SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
COMMISSION FILE NO. 1-12494
CBL & ASSOCIATES PROPERTIES, INC.
(Exact Name of registrant as specified in its charter)
DELAWARE 62-1545718
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
2030 Hamilton Place Blvd., Suite 500, Chattanooga, TN 37421-6000
(Address of principal executive office, including zip code)
Registrant's telephone number, including area code (423) 855-0001
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES |X| NO |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
YES |X| NO |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Exchange Act Rule 12b-2).
YES |_| NO |X|
As of November 4, 2005, there were 63,743,459 shares of common stock, par value
$0.01 per share, outstanding.
1
CBL & Associates Properties, Inc.
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements................................................3
Consolidated Balance Sheets.........................................4
Consolidated Statements of Operations...............................5
Consolidated Statements of Cash Flows...............................6
Notes to Unaudited Consolidated Financial Statements................8
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................20
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk..........37
ITEM 4: Controls and Procedures.............................................37
PART II - OTHER INFORMATION...............................................38
ITEM 1: Legal Proceedings................................................38
ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds......38
ITEM 3: Defaults Upon Senior Securities..................................38
ITEM 4: Submission of Matters to a Vote of Security Holders..............38
ITEM 5: Other Information................................................38
ITEM 6: Exhibits.........................................................38
SIGNATURE.................................................................40
2
CBL & Associates Properties, Inc.
ITEM 1: Financial Statements
The accompanying 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
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, 2005, are not necessarily indicative
of the results to be obtained for the full fiscal year.
These financial statements should be read in conjunction with CBL &
Associates Properties, Inc.'s audited financial statements and notes thereto
included in the CBL & Associates Properties, Inc. Annual Report on Form 10-K for
the year ended December 31, 2004.
3
CBL & Associates Properties, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
September 30, December 31,
2005 2004
----------------- ---------------
ASSETS
Real estate assets:
Land.............................................................. $ 702,250 $ 659,782
Buildings and improvements........................................ 5,066,292 4,670,462
----------------- ---------------
5,768,542 5,330,244
Less accumulated depreciation................................... (683,390) (575,464)
----------------- ---------------
5,085,152 4,754,780
Real estate assets held for sale, net............................. - 61,607
Developments in progress.......................................... 216,318 78,393
----------------- ---------------
Net investment in real estate assets............................ 5,301,470 4,894,780
Cash and cash equivalents........................................... 36,802 25,766
Receivables:
Tenant, net of allowance for doubtful accounts of $3,439 in
2005 and $3,237 in 2004........................................ 41,232 38,409
Other............................................................. 3,915 13,706
Mortgage and other notes receivable................................. 18,104 27,804
Investments in unconsolidated affiliates............................ 80,059 84,782
Other assets........................................................ 140,507 119,253
----------------- ---------------
$ 5,622,089 $ 5,204,500
================= ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage and other notes payable.................................... $ 3,664,086 $ 3,359,466
Mortgage notes payable on real estate assets held for sale.......... - 12,213
Accounts payable and accrued liabilities............................ 247,273 212,064
----------------- ---------------
Total liabilities................................................. 3,911,359 3,583,743
----------------- ---------------
Commitments and contingencies (Notes 2, 3, and 8) ..................
Minority interests.................................................. 606,179 566,606
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 2005 and 2004............... 20 20
7.75% Series C Cumulative Redeemable Preferred Stock,
460,000 shares outstanding in 2005 and 2004................ 5 5
7.375% Series D Cumulative Redeemable Preferred Stock,
700,000 shares outstanding in 2005 and 2004................ 7 7
Common stock, $.01 par value, 180,000,000 shares authorized,
63,557,518 and 62,667,104 shares issued and outstanding
in 2005 and 2004, respectively............................. 636 626
Additional paid - in capital...................................... 1,052,988 1,025,479
Deferred compensation............................................. (9,691) (3,081)
Other comprehensive income........................................ 310 -
Retained earnings................................................. 60,276 31,095
----------------- ---------------
Total shareholders' equity...................................... 1,104,551 1,054,151
----------------- ---------------
$ 5,622,089 $ 5,204,500
================= ===============
The accompanying notes are an integral part of these balance sheets.
4
CBL & Associates Properties, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
2005 2004 2005 2004
-------------- ----------- ----------- -------------
REVENUES:
Minimum rents......................................................... $136,676 $ 120,859 $ 394,485 $ 342,796
Percentage rents...................................................... 3,114 2,290 12,972 10,447
Other rents........................................................... 2,400 2,084 8,320 7,326
Tenant reimbursements................................................. 65,498 60,032 184,598 158,551
Management, development and leasing fees.............................. 11,109 2,868 17,927 6,379
Other................................................................. 5,372 5,503 15,768 15,799
-------------- ----------- ----------- -------------
Total revenues...................................................... 224,169 193,636 634,070 541,298
-------------- ----------- ----------- -------------
EXPENSES:
Property operating.................................................... 35,513 31,642 95,539 85,637
Depreciation and amortization......................................... 46,038 37,901 130,663 103,335
Real estate taxes..................................................... 16,283 15,407 47,626 42,582
Maintenance and repairs............................................... 12,402 11,283 36,673 31,650
General and administrative............................................ 10,221 8,280 28,641 24,505
Loss on impairment of real estate assets.............................. - - 262 -
Other................................................................. 3,769 5,681 10,256 13,636
-------------- ----------- ----------- -------------
Total expenses...................................................... 124,226 110,194 349,660 301,345
-------------- ----------- ----------- -------------
Income from operations................................................ 99,943 83,442 284,410 239,953
Interest income....................................................... 1,937 836 6,214 2,422
Interest expense...................................................... (52,646) (46,042) (151,822) (129,274)
Loss on extinguishment of debt........................................ (44) - (928) -
Gain on sales of real estate assets................................... 46,485 1,522 53,581 26,302
Gain on sales of management contracts................................. 21,619 - 21,619 -
Equity in earnings of unconsolidated affiliates....................... 995 1,407 6,769 6,953
Minority interest in earnings:
Operating partnership............................................... (49,455) (16,624) (87,176) (59,498)
Shopping center properties.......................................... (1,086) (974) (3,661) (4,034)
-------------- ----------- ----------- -------------
Income before discontinued operations................................. 67,748 23,567 129,006 82,824
Operating income (loss) of discontinued operations.................... (15) 288 251 1,240
Gain (loss) on discontinued operations................................ 2 325 (84) 845
-------------- ----------- ----------- -------------
Net income............................................................ 67,735 24,180 129,173 84,909
Preferred dividends................................................... (7,642) (4,416) (22,926) (13,248)
-------------- ----------- ----------- -------------
Net income available to common shareholders........................... $ 60,093 $ 19,764 $106,247 $ 71,661
============== =========== =========== =============
Basic per share data:
Income before discontinued operations,
net of preferred dividends.................................... $ 0.95 $ 0.31 $ 1.69 $ 1.14
Discontinued operations........................................... - 0.01 - 0.03
-------------- ----------- ----------- -------------
Net income available to common shareholders....................... $ 0.95 $ 0.32 $ 1.69 $ 1.17
============== =========== =========== =============
Weighted average common shares outstanding...................... 62,940 61,540 62,693 61,130
Diluted per share data:
Income before discontinued operations,
net of preferred dividends..................................... $ 0.92 $ 0.30 $ 1.63 $ 1.09
Discontinued operations........................................... - 0.01 0.01 0.04
-------------- ----------- ----------- -------------
Net income available to common shareholders....................... $ 0.92 $ 0.31 $ 1.64 $ 1.13
============== =========== =========== =============
Weighted average common and potential
dilutive common shares outstanding............................. 65,253 63,966 64,973 63,554
The accompanying notes are an integral part of these statements.
5
CBL & Associates Properties, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
----------------------------------
2005 2004
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... $129,173 $84,909
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation................................................................ 85,836 71,826
Amortization ............................................................... 50,522 37,252
Amortization of debt premiums............................................... (5,506) (3,601)
Amortization of above and below market leases............................... (4,551) (2,275)
Gain on sales of real estate assets......................................... (53,581) (26,613)
(Gain) loss on disposal of discontinued operations.......................... 84 (845)
Gain on sale of management contracts........................................ (21,619) -
Issuance of stock under incentive plan...................................... 851 1,422
Abandoned development projects.............................................. 474 3,314
Amortization of deferred compensation....................................... 1,273 342
Accrual of deferred compensation............................................ 660 454
Accelerated vesting of stock-based compensation............................. 736 -
Loss on extinguishment of debt.............................................. 928 -
Equity in earnings of unconsolidated affiliates............................. (6,769) -
Distributions from unconsolidated affiliates................................ 5,637 -
Loss on impairment of real estate assets.................................... 262 -
Minority interest in earnings............................................... 90,837 63,532
Changes in:
Tenant and other receivables................................................ 6,247 (1,971)
Other assets................................................................ (4,549) (7,905)
Accounts payable and accrued liabilities.................................... (6,419) 9,401
---------------- ---------------
Net cash provided by operating activities........................... 270,526 229,242
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate assets........................................... (168,305) (89,343)
Acquisitions of real estate assets and other assets....................... (178,993) (379,129)
Other capital expenditures................................................ (76,473) (57,600)
Capitalized interest...................................................... (4,620) (3,219)
Additions to other assets................................................. (4,805) (1,614)
Reduction of cash in escrow .............................................. - 78,476
Proceeds from sales of real estate assets................................. 62,871 117,748
Proceeds from sale of management contracts................................ 21,619 -
Additions to mortgage notes receivable.................................... (859) (9,529)
Payments received on mortgage notes receivable............................ 13,186 10,582
Additional investments in and advances to unconsolidated affiliates....... (19,203) (19,619)
Distributions in excess of equity in earnings of unconsolidated affiliates 12,047 26,840
---------------- ---------------
Net cash used in investing activities............................... (343,535) (326,407)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage and other notes payable............................ 395,460 518,981
Principal payments on mortgage and other notes payable.................... (145,644) (278,973)
Additions to deferred financing costs..................................... (3,175) (5,468)
Proceeds from issuance of common stock.................................... 415 334
Costs related to issuance of preferred stock.............................. (193) -
Proceeds from exercise of stock options................................... 8,006 12,766
Prepayment fees on extinguishment of debt................................. (1,977) -
Purchase of minority interest in the Operating Partnership................ (1,137) (5,450)
Distributions to minority interests....................................... (67,433) (58,297)
Dividends paid to holders of preferred stock.............................. (23,572) (13,248)
Dividends paid to common shareholders..................................... (76,705) (66,574)
---------------- ---------------
Net cash provided by financing activities........................... 84,045 104,071
---------------- ---------------
NET CHANGE IN CASH AND CASH EQUIVALENTS....................................... 11,036 6,906
CASH AND CASH EQUIVALENTS, beginning of period 25,766 20,332
---------------- ---------------
CASH AND CASH EQUIVALENTS, end of period...................................... $ 36,802 $27,238
---------------- ---------------
SUPPLEMENTAL INFORMATION:
Cash paid for interest, net of amounts capitalized.......................... $138,035 $126,450
---------------- ---------------
The accompanying notes are an integral part of these statements.
6
CBL & Associates Properties, Inc.
Notes to Unaudited 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 and community centers. CBL's
shopping center properties are located in 24 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, 2005, the
Operating Partnership owned controlling interests in 67 regional malls, 26
associated centers (each adjacent to a regional shopping mall), seven community
centers and three office buildings. The Operating Partnership consolidates the
financial statements of all entities in which it has a controlling financial
interest. The Operating Partnership owned non-controlling interests in five
regional malls and two associated centers. Because major decisions such as the
acquisition, sale or refinancing of principal partnership assets must be
approved by one or more of the other partners, the Operating Partnership does
not control these partnerships and, accordingly, accounts for these investments
using the equity method. The Operating Partnership had four mall expansions,
three open-air shopping centers, one associated center, one community center and
one community center expansion under construction at September 30, 2005. 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, 2005, 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 53.5%
limited partner interest for a combined interest held by CBL of 55.1%.
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, 2005, CBL's Predecessor owned a 15.2% limited partner interest, Jacobs owned
a 20.6% limited partner interest and third parties owned a 9.1% limited partner
interest in the Operating Partnership. CBL's Predecessor also owned 5.7 million
shares of CBL's common stock at September 30, 2005, for a total combined
effective interest of 20.1% 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 both 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".
7
At the Company's Annual Meeting of Shareholders on May 9, 2005, the
Company's shareholders approved an increase in the authorized shares of the
common stock under the Company's amended and restated certificate of
incorporation to 180,000,000 shares from 95,000,000 shares. On May 10, 2005, the
Company's Board of Directors approved a two-for-one stock split of the Company's
common stock, which was effected in the form of a stock dividend. The record
date for the stock split was June 1, 2005, and the distribution date was June
15, 2005. The Company retained the current par value of $0.01 per share for all
shares of common stock. All references to numbers of common shares and per share
data in the accompanying consolidated financial statements and notes thereto
have been adjusted to reflect the stock split on a retroactive basis.
Shareholders' equity reflects the stock split through a reclassification of $313
from Additional Paid-In Capital to Common Stock, which represents the par value
of the additional shares resulting from the stock split. The Operating
Partnership currently has common units and special common units of limited
partner interest outstanding that may be exchanged by their holders, under
certain circumstances, for shares of common stock on a one-for-one basis. These
common units and special common units were also split on a two-for-one basis so
that they continue to be exchangeable on a one-for-one basis into shares of the
Company's common stock.
Note 2 - Joint Ventures
Investment in Unconsolidated Affiliates
---------------------------------------
At September 30, 2005, the Company had investments in the following 11
partnerships and joint ventures, which are accounted for using the equity method
of accounting:
Company's
Joint Venture Property Name Interest
-------------------------------------------------------------------------------------------------------
Governor's Square IB Governor's Plaza 50.0%
Governor's Square Company Governor's Square 47.5%
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 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%
High Pointe Commons, LP High Pointe Commons 50.0%
Condensed combined financial statement information for the unconsolidated
affiliates is as follows:
Company's Share for the
Total for the Three Months Three Months
Ended September 30, Ended September 30,
------------------------------- ------------------------------
2005 2004 2005 2004
--------------- -------------- ------------- --------------
Revenues $24,656 $26,006 $8,638 $7,288
Depreciation and amortization (7,127) (7,120) (2,207) (1,862)
Interest expense (7,164) (6,492) (3,009) (1,658)
Other operating expenses (7,686) (6,557) (2,686) (1,883)
Discontinued operations 69 1,431 6 143
Gain (loss) on sales of real estate
assets 188 (1,111) 253 (621)
--------------- -------------- ------------- --------------
Net income $ 2,936 $ 6,157 $ 995 $1,407
=============== ============== ============= ==============
8
Company's Share for the
Total for the Nine Months Nine Months
Ended September 30, Ended September 30,
------------------------------- ------------------------------
2005 2004 2005 2004
--------------- -------------- ------------- --------------
Revenues $99,597 $78,970 $27,385 $21,104
Depreciation and amortization (24,935) (18,702) (6,127) (4,605)
Interest expense (28,273) (18,880) (9,069) (4,734)
Other operating expenses (27,794) (20,144) (8,267) (5,572)
Discontinued operations 499 1,646 42 164
Gain on sales of real estate assets 4,674 2,478 2,805 596
--------------- -------------- ------------- --------------
Net income $23,768 $25,368 $6,769 $ 6,953
=============== ============== ============= ==============
The third phase of the Company's joint venture transaction with Galileo
America, Inc. closed on January 5, 2005, when the Company sold its interests in
two power centers, one community center and one community center expansion to
the joint venture, Galileo America LLC ("Galileo America"), for $58,600, which
consisted of $42,529 in cash, the joint venture's assumption of $12,141 of debt,
$3,596 representing the Company's interest in Galileo America and closing costs
of $334. The real estate assets and related mortgage notes payable of the
properties in the third phase were reflected as held for sale as of January 1,
2004, the date that it was determined these assets met the criteria to be
reflected as held for sale. The Company did not record any depreciation expense
on these assets during the nine months ended September 30, 2005 and 2004. The
Company recognized a loss on impairment of real estate assets of $1,947 in
December 2004 and an additional loss on impairment of real estate assets of $262
during the nine months ended September 30, 2005 related to the properties
included in the third phase.
On August 10, 2005, the Company transferred its 8.4% ownership interest in
Galileo America to Galileo America in exchange for Galileo America's interest in
two community centers: Springdale Center in Mobile, AL, and Wilkes-Barre
Township Marketplace in Wilkes-Barre Township, PA. The two properties had a fair
value of $60,000. The Company recognized a gain of $42,022 on the redemption of
its interest in Galileo America, which represents the excess of the fair value
of the two properties over the carrying amount of the Company's investment in
Galileo America of $17,978. The Company has the right to put the two properties
to Galileo America for $60,000 in cash at any time for one year following the
redemption, as well as additional property at Springdale Center that the Company
currently holds in a ground lease for $3,000 in cash. The Company also entered
into an agreement to provide advisory services to Galileo America for a period
of three years in exchange for $1,000 per year.
The Company sold its management and advisory contracts with Galileo America
to New Plan Excel Realty Trust, Inc. ("New Plan") for $22,000 in cash and, after
reductions for closing costs, recognized a gain of $21,619 during the three
months ended September 30, 2005. The Company also transferred its remaining
obligations of $3,818 under the master lease agreement to New Plan by paying New
Plan a cash payment of $1,925. The Company recognized a gain of $1,893 during
the three months ended September 30, 2005, as a result of the settlement of the
remaining master lease liability.
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 the third anniversary of the closing and will pay the Company a
management fee of $1,000 per year. At anytime after November 22, 2007, New Plan
may terminate the agreement by paying the Company a termination fee of $7,000.
The Company will recognize management fee income beginning on the third
anniversary of the closing as it provides services under the management
contract. If and when New Plan should terminate the management agreement with
the Company, the Company will recognize the $7,000 termination fee as gain.
Separately, Galileo America entered into an agreement to acquire New Plan's
interest in a portfolio of properties. Under the terms of its agreement with
Galileo America, the Company received an acquisition fee of $8,000 related to
that transaction, which was recognized as management fee revenues during the
three months ended September 30, 2005.
9
As a result of the disposition of its ownership interest in Galileo America
and the sale of the related management and advisory contracts, the Company
recorded additional compensation expense of $1,301 in the three months ended
September 30, 2005 related to the severance of affected personnel, including
$736 related to the accelerated vesting of stock-based compensation awards for
certain of the affected personnel.
Other
-----
In September 2005, Imperial Valley Mall L.P. obtained a ten-year,
non-recourse mortgage note payable of $60,000 that has a fixed interest rate of
4.985% and matures in September 2015. The proceeds of the loan were used to
retire the outstanding borrowings of $58,265 under the construction loan that
was incurred to develop Imperial Valley Mall.
In April 2005, the Company formed a joint venture with Jacobs to develop
Gulf Coast Town Center in Lee County (Ft. Myers/Naples), Florida. Under the
terms of the joint venture agreement, the Company initially contributed $40,335
for a 50% interest in the joint venture, the proceeds of which were used to
refund the aggregate acquisition and development costs incurred with respect to
the project that were previously paid by Jacobs. The Company will also provide
any additional equity necessary to fund the development of the property, as well
as to fund up to an aggregate of $30,000 of operating deficits of the joint
venture. The Company will receive a preferred return of 11% on its invested
capital in the joint venture and will, after payment of such preferred return
and repayment of the Company's invested capital, share equally with Jacobs in
the joint venture's profits.
The joint venture arrangement provides the Company with the right to put
its 50% ownership interest to Jacobs if certain approvals of tenants and
government entities that are required for the continued development of the
project are not obtained by the second anniversary of the joint venture
agreement. The put right provides that Jacobs will acquire the Company's 50%
ownership interest for an amount equal to the total unreturned equity funded by
the Company plus any accrued and unpaid preferred return on that equity.
Based on its evaluation of the provisions of Financial Accounting Standards
Board Interpretation No. 46(R), Consolidation of Variable Interest Entities
("FIN 46(R)"), the Company has determined that the joint venture is a variable
interest entity in which it is the primary beneficiary. Therefore, the joint
venture is included in the Company's consolidated financial statements
Note 3 - Mortgage and Other Notes Payable
Mortgage and other notes payable consisted of the following at September
30, 2005 and December 31, 2004, respectively:
September 30, 2005 December 31, 2004
------------------------------- ------------------------------
Weighted Weighted
Average Average
Interest Interest
Amount Rate(1) Amount Rate(1)
--------------- -------------- ------------- -------------
Fixed-rate debt:
Non-recourse loans on operating properties $ 2,710,984 6.30% $ 2,688,186 6.38%
Variable-rate debt:
Recourse term loans on operating properties 189,150 4.68% 207,500 3.45%
Construction loans 57,667 5.20% 14,593 3.94%
Lines of credit 706,285 4.82% 461,400 3.37%
--------------- -------------
Total variable-rate debt 953,102 4.81% 683,493 3.41%
--------------- -------------
Total $ 3,664,086 5.91% $ 3,371,679 5.78%
=============== =============
(1) Weighted-average interest rate including the effect of debt premiums, but
excluding amortization of deferred financing costs.
10
During the three months ended September 30, 2005, the Company retired two
mortgage notes payable totaling $52,635, including unamortized debt premiums of
$1,329. The Company recognized a loss on extinguishment of debt in the amount of
$44, which consisted of a prepayment fee of $1,125 and the write-off of
unamortized deferred financing costs of $248, offset by the write-off of the
unamortized debt premium of $1,329.
Unsecured Line of Credit
------------------------
During September 2005, the Company increased the availability under its
unsecured credit facility from $400,000 to $500,000. This credit facility bears
interest at the London Interbank Offered Rate ("LIBOR") plus a margin of 90 to
145 basis points based on the Company's leverage, as defined in the agreement.
The credit facility matures in August 2006 and has three one-year extension
options, which are at the Company's election. At September 30, 2005, the
outstanding borrowings of $256,000 under the unsecured credit facility had a
weighted average interest rate of 4.9125%.
Secured Lines of Credit
-----------------------
The Company has four secured lines of credit that are used for
construction, acquisition, and working capital purposes. Each of these lines is
secured by mortgages on certain of the Company's operating properties. The
following summarizes certain information about the secured lines of credit as of
September 30, 2005:
Total Total Maturity
Available Outstanding Date
----------------------------------------------------
$ 373,000 $ 368,150 February 2006
100,000 52,135 June 2007
20,000 20,000 March 2007
10,000 10,000 April 2007
-------------------------------------
$ 503,000 $ 450,285
=====================================
Borrowings under the secured lines of credit had a weighted average
interest rate of 4.76% at September 30, 2005.
Letters of Credit
-----------------
At September 30, 2005, the Company had additional secured lines of credit
with a total commitment of $27,123 that can only be used for issuing letters of
credit. The total outstanding amount under these lines of credit was $8,263 at
September 30, 2005.
Covenants and Restrictions
--------------------------
Twenty malls, five associated centers, two community centers and the
corporate office building are owned by special purpose entities that are
included in the Company's 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.
The weighted average remaining term of the Company's consolidated debt was
3.9 years at September 30, 2005 and 4.7 years at December 31, 2004. Of the
$925,256 of debt that will mature before September 30, 2006, the Company has
extension options that will extend the maturity date of $813,300 of that debt
11
beyond September 30, 2006. The two mortgage notes payable comprising the
remaining $111,956 were included in the refinancing transaction that is
discussed in Note 13 - Subsequent Events.
Note 4 - Acquisitions
Effective June 1, 2005, the Company acquired a 70% joint venture interest
in Laurel Park Place, a regional mall in Livonia, MI, for a purchase price of
$80,363. The purchase price consisted of $2,828 in cash, the assumption of
$50,654 of nonrecourse debt that bears interest at a stated rate of 8.50% and
matures in December 2012 and the issuance of 571,700 Series L Special Common
Units ("L-SCUs") in the Operating Partnership with a fair value of $26,881
($47.02 per special common unit). The Company recorded a debt premium of
$10,552, computed using an estimated market interest rate of 5.00%, since the
debt assumed was at an above-market interest rate compared to similar debt
instruments at the date of acquisition.
The L-SCUs receive a minimum distribution of $3.03 per unit per year. If
the distribution on the common units exceeds $3.03 per unit per year for any
period, then the L-SCUs will receive a distribution equal to the amount paid on
the common units. Upon the earlier to occur of June 1, 2020, or when the
distribution on the common units exceeds $3.03 per unit for four consecutive
calendar quarters, the L-SCUs will thereafter receive a distribution equal to
the amount paid on the common units.
The Company may elect to acquire the remaining 30% ownership interest in
the joint venture, or a portion thereof, at anytime following the acquisition
date for a purchase price of $14,000, which will be paid either through the
issuance of common units of limited partner interest in the Operating
Partnership or with cash, at the Company's election. If the Company exercises
its right to acquire the remaining 30% joint venture interest, or a portion
thereof, prior to December 2012 through the issuance of common units, the common
units issued will not be entitled to receive distributions until after December
2012. If the Company does not exercise its right to acquire the remaining 30%
joint venture interest, then the joint venture partner owning that interest will
receive a preferred return equal to the greater of 12% or the 10-year treasury
rate plus 800 basis points on the portion of its joint venture interest that has
not yet been acquired by the Company. The Company receives all of the profits
and losses of this joint venture and is responsible for all of its debt. The
$14,000 value of the minority partner's interest has been recorded in Accounts
Payable and Accrued Liabilities.
On July 14, 2005, the Company acquired The Mall of Acadiana, a
super-regional mall in Lafayette, LA, for a cash purchase price, including
transaction costs, of $175,204. The Company also entered into 10-year lease
agreements for 13.4 acres of land adjacent to The Mall of Acadiana, which
provide the Company the right to purchase the land for a cash purchase price of
$3,327 during the first year of the lease term, $3,510 during the second year
and amounts increasing by 10% per year for each year of the lease term
thereafter. After the first year, the seller may put the land to the Company for
a price equal to the amounts set forth in the previous sentence. The Company
also obtained a ten-year option to acquire another adjacent 14.9 acre tract of
land for a cash purchase price of $3,245 during the first six months of the
option, which increases to $3,407 during the second six months of the option and
to $3,570 during the remaining nine years of the option.
The results of operations of Laurel Park Place and The Mall of Acadiana
have been included in the consolidated financial statements since their
respective dates of acquisition. Pro forma financial information reflecting the
acquisitions has not been provided because the acquisitions are not material in
the aggregate. The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed as of the respective acquisition dates:
12
Land $ 35,573
Buildings and improvements 237,198
Above-market leases 12,107
In-place leases 10,475
--------------
Total assets 295,353
Mortgage note payables assumed (50,654)
Premiums on mortgage note payables assumed (10,552)
Below-market leases (15,233)
--------------
Net assets acquired $ 218,914
==============
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:
Associated Community
Three Months Ended September 30, 2005 Malls Centers Centers All Other Total
-------------------------------------- ------------ ------------ ------------ ----------- -----------
Revenues $ 196,589 $ 8,357 $ 3,625 $ 15,598 $ 224,169
Property operating expenses (1) (63,112) (1,965) (1,223) 2,102 (64,198)
Interest expense (45,201) (1,168) (738) (5,539) (52,646)
Other expense -- -- -- (3,769) (3,769)
Gain on sales of real estate assets 1,180 -- 2,408 15 3,603
------------ ------------ ------------ ----------- -----------
Segment profit and loss $ 89,456 $ 5,224 $ 4,072 $ 8,407 107,159
============ ============ ============ ===========
Depreciation and amortization expense (46,038)
General and administrative expense (10,221)
Interest income 1,937
Loss on extinguishment of debt (44)
Gain on sale of real estate assets 42,882
Gain on sale of management contracts 21,619
Equity in earnings of unconsolidated
affiliates 995
Minority interest in earnings (50,541)
-----------
Income before discontinued operations $ 67,748
===========
Capital expenditures (2) $ 247,596 $ 5,002 $ 73,070 $ 41,222 $ 366,890
Associated Community
Three Months Ended September 30, 2004 Malls Centers Centers All Other Total
-------------------------------------- ------------ ------------ ------------ ----------- -----------
Revenues $ 173,188 $ 7,387 $ 4,819 $ 8,242 $ 193,636
Property operating expenses (1) (58,344) (1,582) (1,113) 2,707 (58,332)
Interest expense (41,273) (1,215) (783) (2,771) (46,042)
Other expense -- -- -- (5,681) (5,681)
Gain (loss) on sales of real estate
assets (178) 327 1,369 4 1,522
------------ ------------ ------------ ----------- -----------
Segment profit and loss $ 73,393 $ 4,917 $ 4,292 $ 2,501 85,103
============ ============ ============ ===========
Depreciation and amortization expense (37,901)
General and administrative expense (8,280)
Interest income 836
Equity in earnings of unconsolidated
affiliates 1,407
Minority interest in earnings (17,598)
-----------
Income before discontinued operations $ 23,567
===========
Capital expenditures (2) $ 265,087 $ 36,366 $ 5,399 $ 5,289 $ 312,141
13
Associated Community
Nine Months Ended September 30, 2005 Malls Centers Centers All Other Total
-------------------------------------- ------------ ------------ ------------ ----------- -----------
Revenues $ 570,492 $ 25,124 $ 7,857 $ 30,597 $ 634,070
Property operating expenses (1) (181,830) (5,917) (2,209) 10,118 (179,838)
Interest expense (133,538) (3,517) (2,155) (12,612) (151,822)
Other expense -- -- -- (10,256) (10,256)
Gain on sales of real estate assets 1,200 -- 4,084 5,415 10,699
------------ ------------ ------------ ----------- -----------
Segment profit and loss $ 256,324 $ 15,690 $ 7,577 $ 23,262 302,853
============ ============ ============ ===========
Depreciation and amortization expense (130,663)
General and administrative expense (28,641)
Loss on impairment of real estate
assets (262)
Interest income 6,214
Loss on extinguishment of debt (928)
Gain on sale of real estate assets 42,882
Gain on sale of management contracts 21,619
Equity in earnings of unconsolidated
affiliates 6,769
Minority interest in earnings (90,837)
-----------
Income before discontinued operations $ 129,006
===========
Total assets $4,938,584 $270,593 $145,346 $267,566 $5,622,089
Capital expenditures (2) $ 428,586 $ 15,127 $ 74,177 $121,453 $ 639,343
Associated Community
Nine Months Ended September 30, 2004 Malls Centers Centers All Other Total
-------------------------------------- ------------ ------------ ------------ ----------- -----------
Revenues $ 487,231 $ 21,874 $ 11,732 $ 20,461 $ 541,298
Property operating expenses (1) (163,079) (4,667) (3,365) 11,242 (159,869)
Interest expense (117,944) (3,611) (2,301) (5,418) (129,274)
Other expense -- -- -- (13,636) (13,636)
Gain on sales of real estate assets 848 327 24,933 194 26,302
------------ ------------ ------------ ----------- -----------
Segment profit and loss $ 207,056 $ 13,923 $ 30,999 $ 12,843 264,821
============ ============ ============ ===========
Depreciation and amortization expense (103,335)
General and administrative expense (24,505)
Interest income 2,422
Equity in earnings of unconsolidated
affiliates 6,953
Minority interest in earnings (63,532)
-----------
Income before discontinued operations $ 82,824
===========
Total assets $4,383,552 $244,366 $157,466 $132,552 $4,917,936
Capital expenditures (2) $ 788,742 $ 36,799 $ 11,004 $ 46,342 $ 882,887
(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:
14
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- ------------------------------
2005 2004 2005 2004
--------------- --------------- --------------- -------------
Weighted average shares outstanding 63,423 61,908 62,994 61,418
Effect of nonvested stock awards (483) (368) (301) (288)
--------------- --------------- --------------- -------------
Denominator - basic earnings per share 62,940 61,540 62,693 61,130
Effect of dilutive stock options, nonvested
stock awards and deemed shares related to
deferred compensation plans 2,313 2,426 2,280 2,424
--------------- --------------- --------------- -------------
Denominator - diluted earnings per share 65,253 63,966 64,973 63,554
=============== =============== =============== =============
Note 7- Comprehensive Income
Comprehensive income includes all changes in shareholders' equity during
the period, except those resulting from investments by shareholders and
distributions to shareholders. Comprehensive income includes other comprehensive
income in the three months and nine months ended September 30, 2005 of $310,
which represents unrealized gain on marketable securities that are classified as
available for sale. Comprehensive income was equal to net income for the three
months and nine months ended September 30, 2004.
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.
Based on environmental studies completed to date, management believes any
potential exposure related to environmental cleanup will not materially affect
the Company's financial position or results of operations.
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,
2005, 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 had guaranteed 100% of the construction debt incurred by
Imperial Valley Mall L.P., an unconsolidated affiliate in which the Company owns
a 60% interest, to develop Imperial Valley Mall. The construction loan was
refinanced during the three months ended September 30, 2005, and the Company was
released from its guaranty.
The Company has issued various bonds that it would have to satisfy in the
event of non-performance. At September 30, 2005, the total amount outstanding on
these bonds was $18,094.
Note 9 - Stock-Based Compensation
As noted in Note 2 - Joint Ventures, the Company recognized $736 of
compensation expense related to the accelerated vesting of stock-based
compensation awards for certain personnel that were affected by the disposition
of the Company's ownership interest in Galileo America. This amount included the
accelerated amortization of $256 in deferred compensation plus an additional
$480 of compensation expense, which represents the excess of the fair value of
the unvested awards as of the new measurement date over the intrinsic value of
the awards as of their respective grant dates.
Historically, the Company accounted for its stock-based compensation plans
under the recognition and measurement principles of Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees" (APB No. 25) and
related Interpretations. Effective January 1, 2003, the Company elected to begin
15
recording the expense associated with stock options granted after January 1,
2003, on a prospective basis in accordance with the fair value and transition
provisions of SFAS No. 123, "Accounting for Stock Based Compensation", as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure - An Amendment of FASB Statement No. 123." The Company has not
granted any stock options since January 1, 2003. The Company records
compensation expense for awards of common stock based on the fair value of the
common stock on the date of grant and the related vesting period, if any.
No stock-based compensation expense related to stock options granted prior
to January 1, 2003, other than as discussed above, has been reflected in net
income since all options granted had an exercise price equal to the fair value
of the Company's common stock on the date of grant. Therefore, stock-based
compensation expense included in net income available to common shareholders in
the three months ended September 30, 2005 and 2004, and the nine months ended
September 30, 2005 and 2004, is less than that which would have been recognized
if the fair value method had been applied to all stock-based awards since the
effective date of SFAS No. 123. The following table illustrates the effect on
net income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to all outstanding and unvested awards in
each period:
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------- -------------------------
2005 2004 2005 2004
----------- ----------- ---------- ---------
Net income available to common shareholders, as reported $ 60,093 $ 19,764 $106,247 $ 71,661
Stock-based compensation expense included in reported
net income available to common shareholders 1,936 514 3,872 1,799
Total stock-based compensation expense determined under
fair value method (2,033) (641) (4,194) (2,181)
----------- ----------- ---------- ----------
Pro forma net income available to common shareholders $ 59,996 $ 19,637 $105,925 $ 71,279
=========== =========== ========== ==========
Net income available to common shareholders per share:
Basic, as reported $ 0.95 $ 0.32 $ 1.69 $ 1.17
=========== =========== ========== ==========
Basic, pro forma $ 0.95 $ 0.32 $ 1.69 $ 1.17
=========== =========== ========== ==========
Diluted, as reported $ 0.92 $ 0.31 $ 1.64 $ 1.13
=========== =========== ========== ==========
Diluted, pro forma $ 0.92 $ 0.31 $ 1.63 $ 1.12
=========== =========== ========== ==========
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, 2005 and 2004:
Nine Months Ended
September 30,
-------------------------
2005 2004
-------------------------
Debt assumed to acquire property interests, including premiums $ 61,206 $ 281,892
=========================
Debt consolidated from application of FASB Interpretation No. 46 $ -- $ 38,147
=========================
Minority interest issued in acquisitions of real estate assets $ 40,881 $ 46,212
=========================
Debt assumed by buyer on sales of real estate assets $ 12,141 $ --
=========================
Additions to real estate assets accrued but not yet paid $ 25,253 $ 9,606
=========================
Note 11 - Discontinued Operations
In March 2005, the Company sold five community centers for an aggregate
sales price of $12,100. The Company previously recognized an aggregate loss on
impairment of real estate assets of $617 on these community centers in December
2004 and recognized an additional loss on impairment of $32 during the three
months ended March 31, 2005. Total revenues for these community centers were $0
and $478 for the three months ended September 30, 2005 and 2004, respectively,
and $420 and $1,462 for the nine months ended September 30, 2005 and 2004,
respectively. All prior periods presented have been restated to reflect the
operations of these community centers as discontinued operations.
16
Note 12 - Recent Accounting Pronouncements
In December 2004, the FASB released its final revised standard, SFAS No.
123 (Revised 2004), "Share-Based Payment." SFAS No. 123(R) requires that a
public entity measure the cost of equity based service awards based on the
grant-date fair value of the award. That cost will be recognized over the period
during which an employee is required to provide service in exchange for the
award or the vesting period. No compensation cost is recognized for equity
instruments for which employees do not render the requisite service. In April
2005, the Securities and Exchange Commission amended Regulation S-X to modify
the effective date so that SFAS No. 123(R) can be adopted beginning with the
first interim reporting period of the next fiscal year beginning after June 15,
2005 instead of the first interim period beginning after June 15, 2005. The
Company previously adopted the fair value provisions of SFAS No. 123,
"Accounting for Stock Based Compensation", as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - An
Amendment of FASB Statement No. 123" effective January 1, 2003. The Company does
not expect the adoption of this standard to have a material effect on its
financial position or results of operations.
In December 2004, FASB issued SFAS No. 153, "Exchange of Nonmonetary
Assets, an amendment of APB Opinion No. 29," which addresses the measurement of
exchanges of nonmonetary assets. SFAS No. 153 eliminates the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchange of nonmonetary assets that do not have commercial
substance. It also specifies that a nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS No. 153 is effective beginning
July 1, 2005. The adoption of SFAS No. 153 did not have a material impact on the
Company's financial position, results of operations or cash flows.
In June 2005, the FASB issued Emerging Issues Task Force ("EITF") Issue No.
04-05, "Determining Whether a General Partner, or the General Partners as a
Group, Controls a Limited Partnership or Similar Entity When the Limited
Partners Have Certain Rights." EITF Issue No. 04-05 provides a framework for
determining whether a general partner controls, and should consolidate, a
limited partnership or a similar entity. EITF Issue No. 04-05 is effective after
June 29, 2005, for all newly formed limited partnerships and for any
pre-existing limited partnerships that modify their partnership agreements after
that date. General partners of all other limited partnerships are required to
apply the consensus no later than the beginning of the first reporting period in
fiscal years beginning after December 15, 2005. The Company does not expect that
the adoption of EITF Issue No. 04-05 will have a material impact on its
financial position, results of operations or cash flows.
In June 2005, the FASB issued FSP 78-9-1, "Interaction of AICPA Statement
of Position 78-9 and EITF Issue No. 04-05." The EITF acknowledged that the
consensus in EITF Issue No. 04-05 conflicts with certain aspects of Statement of
Position ("SOP") 78-9, "Accounting for Investments in Real Estate Ventures." The
EITF agreed that the assessment of whether a general partner, or the general
partners as a group, controls a limited partnership should be consistent for all
limited partnerships, irrespective of the industry within which the limited
partnership operates. Accordingly, the guidance in SOP 78-9 was amended in FSP
78-9-1 to be consistent with the guidance in EITF Issue No. 04-05. The effective
dates for this FSP are the same as those mentioned above in EITF Issue No.
04-05. The Company does not expect that the adoption of FSP 78-9-1 will have a
material impact on its financial position, results of operations or cash flows.
Note 13 - Subsequent Events
Special One-Time Dividend For Common Stock
------------------------------------------
On October 5, 2005, the Company's Board of Directors declared a special
one-time cash dividend for the Company's common stock of $0.09 per share. The
dividend is payable on January 16, 2006, to shareholders of record as of
December 30, 2005. The special dividend was declared as a result of the taxable
gains generated from the sale of the Company's management and advisory contracts
with Galileo America that is discussed in Note 2 - Joint Ventures.
17
Acquisitions
------------
On October 17, 2005, the Company entered into definitive agreements to
acquire a portfolio of three malls. The purchase price will consist of cash of
$93,830, the assumption of long-term, fixed-rate debt of $368,250 and the
issuance of Series K Special Common Units ("K-SCUs") of the Operating
Partnership. The K-SCUs will receive a dividend at a rate of 6.0%, or $2.85 per
K-SCU, for the first year following the close of the transaction and 6.25%, or
$2.96875 per K-SCU, thereafter. When the quarterly distribution on the Operating
Partnership's common units exceeds the quarterly K-SCU distribution for four
consecutive quarters, the K-SCUs will receive distributions thereafter at the
rate equal to that paid on the Operating Partnership's common units. At any time
following the first anniversary of the closing date, the holders of the K-SCUs
may exchange them, on a one-for-one basis, for shares of the Company's common
stock or, at the Company's election, their cash equivalent.
On November 7, 2005, the Company purchased Layton Hills Mall, a regional
mall in Layton (Salt Lake City), UT, for a cash purchase price of $121,400.
Mortgage Notes Payable
----------------------
In October 2005, the Company obtained four new mortgage notes payable
totaling $392,000, which are ten-year, non-recourse loans having a weighted
average interest rate of 5.02%. In connection with obtaining these new loans,
the Company retired four loans totaling $179,471. As a result of the retirement
of these four loans, the Company will recognize a loss on extinguishment of debt
of $5,364 in October 2005, which includes prepayment fees of $4,548 and the
write-off of unamortized deferred financings costs of $816.
Settlement of Deferred Compensation Agreement
---------------------------------------------
On October 24, 2005, the Company and one of its officers amended the
deferred compensation agreement between them to change the final termination
date of the agreement from January 2, 2005 to September 30, 2005 and to not
extend the agreement any further. As a result of the termination of the
agreement, the Company issued 174,403 shares of common stock to the officer. The
Company had accrued all compensation expense related to the agreement as it was
earned during the term of the agreement.
Joint Venture
-------------
On October 24, 2005, the Company entered into a definitive agreement to
form a 50/50 joint venture with Jacobs to own Triangle Town Center and its
associated and lifestyle centers, Triangle Town Place and Triangle Town Commons,
in Raleigh, NC. The Company will assume management, leasing and any future
development responsibilities of the properties.
The joint venture property is valued at $283,500. Concurrent with its
formation, the joint venture will enter into a new ten-year, fixed rate
non-recourse loan of $200,000, secured by the collective centers. The proceeds
from the loan will be used to retire an existing construction loan totaling
approximately $121,000 with the balance to be paid to Jacobs as a partial return
of Jacobs' equity. The Company will make an initial capital contribution of
$2,250 to the joint venture. The joint venture equity will be equalized between
Jacobs and the Company through future contributions by the Company and through
property cash flow distributions.
Under the terms of the joint venture agreement, the Company is required to
fund any additional equity necessary for capital expenditures, including future
development or expansion of the property, and any operating deficits of the
joint venture. The Company has guaranteed funding of such items up to a maximum
of $50,000. The joint venture's profits will be allocated 50/50 to Jacobs and
18
the Company. The Company will receive a preferred return on its invested capital
in the joint venture and will, after payment of such preferred return and
repayment of the Company's invested capital, and repayment of the balance of
Jacobs' equity, share equally with Jacobs in the joint venture's cash flows.
The Company is currently evaluating the provisions of FIN 46(R) as they
pertain to this transaction.
Share Repurchase Plan
---------------------
On November 1, 2005, the Company announced that its Board of Directors had
approved a plan to repurchase up to $60,000 of the Company's common stock by
December 31, 2006. Any stock repurchases will be made from time to time through
open market purchases, in accordance with the Securities and Exchange
Commission's safe harbors, and will be funded through the Company's available
cash and lines of credit. The timing and price of any stock repurchases will be
determined by the market value in effect from time to time for the Company's
common stock. The Company is not obligated to repurchase any shares of stock
under the plan, and the Company may terminate the stock repurchase plan at any
time.
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. 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 and
community centers. Our shopping center properties are located in 24 states, but
primarily in the southeastern and midwestern United States.
As of September 30, 2005, we owned controlling interests in 67 regional
malls, 26 associated centers (each adjacent to a regional shopping mall), seven
community centers and three office buildings. We consolidate the financial
statements of all entities in which we have a controlling financial interest. As
of September 30, 2005, we owned non-controlling interests in five regional malls
and two associated centers. Because major decisions such as the acquisition,
sale or refinancing of principal partnership or joint venture assets must be
approved by one or more of the other partners, we do not control these
19
partnerships and joint ventures and, accordingly, account for these investments
using the equity method. We had four mall expansions, three open-air shopping
centers, one associated center, one community center and one community center
expansion under construction at September 30, 2005. 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 reduce borrowings on our credit facilities.
RESULTS OF OPERATIONS
The following significant transactions impact both the comparison of the
results of operations for the three months ended September 30, 2005 to the
results of operations for the three months ended September 30, 2004 and the
comparison of the results of operations for the nine months ended September 30,
2005 to the results of operations for the nine months ended September 30, 2004:
|X| The acquisition of ten malls and two associated centers and the
opening of two malls, one associated center and one community center
since January 1, 2004 (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 open
for one complete calendar year. The New Properties are as follows:
Project Name Location Date Acquired / Opened
------------------------------------------- ----------------------------- ------------------------
Acquisitions:
-------------
Honey Creek Mall Terre Haute, IN March 2004
Volusia Mall Daytona Beach, FL March 2004
Greenbrier Mall Chesapeake, VA April 2004
Chapel Hill Mall Akron, OH May 2004
Chapel Hill Suburban Akron, OH May 2004
Park Plaza Mall Little Rock, AK June 2004
Monroeville Mall Monroeville, PA July 2004
Monroeville Annex Monroeville, PA July 2004
Northpark Mall Joplin, MO November 2004
Mall del Norte Laredo, TX November 2004
Laurel Park Place Livonia, MI June 2005
The Mall of Acadiana Lafayette, LA July 2005
Developments:
-------------
Coastal Grand-Myrtle Beach (50/50 joint Myrtle Beach, SC March 2004
venture)
The Shoppes at Panama City Panama City, FL March 2004
Imperial Valley Mall (60/40 joint venture) El Centro, CA March 2005
Chicopee Marketplace Chicopee, MA September 2005
|X| In January 2005, two power centers, one community center and one
community center expansion were sold to Galileo America LLC ("Galileo
America"). Since we had a continuing involvement with these properties
through our ownership interest in Galileo America and the agreement
under which we were the exclusive manager of the properties, the
results of operations of these properties were not reflected in
discontinued operations. Therefore, the three months ended September
30, 2005, do not include a significant amount of revenues and expenses
related to these properties, whereas the three months ended September
30, 2004 include a full period of revenues and expenses related to
these properties.
20
In August 2005, Galileo America redeemed our 8.4% ownership interest
by distributing two community centers to us: Springdale Center in
Mobile, AL, and Wilkes-Barre Township Marketplace in Wilkes-Barre
Township, PA. We also sold our management and advisory contracts with
Galileo America to a third party. See Note 2 to the consolidated
financial statements for a more thorough discussion of these
transactions.
|X| Properties that were in operation as of January 1, 2004 and September
30, 2005 are referred to as the "Comparable Properties."
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2005 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 2004
Revenues
The $30.5 million increase in revenues resulted primarily from increases of
$16.5 million attributable to the New Properties and $8.3 million from the
Comparable Properties. The increase in revenues from the Comparable Properties
was attributable to our achieving higher occupancy combined with an increase in
average base rents from new and renewal leasing activity, percentage rents and
specialty income.
Our cost recovery ratio decreased slightly to 102.0% for the three months
ended September 30, 2005, compared to 102.9% for the three months ended
September 30, 2004.
The increase in revenues was offset slightly by a decrease in revenues of
$2.4 million related to the properties that were sold to the Galileo America
joint venture in January 2005.
Management, development and leasing fees increased $8.2 million, primarily
as a result of an $8.0 million acquisition fee that was received from Galileo
America in connection with its acquisition of a portfolio of properties from a
third party.
Other revenues decreased $0.1 million as a result of a reduction in
revenues of our taxable REIT subsidiary.
Expenses
The $5.9 million increase in property operating expenses, including real
estate taxes and maintenance and repairs, resulted from an increase of $3.8
million attributable to the New Properties and $2.7 million from the Comparable
Properties. These increases were offset by a decrease of $0.6 million
attributable to the properties that were sold to the Galileo America joint
venture in January 2005.
The $8.1 million increase in depreciation and amortization expense resulted
from increases of $7.7 million from the New Properties and $0.4 million from the
Comparable Properties. The increase attributable to the Comparable Properties is
due to ongoing capital expenditures for renovations, expansions, tenant
allowances and deferred maintenance.
General and administrative expenses increased $1.9 million primarily as a
result of $1.3 million of compensation expense related to the severance packages
for individuals affected by the sale of our management and advisory contracts
with Galileo America. The remainder of the increase is primarily related to
annual increases in salaries and benefits of existing personnel, the addition of
new personnel to support our growth and professional fees.
21
Other expense decreased $1.9 million due to a decrease of $1.3 million in
write-offs of abandoned development projects and a decrease of $0.6 million in
the operating expenses of our taxable REIT subsidiary.
Other Income and Expenses
The increase in interest income of $1.1 million results primarily from
interest income on advances that were made to the joint venture that owns
Imperial Valley Mall for the purpose of funding development costs.
Interest expense increased by $6.6 million primarily due to the additional
debt associated with the New Properties and an increase in the weighted average
interest rate of our variable-rate debt as compared to the comparable period of
the prior year.
Gain on Sales
Gain on sales of real estate assets of $46.5 million in the three months
ended September 30, 2005 includes $42.9 million of gains related to the
redemption of our ownership interest in Galileo America, $1.3 million from the
recognition of deferred gain related to properties that were previously sold to
Galileo America and $2.3 million of gains on the sales of three outparcels. The
gain on sales of $1.5 million in the three months ended September 30, 2004 was
primarily related to a gain of $1.3 million on a center that was sold to Galileo
America. The remaining $0.2 million of net gain relates to sales of three
outparcels that were at consolidated properties.
The gain on sales of management contracts of $21.6 million represents the
gain on the sale of our management and advisory contracts with Galileo America
to a third party.
Equity in Earnings of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliates decreased $0.4 million
primarily because of the disposition of our ownership interest in Galileo
America in August 2005. Although our equity earnings of nine of our other
unconsolidated affiliates increased, this was equally offset by reductions in
our equity in earnings of Coastal Grand-Myrtle Beach and Imperial Valley Mall.
The reduction related to Coastal Grand-Myrtle Beach is due to the mortgage loan
that was placed on that property in September 2004, which is at a fixed interest
rate that is higher than the previous variable rate loan. The reduction related
to Imperial Valley Mall is primarily a result of the interest expense on that
property. Interest costs on the debt incurred to develop Imperial Valley Mall
are now being expensed since the property opened in March 2005, whereas in the
prior year period the interest costs were being capitalized as the property was
still under construction.
Discontinued Operations
Discontinued operations in the three months ended September 30, 2005
represent the true up of estimated expenses to actual amounts for properties
sold during previous periods. Discontinued operations in the three months ended
September 30, 2004 represent the results of operations for five community
centers located in Michigan that were sold during the first quarter of 2005 and
the sale of one community center during the three months ended September 30,
2004.
22
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2005 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2004
Revenues
The $92.8 million increase in revenues resulted primarily from increases of
$65.0 million attributable to the New Properties and $23.3 million from the
Comparable Properties. The increase in revenues from the Comparable Properties
was attributable to our achieving higher occupancy combined with an increase in
average base rents from new and renewal leasing activity, percentage rents and
specialty income.
Our cost recovery ratio improved to 102.6% for the nine months ended
September 30, 2005, compared to 99.2% for the nine months ended September 30,
2004. This increase was driven by (i) an increase in total portfolio occupancy
to 93.3% at September 30, 2005 compared to 92.2% at September 30, 2004, (ii)
increased profitability related to utility reimbursements from tenants at the
New Properties and certain existing malls due to the implementation of
efficiency optimizing utility systems and (iii) a $9.6 million improvement in
bad debt expenses and other charges against revenues, as we recognized a net
$2.8 million in the nine months ended September 30, 2005 for recoveries of
accounts receivable that were previously written off, compared with total bad
debt expense and other charges against revenues of $6.8 million in the nine
months ended September 30, 2004.
The increase in revenues was offset slightly by a decrease in revenues of
$7.0 million related to properties that were sold to the Galileo America joint
venture in January 2005.
Management, development and leasing fees increased $11.5 million, primarily
as a result of an $8.0 million acquisition fee that was received from Galileo
America in connection with its acquisition of a portfolio of properties from a
third party. The remainder of the increase was attributable to the higher fee
income received from Galileo America during 2005 through the date of the
disposition of our ownership interest compared to the fees received from Galileo
America during the comparable period of the prior year.
Expenses
The $20.0 million increase in property operating expenses, including real
estate taxes and maintenance and repairs, resulted from an increase of $19.7
million attributable to the New Properties and $2.3 million from the Comparable
Properties, which was offset by decreases of $2.0 million from the properties
that were sold to the Galileo America joint venture in January 2005.
The $27.3 million increase in depreciation and amortization expense
resulted from increases of $21.2 million from the New Properties and $6.1
million from the Comparable Properties. The increase attributable to the
Comparable Properties is due to ongoing capital expenditures for renovations,
expansions, tenant allowances and deferred maintenance.
General and administrative expenses increased $4.1 million as a result of
$1.3 million of compensation expense related to the severance packages for
individuals affected by the sale of our management and advisory contracts with
Galileo America, as well as an additional $2.8 million related primarily to
annual increases in salaries and benefits of existing personnel, the addition of
new personnel to support our growth and professional fees.
Other expense decreased $3.4 million due to a decrease of $2.8 million in
write-offs of abandoned development projects and a decrease of $0.6 million in
the operating expenses of our taxable REIT subsidiary.
23
Other Income and Expenses
The increase in interest income of $3.8 million results primarily from
interest income on advances that were made to the joint venture that owns
Imperial Valley Mall for the purpose of funding development costs.
Interest expense increased by $22.5 million primarily due to the additional
debt associated with the New Properties as well as an increase in the weighted
average interest rate of our variable-rate debt as compared to the comparable
period of the prior year.
Gain on Sales
Gain on sales of real estate assets of $53.6 million in the nine months
ended September 30, 2005 includes $44.2 million of gains related to the
redemption of our ownership interest in Galileo America, $1.0 million from the
recognition of deferred gain related to properties that were previously sold to
Galileo America and $8.4 million of gains on the sales of ten outparcels. The
gain on sales of $26.3 million in the nine months ended September 30, 2004
resulted primarily from the sale of community centers to Galileo America.
The gain on sales of management contracts of $21.6 million represents the
gain on the sale of our management and advisory contracts with Galileo America
to a third party.
Equity in Earnings of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliates decreased $0.2 million.
Although Coastal Grand-Myrtle Beach and Imperial Valley Mall opened in March
2004 and March 2005, respectively, our equity in the earnings of these two
properties was flat compared to the prior year. This was due to the mortgage
loan that was placed on Coastal Grand-Myrtle Beach in September 2004, which is
at a fixed interest rate that is higher than the previous variable rate loan.
Additionally, interest costs on the debt incurred to develop Imperial Valley
Mall are now being expensed since the property opened in March 2005, whereas in
the prior year period the interest costs were being capitalized as the property
was still under construction.
Discontinued Operations
Discontinued operations in the nine months ended September 30, 2005 are
related to five community centers located throughout Michigan that were sold in
March 2005. Discontinued operations in the nine months ended September 30, 2004
represent the results of operations for the same five properties and the true up
of estimated expenses to actual amounts for properties sold during previous
periods.
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
24
currently include Parkway Place in Huntsville, AL, which opened in October 2002;
Coastal Grand-Myrtle Beach in Myrtle Beach, SC, which opened in March 2004; and
Imperial Valley Mall in El Centro, CA, which opened in March 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,
---------------------------------
2005 2004
----------------- ---------------
Malls 89.5% 90.7%
Associated centers 4.0% 4.0%
Community centers * 1.2% 2.2%
Mortgages, office building and other 5.3% 3.1%
* Excludes the community centers that were sold to the Galileo America joint
venture
Sales and Occupancy Costs
Mall store sales (for those tenants who occupy 10,000 square feet or less
and have reported sales) increased by 2.3% on a comparable per square foot basis
to $320.72 per square foot for the trailing twelve months ended September 30,
2005, from $313.48 per square foot for the trailing twelve months ended
September 30, 2004.
Occupancy costs as a percentage of sales for the stabilized malls were
13.5% and 13.7% for the nine months ended September 30, 2005 and 2004,
respectively.
Occupancy
The occupancy of the portfolio was as follows:
At September 30,
-------------------------------------
2005 2004
------------------ ------------------
Total portfolio occupancy 93.3% 92.4%
Total mall portfolio 93.2% 92.7%
Stabilized malls 93.4% 92.7%
Non-stabilized malls 88.0% 91.3%
Associated centers 94.5% 90.4%
Community centers* 92.8% 93.2%
* Excludes the community centers that were sold to the Galileo America joint
venture
Leasing
Average annual base rents per square foot were as follows for each
property type:
At September 30,
-------------------------------------
2005 2004
------------------ ------------------
Stabilized malls $25.85 $24.79
Non-stabilized malls 27.46 26.62
Associated centers 10.16 9.56
Community centers * 9.00 7.98
Other 19.33 18.89
* Excludes the community centers that were sold to the Galileo America joint
venture.
The following table shows the positive results we achieved in increasing
the initial and average base rents through new and renewal leasing during the
second quarter of 2005 for small shop spaces less than 20,000 square feet that
were previously occupied, excluding junior anchors:
25
Base Rent
Per Initial Base Average Base
Square Foot Rent Per Rent Per
Prior Lease Square Foot % Change Square Foot % Change
Square Feet (1) New Lease (2) Initial New Lease (3) Average
------------ ------------- -------------- ---------- ---------------- ----------
Quarter:
Stabilized Malls 465,697 $28.23 $28.89 2.3% $29.70 5.2%
Associated centers 36,568 12.10 14.58 20.5% 15.03 24.2%
Community centers (4) 7,500 19.45 19.88 2.2% 19.93 2.5%
Other 1,335 13.24 14.19 7.2% 14.19 7.2%
------------ ------------- -------------- ---------- ---------------- ----------
511,100 $26.91 $27.70 2.9% $28.47 5.8%
============ ============= ============== ========== ================ ==========
Year-To-Date:
Stabilized Malls 1,626,359 $25.57 $26.73 4.5% $27.41 7.2%
Associated centers 85,901 13.11 16.27 24.1% 16.66 27.1%
Community centers (4) 46,000 16.15 16.33 1.1% 16.36 1.3%
Other 4,422 18.54 21.28 14.8% 21.72 17.2%
------------ ------------- -------------- ---------- ---------------- ----------
1,762,682 $24.70 $25.94 5.0% $26.58 7.6%
============ ============= ============== ========== ================ ==========
(1) Represents the rent that was in place at the end of the lease term.
(2) Represents the rent in place at beginning of the lease terms.
(3) Average base rent over the term of the new lease.
(4) Excludes the community centers that were sold to the Galileo America joint
venture.
LIQUIDITY AND CAPITAL RESOURCES
There was $36.8 million of cash and cash equivalents as of September 30,
2005, an increase of $11.0 million from December 31, 2004. 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, 2005, increased by $41.3 million to $270.5 million from $229.2
million during the nine months ended September 30, 2004, which was primarily due
to the incremental operations of the New Properties plus improvements in the
operations of the Comparable Properties.
Debt
During the nine months ended September 30, 2005, we borrowed $395.5 million
under mortgage and other notes payable and paid $145.6 million to reduce
outstanding borrowings under mortgage and other notes payable. We also assumed
$50.6 million and recorded a debt premium of $10.6 million, in connection with
the acquisition of Laurel Park Place.
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 and
liquidity (in thousands):
26
Weighted
Average
Minority Unconsolidated Interest
Consolidated Interests Affiliates Total Rate(1)
------------- ---------------- --------------- ------------- ---------------
September 30, 2005:
Fixed-rate debt:
Non-recourse loans on operating properties $ 2,710,984 $ (52,168) $ 116,637 $2,775,453 6.27%
------------- ---------------- --------------- -------------
Variable-rate debt:
Recourse term loans on operating properties 189,150 -- 26,600 215,750 4.79%
Construction loans 57,667 -- -- 57,667 5.20%
Lines of credit 706,285 -- -- 706,285 4.82%
------------- ---------------- --------------- -------------
Total variable-rate debt 953,102 -- 26,600 979,702 4.81%
------------- ---------------- --------------- -------------
Total $ 3,664,086 $ (52,168) $ 143,237 $3,755,155 5.89%
============= ================ =============== =============
Weighted
Average
Minority Unconsolidated Interest
Consolidated Interests Affiliates Total Rate(1)
------------- ---------------- --------------- ------------- ---------------
December 31, 2004:
Fixed-rate debt:
Non-recourse loans on operating properties $ 2,688,186 $ (52,914) $ 104,114 $2,739,386 6.35%
------------- ---------------- --------------- -------------
Variable-rate debt:
Recourse term loans on operating properties 207,500 -- 29,415 236,915 3.40%
Construction loans 14,593 -- 39,493 54,086 4.05%
Lines of credit 461,400 -- -- 461,400 3.37%
------------- ---------------- --------------- -------------
Total variable-rate debt 683,493 -- 68,908 752,401 3.44%
------------- ---------------- --------------- -------------
Total $ 3,371,679 $ (52,914) $ 173,022 $3,491,787 5.72%
============= ================ =============== =============
(1) Weighted average interest rate including the effect of debt premiums, but
excluding amortization of deferred financing costs.
In February 2005, we amended one of our secured credit facilities to
increase the total availability from $80.0 million to $100.0 million and to
extend the maturity by one year to June 2007. The interest rate remained at
LIBOR plus 1.00%.
In September 2005, we obtained a ten-year, non-recourse mortgage note
payable of $60.0 million on Imperial Valley Mall, one of our unconsolidated
affiliates, that has a fixed interest rate of 4.985% and matures in September
2015. The proceeds of the loan were used to retire the outstanding borrowings of
$58.3 million under the construction loan that was incurred to develop Imperial
Valley Mall.
During the three months ended September 30, 2005, we retired two mortgage
notes payable totaling $52.6 million, including unamortized debt premiums of
$1.3 million. We recognized a loss on extinguishment of debt in the amount of
less than $0.1 million, which consisted of a prepayment fee of $1.1 million and
the write-off of unamortized deferred financing costs of $0.2 million, offset by
the write-off of the unamortized debt premium of $1.3 million.
In October 2005, we obtained four new mortgage notes payable totaling
$392.0 million, which are ten-year, non-recourse loans having a weighted average
interest rate of 5.02%. In connection with obtaining these new loans, we retired
four loans totaling $179.5 million. As a result of the retirement of these four
loans, we will recognize a loss on extinguishment of debt of $5.4 million in
October 2005, which includes prepayment fees of $4.6 million and the write-off
of unamortized deferred financings costs of $0.8 million.
We have four secured credit facilities with total availability of $503.0
million, of which $450.3 million was outstanding as of September 30, 2005. The
secured credit facilities bear interest at rate of LIBOR plus a margin ranging
from 90 to 100 basis points.
During September 2005, we increased the availability under our unsecured
credit facility from $400.0 million to $500.0 million, of which $256.0 million
was outstanding as of September 30, 2005. The unsecured credit facility bears
interest at LIBOR plus a margin of 90 to 145 basis points based on our leverage.
27
We also have secured and unsecured lines of credit with total availability
of $27.1 million that can only be used to issue letters of credit. There was
$8.3 million outstanding under these lines at September 30, 2005.
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, 2005. Additionally,
certain property-specific mortgage notes payable require the maintenance of debt
service coverage ratios. At September 30, 2005, the properties subject to these
mortgage notes payable were in compliance with the applicable ratios.
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 is $925.3 million of debt that is scheduled to mature
before September 30, 2006. There are extension options in place that will extend
the maturity of $813.3 million of this debt beyond September 30, 2006. The two
mortgage notes payable comprising the remaining $112.0 million were included in
the October 2005 refinancing transaction that is discussed above.
Equity
At our Annual Meeting of Shareholders on May 9, 2005, our shareholders
approved an increase in the authorized shares of the common stock under our
amended and restated certificate of incorporation to 180,000,000 shares from
95,000,000 shares. On May 10, 2005, the Board of Directors approved a
two-for-one stock split of our common stock, which was effected in the form of a
stock dividend. The record date for the stock split was June 1, 2005, and the
distribution date was June 15, 2005. We retained the current par value of $0.01
per share for all shares of common stock. The Operating Partnership currently
has common units and special common units of limited partner interest
outstanding that may be exchanged by their holders, under certain circumstances,
for shares of common stock on a one-for-one basis. These common units and
special common units were also split on a two-for-one basis so that they
continue to be exchangeable on a one-for-one basis into shares of our common
stock. All references to numbers of common shares and per share data in the
accompanying consolidated financial statements, the notes thereto and this
quarterly report have been adjusted to reflect the stock split on a retroactive
basis. Shareholders' equity reflects the stock split through a reclassification
of $0.3 million from Additional Paid-In Capital to Common Stock, which
represents the par value of the additional shares resulting from the split.
On October 5, 2005, our Board of Directors declared a special one-time cash
dividend for our common stock of $0.09 per share. The dividend is payable on
January 16, 2006, to shareholders of record as of December 30, 2005. The special
dividend was declared as a result of the taxable gains generated from the sale
of our management and advisory contracts with Galileo America that is discussed
in Note 2 - Joint Ventures to the consolidated financial statements.
On November 1, 2005, we announced that our Board of Directors had approved
a plan to repurchase up to $60.0 million of our common stock by December 31,
2006. Any stock repurchases will be made from time to time through open market
purchases, in accordance with Securities and Exchange Commission's safe harbors,
and will be funded through our available cash and lines of credit. The timing
and price of any stock repurchases will be determined by the market value in
effect from time to time for our common stock. We are not obligated to
repurchase any shares of stock under the plan, and we may terminate the stock
repurchase plan at any time. The stock repurchase plan was adopted to provide us
the opportunity to repurchase shares relatively equivalent to the Series K
Special Common Units ("K-SCUs") that will be issued in connection with the
acquisition of the three-mall portfolio that is discussed in Note 13 to the
consolidated financial statements.
28
On October 24, 2005, we amended the deferred compensation agreement we had
with one of our officers to change the final termination date of the agreement
from January 2, 2005 to September 30, 2005 and to not extend the agreement any
further. As a result of the termination of the agreement, we issued 174,403
shares of common stock to the officer. We had accrued all compensation expense
related to the agreement as it was earned during the term of the agreement.
During the nine months ended September 30, 2005, we received $8.4 million
in proceeds from issuances of common stock related to exercises of employee
stock options and our dividend reinvestment plan.
During the nine months ended September 30, 2005, we paid dividends of
$100.3 million to holders of our common stock and our preferred stock, as well
as $67.4 million in distributions to the minority interest investors in our
Operating Partnership and certain shopping center properties.
As a publicly traded company, we have access to capital through both the
public equity and debt markets. We have an effective shelf registration
statement authorizing us to publicly issue shares of preferred stock, common
stock and warrants to purchase shares of common stock with an aggregate public
offering price up to $562.0 million, of which $272.0 million was available at
September 30, 2005.
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 policy 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, 2005 (in thousands, except stock prices):
Shares
Outstanding Stock Price (1) Value
------------------ ----------------- -----------------
Common stock and operating partnership units 115,338 $ 40.99 $4,727,705
8.75% Series B Cumulative Redeemable Preferred Stock 2,000 $ 50.00 100,000
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 5,117,705
Company's share of total debt 3,755,155
-----------------
Total market capitalization $8,872,860
=================
Debt-to-total-market capitalization ratio 42.3%
=================
(1) Stock price for common stock and operating partnership units equals the
closing price of the common stock on September 30, 2005. The stock price
for the preferred stock represents the liquidation preference of each
respective series of preferred stock.
As of September 30, 2005, our variable rate debt of $979.7 million
represents 11.0% of our total market capitalization and 26.1% of our share of
total consolidated and unconsolidated debt.
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.
29
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.
The following development projects are under construction (dollars in
thousands):
Our Share
of Costs
Incurred
Project Our Share as of
Square Of Total September Projected Initial
Property Location Feet Costs 30, 2005 Opening Date Yield
--------------------------------- ------------------ ----------- ------------ ------------- ---------------- -----------
Mall Expansions:
----------------
Fayette Mall Lexington, KY 140,000 $22,961 $14,525 October-05 11%
Burnsville Center Burnsville, MN 145,000 24,612 9,249 Sep-05/Apr-06 9%
Stroud Mall Stroudsburg, PA 4,513 1,326 640 November-05 9%
Hanes Mall-Dick's Sporting Goods Winston-Salem, NC 66,000 10,150 918 July-06 10%
Open-Air Centers:
-----------------
Southaven Towne Center Southaven, MS 437,600 43,238 32,850 October-05 10%
Gulf Coast Town Center Phase I Ft. Myers, FL 445,000 72,075 56,532 October-05 9%
Lakeview Point Stillwater, OK 205,000 20,307 4,647 Fall 2006 9%
Fourth Quarter
Gulf Coast Town Center Phase II Ft. Myers, FL 743,000 94,047 886 2006 9%
Associated Center:
------------------
The Plaza at Fayette Lexington, KY 76,000 25,140 11,688 Fall 2006 9%
Community Center:
-----------------
Cobblestone Village at Royal Palm Royal Palm, FL 225,000 10,029 9,086 December-05 9%
Community Center Expansion:
---------------------------
Fashion Square Orange Park, FL 18,000 3,278 1,650 December-05 10%
------------- ------------ -----------
2,505,113 $327,163 $142,671
============= ============ ===========
(a) Amounts shown are 100% of the cost and cost to date as CBL is funding the
cost at this time.
There is a construction loan in place for the costs of Southaven Towne
Center and Gulf Coast Towne Center. There is a construction loan in place for
$9.0 million of the construction costs of The Plaza at Fayette. The remaining
construction costs will be funded with operating cash flows and the credit
facilities.
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.
Acquisitions
Effective June 1, 2005, we acquired a 70% joint venture interest in Laurel
Park Place, a regional mall in Livonia, MI, for a purchase price of $80.4
million. The purchase price consisted of $2.8 million in cash, the assumption of
$50.7 million of nonrecourse debt that bears interest at a stated rate of 8.50%
and matures in December 2012 and the issuance of 571,700 special common units in
the Operating Partnership with a fair value of $26.9 million ($50.48 per special
common unit). We recorded a debt premium of $10.6 million, computed using an
estimated market interest rate of 5.00%, since the debt assumed was at an
above-market interest rate compared to similar debt instruments at the date of
acquisition. See Note 4 to the accompanying consolidated financial statements
for more information related to the purchase of Laurel Park Place.
30
On July 14, 2005, we purchased The Mall of Acadiana, a super-regional mall
in Lafayette, LA, for a cash purchase price of $175.0 million. We also entered
into 10-year lease agreements for 13.4 acres of land adjacent to The Mall of
Acadiana, which provide us the right to purchase the land for a cash purchase
price of $3.3 million during the first year of the lease term, $3.5 million
during the second year and amounts increasing by 10% per year for each year of
the lease term thereafter. After the first year, the seller may put the land to
us for a price equal to the amounts set forth in the previous sentence.
Additionally, we obtained a ten-year option to acquire another adjacent 14.9
acres tract of land for a cash purchase price of $3.2 million during the first
six months of the option, which increases to $3.4 million during the second six
months of the option and to $3.6 million during the remaining nine years of the
option.
On October 17, 2005, we entered into definitive agreements to acquire a
portfolio of three malls. The purchase price will consist of cash of $93.8
million, the assumption of long-term, fixed-rate debt of $368.3 million and the
issuance of Series K Special Common Units ("K-SCUs") of our operating
partnership. The K-SCUs will receive a dividend at a rate of 6.0%, or $2.85 per
K-SCU, for the first year following the close of the transaction and 6.25%, or
$2.96875 per K-SCU, thereafter. See Note 13 - Subsequent Events for further
discussion of this transaction.
On October 24, 2005, we entered into a definitive agreement to form a 50/50
joint venture with affiliates of The Richard E. Jacobs Group, Inc. ("Jacobs") to
own Triangle Town Center and its associated and lifestyle centers, Triangle Town
Place and Triangle Town Commons, in Raleigh, NC. We will assume management,
leasing and any future development responsibilities of the properties.
The joint venture property is valued at $283.5 million. Concurrent with its
formation, the joint venture will enter into a new ten-year, fixed rate
non-recourse loan of $200.0 million, secured by the collective centers. The
proceeds from the loan will be used to retire an existing construction loan
totaling approximately $121.0 million with the balance to be paid to Jacobs as a
partial return of Jacobs' equity. We will make an initial capital contribution
of $2.3 million to the joint venture. The joint venture equity will be equalized
between Jacobs and us through our future contributions and through property cash
flow distributions.
On November 7, 2005, we purchased Layton Hills Mall, a regional mall in
Layton (Salt Lake City), UT, for a cash purchase price of $121.4 million.
Dispositions
We received a total of $62.9 million in cash proceeds from the sales of
real estate assets during the nine months ended September 30, 2005. The third
phase of the joint venture transaction with Galileo America, which is discussed
in Note 2 to the unaudited consolidated financial statements, closed on January
5, 2005 and generated net cash proceeds of $42.5 million. We received $8.2
million in cash proceeds and took a note receivable for $2.6 million from the
sale of five community centers that are located in Michigan. We also received
$12.2 million in cash proceeds from the sales of ten outparcels.
We received $21.6 million in net cash proceeds from the sale of our
management and advisory contracts with Galileo America. We also received an
acquisition fee of $8.0 million as a result of Galileo America's purchase of a
portfolio of properties from New Plan Excel Realty Trust, Inc. See Note 2 to the
accompanying consolidated financial statements for a more detailed description
of these transactions.
Other Capital Expenditures
Including our share of unconsolidated affiliates' capital expenditures and
excluding minority investor's share of capital expenditures, we spent $34.3
million during the nine months ended September 30, 2005 for tenant allowances,
which generate increased rents from tenants over the terms of their leases.
Deferred maintenance expenditures were $21.1 million for the nine months ended
September 30, 2005 and included $8.8 million for roof repairs and replacements,
$7.6 million for resurfacing and improved lighting of parking lots and $4.7
31
million for other capital expenditures. Renovation expenditures were $22.1
million for the nine months ended September 30, 2005.
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.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are disclosed in Note 2 to the
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2004. 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. Certain 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. Development and
leasing fees received from unconsolidated affiliates during the development
period 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.
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
32
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 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. See
Note 2 to the unaudited consolidated financial statements for a description of
the loss on impairment of real estate assets of $0.3 million that was recorded
in the nine months ended September 30, 2005. There were no impairment charges in
the three months ended September 30, 2005 and 2004 or in the nine months ended
September 30, 2004.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB released its final revised standard, SFAS No.
123 (Revised 2004), "Share-Based Payment." SFAS No. 123(R) requires that a
public entity measure the cost of equity based service awards based on the
grant-date fair value of the award. That cost will be recognized over the period
during which an employee is required to provide service in exchange for the
award or the vesting period. No compensation cost is recognized for equity
instruments for which employees do not render the requisite service. In April
2005, the Securities and Exchange Commission amended Regulation S-X to modify
the effective date so that SFAS No. 123(R) can be adopted beginning with the
first interim reporting period of the next fiscal year beginning after June 15,
2005 instead of the first interim period beginning after June 15, 2005. The
Company previously adopted the fair value provisions of SFAS No. 123,
"Accounting for Stock Based Compensation", as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - An
Amendment of FASB Statement No. 123" effective January 1, 2003. The Company does
not expect the adoption of this standard to have a material effect on its
financial position or results of operations.
In December 2004, FASB issued SFAS No. 153, "Exchange of Nonmonetary
Assets, an amendment of APB Opinion No. 29," which addresses the measurement of
exchanges of nonmonetary assets. SFAS No. 153 eliminates the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchange of nonmonetary assets that do not have commercial
substance. It also specifies that a nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
33
significantly as a result of the exchange. SFAS No. 153 is effective beginning
July 1, 2005. The adoption of SFAS No. 153 did not have a material impact on our
financial position, results of operations or cash flows.
In June 2005, the FASB issued Emerging Issues Task Force ("EITF") Issue No.
04-05, "Determining Whether a General Partner, or the General Partners as a
Group, Controls a Limited Partnership or Similar Entity When the Limited
Partners Have Certain Rights." EITF Issue No. 04-05 provides a framework for
determining whether a general partner controls, and should consolidate, a
limited partnership or a similar entity. EITF Issue No. 04-05 is effective after
June 29, 2005, for all newly formed limited partnerships and for any
pre-existing limited partnerships that modify their partnership agreements after
that date. General partners of all other limited partnerships are required to
apply the consensus no later than the beginning of the first reporting period in
fiscal years beginning after December 15, 2005. We do not expect that the
adoption of EITF Issue No. 04-05 will have a material impact on our financial
position, results of operations or cash flows.
In June 2005, the FASB issued FSP 78-9-1, "Interaction of AICPA Statement
of Position 78-9 and EITF Issue No. 04-05." The EITF acknowledged that the
consensus in EITF Issue No. 04-05 conflicts with certain aspects of Statement of
Position ("SOP") 78-9, "Accounting for Investments in Real Estate Ventures." The
EITF agreed that the assessment of whether a general partner, or the general
partners as a group, controls a limited partnership should be consistent for all
limited partnerships, irrespective of the industry within which the limited
partnership operates. Accordingly, the guidance in SOP 78-9 was amended in FSP
78-9-1 to be consistent with the guidance in EITF Issue No. 04-05. The effective
dates for this FSP are the same as those mentioned above in EITF Issue No.
04-05. We do not expect that the adoption of FSP 78-9-1 will have a material
impact on our financial position, results of operations or cash flows.
IMPACT OF INFLATION
In the last three years, inflation has not had a significant impact on the
Company because of the relatively low inflation rate. Substantially all tenant
leases do, however, contain provisions designed to protect the Company from the
impact of inflation. These provisions include clauses enabling the Company to
receive percentage rent based on tenant's gross sales, which generally increase
as prices rise, and/or escalation clauses, which generally increase rental rates
during the terms of the leases. In addition, many of the leases are for terms of
less than ten years, which may enable the Company to replace existing leases
with new leases at higher base and/or percentage 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 the Company's
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. Adjustments for
unconsolidated partnerships and joint ventures are calculated on the same basis.
We define FFO available for distribution as defined above by NAREIT less
dividends on preferred stock. Our method of calculating FFO may be different
from methods used by other REITs and, accordingly, may not be comparable to such
other REITs.
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 risen with market conditions, we believe that FFO enhances
investors' understanding of our operating performance. The use of FFO as an
34
indicator of financial performance is influenced not only by the operations of
our properties and interest rates, but also by our capital structure.
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 increased 52.1% for the three months ended September 30, 2005 to $114.4
million compared to $75.2 million for the same period in 2004. FFO increased
33.9% for the nine months ended September 30, 2005 to $286.1 million compared to
$213.6 million for the same period in 2004. The New Properties generated 65.1%
and 68.4% of the growth in FFO in the three-month and nine-month periods,
respectively. Consistently high portfolio occupancy, recoveries of operating
expenses, increases in rental rates from renewal and replacement leasing and
lower expenses related to bad debt and other charges against revenues accounted
for the remaining 34.9% and 31.6% growth in FFO in the three-month and
nine-month periods, respectively.
The calculation of FFO is as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2005 2004 2005 2004
------------ ----------- ----------- ------------
Net income available to common shareholders $ 60,093 $19,764 $106,247 $71,661
Depreciation and amortization from:
Consolidated properties 46,038 37,901 130,663 103,335
Unconsolidated affiliates 2,207 1,862 6,127 4,605
Discontinued operations -- 125 -- 470
Minority interest in earnings of operating partnership 49,455 16,624 87,176 59,498
Minority investors' share of depreciation and
amortization in shopping center properties (311) (302) (962) (899)
(Gain) loss on disposal of:
Operating real estate assets (42,882) (200) (42,708) (23,765)
Discontinued operations (2) (325) 84 (845)
Depreciation and amortization of non-real estate assets (188) (214) (553) (427)
------------ ----------- ----------- ------------
Funds from operations $114,410 $75,235 $286,074 $213,633
============ =========== =========== ============
Diluted weighted average shares and potential dilutive
common shares with operating partnership
units fully converted 117,050 115,674 116,477 114,322
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
We are exposed to interest rate risk on our debt obligations and derivative
financial instruments. We may elect to use derivative financial instruments to
manage our exposure to changes in interest rates, but will not use them for
speculative purposes. Our interest rate risk management policy requires that
derivative instruments be used for hedging purposes only and that they be
entered into only with major financial institutions based on their credit
ratings and other factors.
Based on our proportionate share of consolidated and unconsolidated
variable rate debt at September 30, 2005, a 0.5% increase or decrease in
interest rates on this variable-rate debt would decrease or increase annual cash
flows by approximately $4.9 million and, after the effect of capitalized
interest, annual earnings by approximately $4.6 million.
Based on our proportionate share of total consolidated and unconsolidated
debt at September 30, 2005, a 0.5% increase in interest rates would decrease the
fair value of debt by approximately $52.3 million, while a 0.5% decrease in
interest rates would increase the fair value of debt by approximately $53.7
million.
35
We did not have any derivative financial instruments during the nine months
ended September 30, 2005 or at September 30, 2004.
ITEM 4: Controls and Procedures
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of its effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
As of the end of the period covered by this quarterly report, an
evaluation, under Rule 13a-15 of the Securities Exchange Act of 1934 was
performed under the supervision of our Chief Executive Officer and Chief
Financial Officer and with the participation of our management, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective. No change in our internal
control over financial reporting occurred during the period covered by this
quarterly report that materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings
None
ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents information with respect to repurchases
of common stock made by us during the three months ended September 30,
2005:
Maximum Number of
Average Total Number of Shares that May Yet
Total Number Price Shares Purchased as Be Purchased
of Shares Paid per Part of a Publicly Under the
Period Purchased (1) Share (2) Announced Plan Plan
------ ------------- --------- --------------------- ---------------------
July 1-31, 2005 -- -- -- --
August 1-31, 2005 2,741 $ 41.855 -- --
September 1-30, 2005 -- -- -- --
---------------- ---------------- --------------------- ---------------------
Total 2,741 $ 41.855 -- --
================ ================ ===================== =====================
(1) Represents shares surrendered to the Company by
employees to satisfy federal and state income tax
withholding requirements related to the vesting of
shares of restricted stock issued under the CBL &
Associates Properties, Inc. 1993 Stock Incentive Plan.
(2) Represents the market value of the common stock on the
vesting date for the shares of restricted stock, which
was used to determine the number of shares required to
be surrendered to satisfy income tax withholding
requirements.
36
ITEM 3: Defaults Upon Senior Securities
None
ITEM 4: Submission of Matters to a Vote of Security Holders
None
ITEM 5: Other Information
None
ITEM 6: Exhibits
10.5.4 Deferred Compensation Arrangement dated January 1, 1997, for Eric P.
Snyder, as previously amended. Incorporated herein by reference to
Exhibit 10.5.4 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2002.+
10.5.10 Letter amending Deferred Compensation Arrangement for Eric P.
Snyder, dated October 24, 2005. Incorporated herein by reference to
Exhibit 10.5.10 to the Company's Current Report on Form 8-K, filed on
October 28, 2005.+
10.12.1 First Amendment to Unsecured Credit Agreement by and among the
Operating Partnership and Wells Fargo Bank, N.A., et al., dated as of
September 21, 2005
10.17.3 Second Amendment to Sixth Amended and Restated Credit Agreement
between the Operating Partnership and Wells Fargo Bank, National
Association, et al., dated September 21, 2005.
31.1 Certification pursuant to Securities Exchange Act Rule 13a-14(a) by
the Chief Executive Officer, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification pursuant to Securities Exchange Act Rule 13a-14(a) by
the Chief Financial Officer, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to Securities Exchange Act Rule 13a-14(b) by
the Chief Executive Officer, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to Securities Exchange Act Rule 13a-14(b) by
the Chief Financial Officer as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
+ A management contract or compensatory plan or arrangement required to
be filed pursuant to Item 15(b) of this report.
37
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CBL & ASSOCIATES PROPERTIES, INC.
/s/ John N. Foy
--------------------------------------------------------
John N. Foy
Vice Chairman of the Board, Chief Financial Officer and
Treasurer
(Authorized Officer of the Registrant,
Principal Financial Officer)
Date: November 9, 2005
38
INDEX TO EXHIBITS
Exhibit
Number Description
10.5.4 Deferred Compensation Arrangement dated January 1, 1997, for Eric P.
Snyder, as previously amended. Incorporated herein by reference to
Exhibit 10.5.4 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2002.+
10.5.10 Letter amending Deferred Compensation Arrangement for Eric P.
Snyder, dated October 24, 2005. Incorporated herein by reference to
Exhibit 10.5.10 to the Company's Current Report on Form 8-K, filed on
October 28, 2005.+
10.12.1 First Amendment to Unsecured Credit Agreement by and among the
Operating Partnership and Wells Fargo Bank, N.A., et al., dated as of
September 21, 2005
10.17.3 Second Amendment to Sixth Amended and Restated Credit Agreement
between the Operating Partnership and Wells Fargo Bank, National
Association, et al., dated September 21, 2005.
31.1 Certification pursuant to Securities Exchange Act Rule 13a-14(a) by
the Chief Executive Officer, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification pursuant to Securities Exchange Act Rule 13a-14(a) by
the Chief Financial Officer, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to Securities Exchange Act Rule 13a-14(b) by
the Chief Executive Officer, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to Securities Exchange Act Rule 13a-14(b) by
the Chief Financial Officer as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
+ A management contract or compensatory plan or arrangement required to
be filed pursuant to Item 15(b) of this report.
39