cost
|
|
Cost
To
Date
|
Mall
Renovations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brookfield Square
|
|
Brookfield, WI
|
|
1,132,984
|
|
$
|
18,100
|
|
$
|
2,751
|
|
Fall 2007
|
|
N/A
|
|
Georgia Square
|
|
Athens, GA
|
|
674,738
|
|
|
16,900
|
|
|
5,146
|
|
Spring 2008
|
|
N/A
|
|
Mall del Norte
|
|
Laredo, TX
|
|
1,207,687
|
|
|
20,400
|
|
|
18,810
|
|
Fall 2007
|
|
N/A
|
|
Honey Creek
Mall
|
|
Terre Haute, IN
|
|
678,763
|
|
|
5,600
|
|
|
4,319
|
|
Fall 2007
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redevelopments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parkdale Mall - Former Dillards (Phase
I)
|
|
Beaumont, TX
|
|
50,720
|
|
|
14,720
|
|
|
8,062
|
|
Fall 2007
|
|
4.1
|
%
|
Northpark Mall - Former
Wards
|
|
Joplin, MO
|
|
90,688
|
|
|
9,750
|
|
|
7,327
|
|
October 2007
|
|
7.8
|
%
|
Columbia Place - Former
JCPenney
|
|
Columbia, SC
|
|
124,819
|
|
|
12,831
|
|
|
11,512
|
|
Fall 2007
|
|
7.0
|
%
|
|
|
|
|
3,960,399
|
|
$
|
98,301
|
|
$
|
57,927
|
|
|
|
|
|
29
Properties Under Development at September 30, 2007
Property
|
|
Location
|
|
Total
Project
Square
Feet
|
|
CBL’s
Share
of
|
|
Date
Opened
|
|
Initial
Yield
(d)
|
|
Total
Cost
|
|
Cost
To
Date
|
Mall
Expansions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brookfield Square - Claim
Jumpers
|
|
Brookfield, WI
|
|
12,000
|
|
$
|
3,430
|
|
$
|
282
|
|
Fall 2008
|
|
11.9
|
%
|
The District at
CherryVale
|
|
Rockford, IL
|
|
84,541
|
|
|
21,099
|
|
|
14,162
|
|
Fall 2007
|
|
7.4
|
%
|
Coastal Grand - Old
Navy
|
|
Myrtle Beach, SC
|
|
23,269
|
|
|
1,813
|
|
|
736
|
|
October 2007
|
|
7.9
|
%
|
Coastal Grand -
JCPenney
|
|
Myrtle Beach, SC
|
|
103,395
|
|
|
N/A
|
|
|
N/A
|
|
Spring 2008
|
|
N/A
|
|
Coastal Grand - Ulta
Cosmetics
|
|
Myrtle Beach, SC
|
|
10,000
|
|
|
1,449
|
|
|
794
|
|
Spring 2008
|
|
8.7
|
%
|
Cary Towne Center - Mimi's
Café
|
|
Cary, NC
|
|
6,674
|
|
|
2,243
|
|
|
893
|
|
Spring 2008
|
|
15.0
|
%
|
Southpark Mall -
Foodcourt
|
|
Colonial Heights, VA
|
|
17,150
|
|
|
4,188
|
|
|
849
|
|
Spring 2008
|
|
11.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Associated/Lifestyle
Centers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Milford
Marketplace
|
|
Milford, CT
|
|
105,638
|
|
|
25,729
|
|
|
15,372
|
|
October 2007
|
|
8.3
|
%
|
Imperial Valley Commons (Phase I)
(e)
|
|
El Centro, CA
|
|
610,966
|
|
|
11,471
|
|
|
15,434
|
|
Fall 2008/
|
|
8.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Summer 2009
|
|
|
|
Brookfield Square - Corner
Development
|
|
Brookfield, WI
|
|
19,745
|
|
|
8,372
|
|
|
1,229
|
|
Fall 2008
|
|
8.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CBL Center II
|
|
Chattanooga, TN
|
|
74,598
|
|
|
17,120
|
|
|
7,564
|
|
January 2008
|
|
8.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mixed-Use
Center:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pearland Town Center (Retail
Portion)
|
|
Pearland, TX
|
|
694,417
|
|
|
160,248
|
|
|
70,802
|
|
Fall 2008
|
|
7.4
|
%
|
Pearland Town Center (Hotel
Portion)
|
|
Pearland, TX
|
|
72,500
|
|
|
17,886
|
|
|
476
|
|
Fall 2008
|
|
8.3
|
%
|
Pearland Town Center (Residential
Portion)
|
|
Pearland, TX
|
|
68,110
|
|
|
11,312
|
|
|
431
|
|
Fall 2008
|
|
8.4
|
%
|
Pearland Town Center (Office
Portion)
|
|
Pearland, TX
|
|
51,560
|
|
|
9,385
|
|
|
302
|
|
Fall 2008
|
|
8.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community/Open-Air
Centers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alamance Crossing -
Theater/Shops
|
|
Burlington, NC
|
|
82,997
|
|
|
18,882
|
|
|
29
|
|
Spring 2008
|
|
8.4
|
%
|
Summit Fair
|
|
Lee's Summit, MO
|
|
512,551
|
|
|
22,000
|
|
|
22,000
|
|
Fall 2008/
|
|
9.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Summer 2009
|
|
|
|
Cobblestone Village at Palm
Coast
|
|
Palm Coast, FL
|
|
277,770
|
|
|
10,520
|
|
|
15,306
|
|
October 2007
|
|
7.7
|
%
|
Settlers Ridge
(e)
|
|
Robinson Township, PA
|
|
515,444
|
|
|
119,146
|
|
|
26,689
|
|
Summer 2009
|
|
8.6
|
%
|
|
|
|
|
3,343,325
|
|
$
|
466,293
|
|
$
|
193,350
|
|
|
|
|
|
(a)
Amounts shown are 100% of total cost and cost to date for all of Phase II due to the
fact that we fund all costs.
(b)
Total square footage includes redevelopment and expansion of 2,641 square
feet.
(c)
50/50 joint venture.
(d)
Initial yields include reductions for management and development fees.
(e)
60/40 Joint Venture. Amounts shown are 100% of total costs and cost to date as CBL has
funded all costs to date.
As of September 30, 2007, there were construction loans in place for the
development costs of Alamance Crossing, Milford Marketplace York Town Center, Pearland
Town Center and CBL Center II. The remaining development costs will be funded with
operating cash flows, credit facilities or construction loans that we plan to obtain in
the near term.
We have entered into a number of option agreements for the development
of future regional malls, open-air centers and community centers. Except for the
projects discussed under Developments and Expansions above, we do not have any other
material capital commitments.
Dispositions
We received $52.9 million in net proceeds from the sales of ten parcels
of land during the nine months ended September 30, 2007.
30
Other Capital Expenditures
Including our share of unconsolidated affiliates’ capital
expenditures and excluding minority investors’ share of capital expenditures, we
spent $45.4 million during the nine months ended September 30, 2007 for tenant
allowances, which will generate increased rents from tenants over the terms of their
leases. Deferred maintenance expenditures were $20.4 million for the nine months ended
September 30, 2007 and included $12.8 million for roof repairs and replacements, $2.2
million parking lots and parking lot lighting and $5.4 million for other capital
expenditures. Renovation expenditures were $32.1 million for the nine months ended
September 30, 2007.
Deferred maintenance expenditures are generally billed to tenants as
common area maintenance expense, and most are recovered over a 5 to 15-year period.
Renovation expenditures are primarily for remodeling and upgrades of malls, of which
approximately 30% is recovered from tenants over a 5 to 15-year period. We are
recovering these costs through fixed amounts with annual increases or pro rata cost
reimbursements based on the tenant’s occupied space.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are disclosed in Note 2 to the
consolidated financial statements included in our Annual Report on Form 10-K for the
year ended December 31, 2006. The following discussion describes our most critical
accounting policies, which are those that are both important to the presentation of our
financial condition and results of operations and that require significant judgment or
use of complex estimates.
Revenue Recognition
Minimum rental revenue from operating leases is recognized on a
straight-line basis over the initial terms, including rent holidays, of the related
leases. Most tenants are required to pay percentage rent if their sales volumes exceed
thresholds specified in their lease agreements. Percentage rent is recognized as
revenue when the thresholds are achieved and the amounts become
determinable.
We receive reimbursements from tenants for real estate taxes, insurance,
common area maintenance, utilities and other recoverable operating expenses as provided
in the lease agreements. Tenant reimbursements are recognized as revenue in the period
the related operating expenses are incurred. Tenant reimbursements related to certain
capital expenditures are billed to tenants over periods of 5 to 15 years and are
recognized as revenue when billed.
We receive management, leasing and development fees from third parties
and unconsolidated affiliates. Management fees are charged as a percentage of revenues
(as defined in the management agreement) and are recognized as revenue when earned.
Development fees are recognized as revenue on a pro rata basis over the development
period. Leasing fees are charged for newly executed leases and lease renewals and are
recognized as revenue when earned. Financing fees are earned in accordance with the
terms of the applicable joint venture agreement. Development, leasing and financing
fees received from unconsolidated affiliates are recognized as revenue to the extent of
the third-party partners’ ownership interest. Fees to the extent of our ownership
interest are recorded as a reduction to our investment in the unconsolidated
affiliate.
Gains on sales of real estate assets are recognized when it is
determined that the sale has been consummated, the buyer’s initial and continuing
investment is adequate, our receivable, if any, is not subject to future subordination,
and the buyer has assumed the usual risks and rewards of ownership of the asset. When
we have an ownership interest in the buyer, gain is recognized to the extent of the
third party partner's
ownership interest and the portion of the gain attributable to our
ownership interest is deferred.
31
Real Estate Assets
We capitalize predevelopment project costs paid to third parties. All
previously capitalized predevelopment costs are expensed when it is no longer probable
that the project will be completed. Once development of a project commences, all direct
costs incurred to construct the project, including interest and real estate taxes, are
capitalized. Additionally, certain general and administrative expenses are allocated to
the projects and capitalized based on the amount of time applicable personnel work on
the development project. Ordinary repairs and maintenance are expensed as incurred.
Major replacements and improvements are capitalized and depreciated over their
estimated useful lives.
All acquired real estate assets are accounted for using the purchase
method of accounting and, accordingly, the results of operations are included in the
consolidated statements of operations from the respective dates of acquisition. The
purchase price is allocated to (i) tangible assets, consisting of land, buildings and
improvements, and tenant improvements, (ii) and identifiable intangible assets and
liabilities generally consisting of above and below-market leases and in-place leases.
We use estimates of fair value based on estimated cash flows, using appropriate
discount rates, and other valuation methods to allocate the purchase price to the
acquired tangible and intangible assets. Liabilities assumed generally consist of
mortgage debt on the real estate assets acquired. Assumed debt with a stated interest
rate that is significantly different from market interest rates is recorded at its fair
value based on estimated market interest rates at the date of acquisition.
Depreciation is computed on a straight-line basis over estimated lives
of 40 years for buildings, 10 to 20 years for certain improvements and 7 to 10 years
for equipment and fixtures. Tenant improvements are capitalized and depreciated on a
straight-line basis over the term of the related lease. Lease-related intangibles from
acquisitions of real estate assets are amortized over the remaining terms of the
related leases. Any difference between the face value of the debt assumed and its fair
value is amortized to interest expense over the remaining term of the debt using the
effective interest method.
Carrying Value of Long-Lived Assets
We periodically evaluate long-lived assets to determine if there has
been any impairment in their carrying values and record impairment losses if the
undiscounted cash flows estimated to be generated by those assets are less than the
assets’ carrying amounts or if there are other indicators of impairment. If it is
determined that an impairment has occurred, the excess of the asset’s carrying
value over its estimated
fair
value will be charged to operations. We did recognize an impairment of $0.3 million
during the nine months ended September 30, 2006. No impairments have been incurred
during the current year as of September 30, 2007.
RECENT ACCOUNTING PRONOUNCEMENTS
On July 13, 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(“FIN 48”), which is effective for fiscal years beginning
after December 15, 2006. FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in the financial statements in accordance with FASB Statement
No.109,
Accounting for Income Taxes
,
by prescribing the minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements. FIN 48 also provides guidance on
derecognition, measurement, classification, interest and penalties, accounting in
interim periods, disclosure and transition.
We adopted FIN 48 as of January 1, 2007 and have analyzed our various
federal and state filing positions. Based on this evaluation, we believe that our
accruals for income tax liabilities are adequate
32
and,
therefore, no reserves for uncertain income tax positions have been recorded pursuant
to FIN 48. Additionally, we did not record a cumulative effect adjustment related to
the adoption of FIN 48.
In September 2006, the FASB issued Statement of Financial
Accounting Standards (“SFAS”) No. 157,
Fair
Value Measurements
. SFAS No. 157 defines fair value,
establishes a framework that clarifies the fair value measurement objective within GAAP
and its application under the various pronouncements that require or permit fair value
measurements, and expands disclosures about fair value measurements. It is intended to
increase consistency and comparability among fair value estimates used in financial
reporting. SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years.
The transition adjustment, which is measured as the difference between the carrying
amount and the fair value of those financial instruments at the date SFAS No. 157 is
initially applied, should be recognized as a cumulative effect adjustment to the
opening balance of retained earnings for the fiscal year in which SFAS No. 157 is
initially applied. The provisions of SFAS No. 157 are effective for us beginning
January 1, 2008. We are currently evaluating the impact of adopting SFAS
No. 157 on our financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities
. SFAS No. 159 permits entities to choose to
measure many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. SFAS No. 109 also establishes
presentation and disclosure requirements designed to facilitate comparisons between
entities that choose different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, although early application is allowed. We are
currently evaluating the impact of adopting SFAS No. 159 on our financial position
and results of operations.
IMPACT OF INFLATION
In the last three years, inflation has not had a significant impact on
us because of the relatively low inflation rate. Substantially all tenant leases do,
however, contain provisions designed to protect us from the impact of inflation. These
provisions include clauses enabling us to receive percentage rent based on
tenants’ gross sales, which generally increase as prices rise, and/or escalation
clauses, which generally increase rental rates during the terms of the leases. In
addition, many of the leases are for terms in the range of five to ten years, which may
enable us to replace existing leases with new leases at higher base and/or percentage
rents if rents of the existing leases are below the then existing market rate. Most of
the leases require tenants to pay their share of operating expenses, including common
area maintenance, real estate taxes and insurance, thereby reducing our exposure to
increases in costs and operating expenses resulting from inflation.
FUNDS FROM OPERATIONS
Funds From Operations (“FFO”) is a widely used measure of
the operating performance of real estate companies that supplements net income
determined in accordance with generally accepted accounting principles
(“GAAP”). The National Association of Real Estate Investment Trusts
(“NAREIT”) defines FFO as net income (computed in accordance with GAAP)
excluding gains or losses on sales of operating properties, plus depreciation and
amortization, and after adjustments for unconsolidated partnerships and joint ventures
and minority interests. Adjustments for unconsolidated partnerships and joint ventures
and minority interests are calculated on the same basis. We define FFO allocable to
common shareholders as defined above by NAREIT less dividends on preferred stock. Our
method of calculating FFO allocable to common shareholders may be different from
methods used by other REITs and, accordingly, may not be comparable to such other
REITs.
33
We believe that FFO provides an additional indicator of the operating
performance of our Properties without giving effect to real estate depreciation and
amortization, which assumes the value of real estate assets declines predictably over
time. Since values of well-maintained real estate assets have historically increased or
decreased based on prevailing market conditions, we believe that FFO enhances
investors’ understanding of our operating performance. The use of FFO as an
indicator of financial performance is influenced not only by the operations of our
Properties and interest rates, but also by our capital structure.
We present both FFO of our operating partnership and FFO allocable to
common shareholders, as we believe that both are useful performance measures. We
believe FFO of our operating partnership is a useful performance measure since we
conduct substantially all of our business through our operating partnership and,
therefore, it reflects the performance of the Properties in absolute terms regardless
of the ratio of ownership interests of our common shareholders and the minority
interest in our operating partnership. We believe FFO allocable to common shareholders
is a useful performance measure because it is the performance measure that is most
directly comparable to net income available to common shareholders.
In our reconciliation of net income available to common shareholders to
FFO allocable to common shareholders that is presented below, we make an adjustment to
add back minority interest in earnings of our operating partnership in order to arrive
at FFO of our operating partnership. We then apply a percentage to FFO of our operating
partnership to arrive at FFO allocable to common shareholders. The percentage is
computed by taking the weighted average number of common shares outstanding for the
period and dividing it by the sum of the weighted average number of common shares and
the weighted average number of operating partnership units outstanding during the
period.
FFO does not represent cash flows from operations as defined by
accounting principles generally accepted in the United States, is not necessarily
indicative of cash available to fund all cash flow needs and should not be considered
as an alternative to net income for purposes of evaluating our operating performance or
to cash flow as a measure of liquidity.
FFO allocable to common shareholders decreased 2.3% for the three months
ended September 30, 2007 to $49.7 million from $50.9 million for the same period in
2006. FFO allocable to common shareholders decreased 2.3% for the nine months ended
September 30, 2007 to $149.1 million compared to $152.6 million for the same period in
2006.
FFO of our operating partnership decreased 3.7% for the three months
ended September 30, 2007 to $88.3 million from $91.6 million for the same period in
2006. FFO of our operating partnership decreased 4.3% for the nine months ended
September 30, 2007 to $265.0 million compared to $276.8 million for the same period in
2006.
The decline in FFO for both the three and nine months ended September
30, 2007 was primarily the result of a decrease in lease termination fees, the non-cash
income tax provision and a decrease in the amortization of above and below-market
leases. The write-off of the direct issuance costs during the nine month period ended
September 30, 2007, related to the redemption of our Series B preferred stock also
impacted FFO. No comparable charges were incurred in the prior year periods.
34
The reconciliation of net income available to common shareholders to FFO
allocable to common shareholders is as follows:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
17,088
|
|
$
|
14,337
|
|
$
|
45,954
|
|
$
|
55,878
|
|
Minority interest in earnings of operating
partnership
|
|
|
13,288
|
|
|
12,075
|
|
|
35,886
|
|
|
47,930
|
|
Depreciation and amortization expense of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated properties
|
|
|
58,893
|
|
|
62,142
|
|
|
176,067
|
|
|
170,546
|
|
Unconsolidated affiliates
|
|
|
3,425
|
|
|
3,377
|
|
|
10,550
|
|
|
10,020
|
|
Discontinued operations
|
|
|
—
|
|
|
462
|
|
|
859
|
|
|
1,810
|
|
Non-real estate assets
|
|
|
(228
|
)
|
|
(218
|
)
|
|
(690
|
)
|
|
(623
|
)
|
Minority investors' share of depreciation and
amortization
|
|
|
(300
|
)
|
|
(568
|
)
|
|
190
|
|
|
(1,675
|
)
|
(Gain) loss on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of operating real estate assets
|
|
|
—
|
|
|
49
|
|
|
—
|
|
|
87
|
|
Discontinued operations
|
|
|
(3,957
|
)
|
|
(2
|
)
|
|
(3,902
|
)
|
|
(7,217
|
)
|
Funds from operations of the operating
partnership
|
|
|
88,209
|
|
|
91,654
|
|
|
264,914
|
|
|
276,756
|
|
Percentage allocable to Company shareholders
(1)
|
|
|
56.34
|
%
|
|
55.55
|
%
|
|
56.28
|
%
|
|
55.14
|
%
|
Funds from operations allocable to Company
shareholders
|
|
$
|
49,697
|
|
$
|
50,914
|
|
$
|
149,094
|
|
$
|
152,603
|
|
|
(1)
|
Represents the weighted average number of common shares
outstanding for the period divided by the sum of the weighted
average
|
number of common shares and the weighted
average number of operating partnership units outstanding during the period.