SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2005
Or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-12494
CBL & ASSOCIATES PROPERTIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 62-1545718
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporate or organization)
2030 Hamilton Place Blvd, Suite 500 37421
Chattanooga, TN (Zip Code)
(Address of principal executive office)
Registrant's telephone number, including area code:(423) 855-0001
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
------------------------------------ -----------------------------------------
Common Stock, $0.01 par value New York Stock Exchange
8.75% Series B Cumulative Redeemable
Preferred Stock, $0.01 par value New York Stock Exchange
7.75% Series C Cumulative Redeemable
Preferred Stock, $0.01 par value New York Stock Exchange
7.375% Series D Cumulative Redeemable
Preferred Stock, $0.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes |X| No |_|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No |X|
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such report(s)) and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
1
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The aggregate market value of the 60,749,837 shares of common stock held by
non-affiliates of the registrant as of June 30, 2005 was $2,616,495,460, based
on the closing price of $43.07 per share on the New York Stock Exchange on June
30, 2005. (For this computation, the registrant has excluded the market value of
all shares of its common stock reported as beneficially owned by executive
officers and directors of the registrant; such exclusion shall not be deemed to
constitute an admission that any such person is an "affiliate" of the
registrant.) As of March 10, 2006, there were 64,116,757 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for the annual shareholders meeting
to be held on May 8, 2006, are incorporated by reference into Part III.
2
TABLE OF CONTENTS
Item No. Page
PART I
1 Business 4
1A Risk Factors 12
1B Unresolved Staff Comments 20
2 Properties 20
3 Legal Proceedings 35
4 Submission of Matters to a Vote of Security Holders 35
PART II
5 Market For Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities 35
6 Selected Financial Data 37
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 38
7A Quantitative and Qualitative Disclosures about Market Risk 56
8 Financial Statements and Supplementary Data 56
9 Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 56
9A Controls and Procedures 56
9B Other Information 59
PART III
10 Directors and Executive Officers of the Registrant 61
11 Executive Compensation 61
12 Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 61
13 Certain Relationships and Related Transactions 61
14 Principal Accounting Fees and Services 61
PART IV
15 Exhibits, Financial Statement Schedules 62
Signatures 63
3
Cautionary Statement Relevant to Forward-Looking Information for the Purpose of
the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of
1995
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 cannot give assurance that
these expectations will be attained, and it is possible that actual results may
differ materially from those indicated by these forward-looking statements due
to a variety of risks and uncertainties. In addition to the risk factors
discussed below in Item 1A. of this report, such risks and uncertainties
include, without limitation, general industry, economic and business conditions,
interest rate fluctuations, costs of capital and capital requirements,
availability of real estate properties, inability to consummate acquisition
opportunities, competition from other companies and retail formats, changes in
retail rental rates in our 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.
Part I.
ITEM 1. BUSINESS
Background
CBL & Associates Properties, Inc. (the "CBL") was organized on July 13,
1993, as a Delaware corporation, to acquire substantially all of the real estate
properties owned by CBL & Associates, Inc., and its affiliates ("CBL's
Predecessor"), which was formed by Charles B. Lebovitz in 1978. On November 3,
1993, CBL completed an initial public offering (the "Offering"). Simultaneous
with the completion of the Offering, CBL's Predecessor transferred substantially
all of its interests in its real estate properties to CBL & Associates Limited
Partnership (the "Operating Partnership") in exchange for common units of
limited partnership interest in the Operating Partnership. The interests in the
Operating Partnership contain certain conversion rights that are more fully
described in Note 9 to the consolidated financial statements. The terms "we",
"us", "our" and the "Company" refer to CBL & Associates Properties, Inc. and its
subsidiaries.
Recent Developments
In January 2005, we closed the third phase of our joint venture, Galileo
America LLC ("Galileo America"), when we sold our interests in two power
centers, one community center and one community center expansion to Galileo
America for $58.6 million.
We acquired the properties listed in the following table during 2005.
Please see Note 3 to the consolidated financial statements for more information.
Purchase Acquisition
Property Location Price Date
----------------------------------------------------- ----------------------------------------------- ------------ -----------
(in 000's)
Laurel Park Place Livonia, MI $ 80,363 June 2005
The Mall of Acadiana Lafayette, LA 175,204 July 2005
Layton Hills Mall and Layton Hills Convenience Center Layton Hills, UT 120,926 November 2005
Oak Park Mall, Eastland Mall and Hickory Point Mall Overland Park, KS; Bloomington, IL; Forsyth, IL 508,180 November 2005
-----------
$884,673
===========
4
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.
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, our
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. The common
units and special common units of limited partner interest in the Operating
Partnership 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.
In April 2005, we formed a joint venture with the Richard E. Jacobs Group
("Jacobs") to develop Gulf Coast Town Center in Lee County (Ft. Myers/Naples),
Florida. See Note 5 to the consolidated financial statements for more
information.
In August 2005, we transferred our 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. We also sold our management and
advisory contracts with Galileo America to New Plan Excel Realty Trust, Inc.
("New Plan").
In September 2005, we increased the availability under our unsecured credit
facility from $400.0 million to $500.0 million.
In October 2005, our board of directors declared a special one-time cash
dividend for our common stock of $0.09 per share. The dividend was 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 5 to the consolidated financial statements.
In November 2005, our board of directors approved a plan to repurchase up
to $60.0 million of our common stock by December 31, 2006. The stock repurchase
plan was adopted to provide us the opportunity to repurchase shares relatively
equivalent to the Series K Special Common Units that were issued in connection
with the acquisition of the three-mall portfolio that is discussed in Note 3 to
the consolidated financial statements. We had repurchased 1,371,034 shares of
our common stock as of December 31, 2005 for a total of $55.0 million, or a
weighted average cost of $40.11 per share. We do not intend to repurchase any
additional shares subsequent to December 31, 2005.
In November 2005, we formed 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. We assumed management, leasing
and any future development responsibilities of these properties.
The Company's Business
We are a self-managed, self-administered, fully integrated real estate
investment trust ("REIT"). We own, develop, acquire, lease, manage, and operate
regional malls, open-air and community shopping centers. Our shopping center
properties are located in 27 states, but primarily in the southeastern and
midwestern United States. We have elected to be taxed as a REIT for federal
income tax purposes.
We conduct substantially all of our business through the Operating
Partnership. We are the 100% owner of two qualified REIT subsidiaries, CBL
Holdings I, Inc. and CBL Holdings II, Inc. CBL Holdings I, Inc. is the sole
general partner of the Operating Partnership. At December 31, 2005, CBL Holdings
5
I, Inc. owned a 1.6% general partnership interest and CBL Holdings II, Inc.
owned a 52.5% limited partnership interest in the Operating Partnership, for a
combined interest held by us of 54.1%.
As of December 31, 2005, we owned:
|X| interests in a portfolio of operating properties including 77 enclosed
regional malls and two open-air centers (the "Malls"), 30 associated
centers (the "Associated Centers"), seven community centers (the
"Community Centers") and our corporate office building (the "Office
Building");
|X| interests in two mall expansions, two open-air centers, one open-air
shopping center expansion, two associated centers, one community
center and one community center expansion that are currently under
construction (the "Construction Properties"), as well as options to
acquire certain shopping center development sites; and
|X| mortgages on eight properties that are secured by first mortgages or
wrap-around mortgages on the underlying real estate and related
improvements (the "Mortgages").
The Malls, Associated Centers, Community Centers, Construction Properties,
Mortgages and Office Building are collectively referred to as the "Properties"
and individually as a "Property."
We conduct our property management and development activities through CBL &
Associates Management, Inc. (the "Management Company") to comply with certain
technical requirements of the Internal Revenue Code of 1986, as amended.
The Management Company manages all but five of the Properties. Governor's
Square and Governor's Plaza in Clarksville, TN, and Kentucky Oaks Mall, in
Paducah, KY are all owned by joint ventures and are managed by a property
manager that is affiliated with the third party managing general partner, which
receives a fee for its services. The managing partner of each of these
Properties controls the cash flow distributions, although our approval is
required for certain major decisions. Springdale Center in Mobile, AL and
Wilkes-Barre Township Marketplace in Wilkes-Barre Township, PA, are managed by a
third party that receives a fee for its services.
The majority of our revenues are derived from leases with retail tenants
and generally include minimum rents, percentage rents based on tenants' sales
volumes and reimbursements from tenants for expenditures related to property
operating expenses, real estate taxes, insurance and maintenance and repairs, as
well as certain capital expenditures. We also generate revenues from sales of
peripheral land at the properties and from sales of real estate assets when it
is determined that we can realize a premium value for the assets. Proceeds from
such sales are generally used to reduce borrowings on our credit facilities.
The following terms used in this annual report on Form 10-K will have the
meanings described below:
|X| GLA - refers to gross leasable area of retail space in square feet,
including anchors and mall tenants
|X| Anchor - refers to a department store or other large retail store
|X| Freestanding - property locations that are not attached to the primary
complex of buildings that comprise the mall shopping center
|X| Outparcel - land used for freestanding developments, such as retail
stores, banks and restaurants, on the periphery of the Properties
6
Significant Markets
Our top five markets, in terms of revenues, were as follows for the year
ended December 31, 2005:
Market Percentage Total of Revenues
---------------------- ----------------------------
Nashville, TN 6.2%
Madison, WI 3.5%
Chattanooga, TN 3.1%
Pittsburgh, PA 3.3%
Winston-Salem, NC 3.0%
------
19.1%
=====
Top 25 Tenants
Our top 25 tenants based on percentage of total revenues were as follows
for the year ended December 31, 2005:
Annual Percentage
Number Gross of Total
Tenant of Stores Square Feet Rentals (1) Revenues
------------------------------------------ ----------- -------------- --------------- --------------
1 Limited Brands, Inc. 235 1,451,230 $49,816,597 5.6%
2 Foot Locker, Inc. 193 760,487 28,743,398 3.2%
3 The Gap, Inc. 106 1,052,246 24,849,474 2.8%
4 Luxottica Group, S.P.A. (2) 77 362,187 16,993,141 1.9%
5 Abercrombie & Fitch, Co. 197 479,638 16,737,262 1.9%
6 AE Outfitters Retail Company 73 384,206 15,162,552 1.7%
7 Signet Group PLC (3) 104 158,906 14,502,975 1.6%
8 Zale Corporation 148 148,800 13,637,113 1.5%
9 JC Penney Co. Inc. (4) 69 7,701,909 13,273,150 1.5%
10 Finish Line, Inc. 68 356,479 12,948,490 1.5%
11 New York & Company, Inc. 45 348,612 11,031,050 1.2%
12 The Regis Corporation 198 230,075 11,014,242 1.2%
13 Hallmark Cards, Inc. 88 309,068 10,310,067 1.2%
14 The Children's Place Retail Stores, Inc.(5) 61 258,951 9,898,797 1.1%
15 Genesco Inc. (6) 139 178,211 9,801,639 1.1%
16 Charming Shoppes, Inc. (7) 58 344,733 9,789,050 1.1%
17 Pacific Sunwear of California 81 279,350 9,625,585 1.1%
18 Dick's Sporting Goods, Inc. 11 654,686 9,085,563 1.0%
19 Aeropostale, Inc. 66 223,772 8,736,517 1.0%
20 Trans World Entertainment (8) 50 259,060 8,364,797 0.9%
21 Sun Capital Partners, Inc. (9) 65 441,360 7,988,783 0.9%
22 Federated Department Stores, Inc.(10) 86 6,228,826 7,951,723 0.9%
23 Christopher & Banks, Inc. 67 231,681 7,736,242 0.9%
24 Claire's Stores, Inc. 117 132,167 7,537,292 0.9%
25 The Buckle, Inc. 44 214,094 7,377,496 0.8%
----------- -------------- --------------- --------------
2,446 23,190,734 $342,912,995 38.5%
=========== ============== =============== ==============
(1) Includes annual minimum rent and tenant reimbursements based on amounts in
effect at December 31, 2005.
(2) Luxottica was previously Lenscrafters and Sunglass Hut. Luxottica purchased
Cole National Corporation, which operates Pearl Vision and Things
Remembered in October 2004.
(3) Signet Group was previously Sterling, Inc. They operate Kay Jewelers, Marks
& Morgan, JB Robinson, Shaw's Jewelers, Osterman's Jewelers, LeRoy's
Jewelers, Jared Jewelers, Belden Jewelers and Rogers Jewelers.
(4) J.C. Penney owns 29 of these stores.
(5) The Children's Place Retail Stores, Inc. purchased The Disney Store in
November 2004.
(6) Genesco Inc. operates Journey's, Jarman and Underground Station. Genesco
purchased Hat World, which operates Hat World, Lids, Hat Zone and Cap
Factory, as of April 2, 2004.
(7) Charming Shoppes, Inc. operates Lane Bryant, Fashion Bug and Catherine's.
(8) Trans World Entertainment operates FYE (formerly Camelot Music and Record
Town) and Saturday Matinee.
(9) Sun Capital Partners, Inc. operates Sam Goody, Suncoast Motion Pictures,
Musicland, Life Uniform, Anchor Blue, Mervyn's, Bruegger's Bagels, Wick's
Furniture and the Mattress Firm. Musicland Group, which includes Sam Goody.
7
and Suncoast, recently filed for bankruptcy under Chapter 11. They
represent 178,776 square feet and $6,535,866 in total annual revenue.
(10) Federated Department Stores merged with May Company in 2005. They now
operate After Hours Formalwear, Desmond's Formal Wear, Mitchell's Formal
Wear, Tuxedo World, David's Bridal, Burdine's, Famous Barr, Foley's,
Hecht's, Kaufmann's, Lazarus, L.S. Ayers, Macy's, Marshall Field's, Meier &
Frank, Rich's-Macy's, Robinson's May, & The Jones Store.
Our Growth Strategy
Our objective is to achieve growth in funds from operations by maximizing
cash flows through a variety of methods that are discussed below.
Leasing, Management and Marketing
Our objective is to maximize cash flows from our existing Properties
through:
|X| aggressive leasing that seeks to increase occupancy,
|X| originating and renewing leases at higher base rents per square foot
compared to the previous lease,
|X| merchandising, marketing, sponsorship and promotional activities and
|X| aggressively controlling operating costs and resulting tenant
occupancy costs.
Expansions and Renovations
We can generate additional revenue by expanding a Property through the
addition of department stores, mall stores and large retail formats. An
expansion also protects the Property's competitive position within its market.
As shown below, we completed seven expansions during 2005 and expect to expand
four Properties in 2006:
Property Location GLA Opening Date
-----------------------------------------------------------------------------------------------------------------
Completed in 2005:
------------------
CoolSprings Crossing Nashville, TN 10,000 March
The District at Monroeville Mall Monroeville, PA 75,000 April
Citadel Mall Charleston, SC 45,000 August
St. Clair Square Fairview Heights, IL 8,500 September
Stroud Mall Stroudsburg, PA 4,500 October
Fayette Mall Lexington, KY 144,000 October
Fashion Square Orange Park, FL 18,000 October
---------
305,000
=========
Scheduled for 2006:
-------------------
Southaven Towne Center (Dillard's) Southaven, MS 158,900 March
Southaven Towne Center (Gordman's) Southaven, MS 59,400 April
Burnsville Center Burnsville, MN 20,600 April
Coastal Grand-Myrtle Beach (PetsMart) Myrtle Beach, SC 20,100 May
Hanes Mall (Dick's Sporting Goods) Winston-Salem, NC 66,000 July
Southaven Towne Center Southaven, MS 15,000 November
---------
340,000
=========
Renovations usually include renovating existing facades, uniform signage,
new entrances and floor coverings, updating interior decor, resurfacing parking
lots and improving the lighting of interiors and parking lots. Renovations can
result in attracting new retailers, increased rental rates and occupancy levels
and maintaining the Property's market dominance. As shown below, we renovated
three Properties during 2005 and expect to renovate nine Properties during 2006.
8
Property Location
---------------------------------------------------------
Completed in 2005:
Fayette Mall Lexington, KY
Hamilton Corner Chattanooga, TN
Village at Rivergate Nashville, TN
Scheduled for 2006:
CoolSprings Galleria Nashville, TN
Chapel Hill Mall Akron, OH
Hamilton Crossing Chattanooga, TN
Harford Mall Bel Air, MD
Honey Creek Mall Terre Haute, IN
Madison Square Huntsville, AL
Northpark Mall Joplin, MO
Park Plaza Mall Little Rock, AR
Wausau Center Wausau, WI
Development of New Retail Properties
In general, we seek development opportunities in middle-market trade areas
that we believe are under-served by existing retail operations. These
middle-markets must also have sufficient demographics to provide the opportunity
to effectively maintain a competitive position. The following shows the new
developments we opened during 2005 and those under construction at December 31,
2005:
Property Location GLA Opening Date
--------------------------------------------------------------------------------------------------------
Opened in 2005:
---------------
Imperial Valley Mall (60/40 joint venture) El Centro, CA 754,000 March
Hamilton Corner Chattanooga, TN 68,000 March
Coastal Grand Crossing Myrtle Beach, SC 15,000 May
Cobblestone Village at Royal Palm Beach Royal Palm Beach, FL 225,000 June
Chicopee Marketplace Chicopee, MA 156,000 September
Southaven Towne Center Southaven, MS 279,100 October
Gulf Coast Town Center (Phase I) Ft. Myers, FL 436,000 November
------------------
1,933,100
==================
Currently under construction:
-----------------------------
The Plaza at Fayette (Phase I) Lexington, KY 73,400 July 2006
Lakeview Point Stillwater, OK 207,300 October 2006
Gulf Coast Town Center (Phase II) Ft. Myers, FL 739,000 October 2006
High Pointe Commons Harrisburg, PA 297,100 October 2006
The Shoppes at St. Clair Fairview Heights, IL 75,000 March 2007
------------------
1,391,800
==================
Our total investment in the Properties opened in 2005 was $282.6 million
and the total investment in the Properties we had under construction at December
31, 2005 is projected to be $219.7 million.
Acquisitions
We believe there is opportunity for growth through acquisitions of regional
malls and other associated properties. We selectively acquire regional mall
properties where we believe we can increase the value of the property through
our development, leasing and management expertise. We acquired the following
Properties during 2005:
9
Property Location GLA Month Acquired
------------------------------------------------------------------------------------------------------
Laurel Park Place Livonia, MI 805,200 June
The Mall of Acadiana Lafayette, LA 997,300 July
Layton Hills Mall Layton Hills, UT 660,700 November
Layton Hills Convenience Center Layton, UT 93,900 November
Oak Park Mall Overland Park, KS 1,488,500 November
Eastland Mall Bloomington, IL 755,800 November
Hickory Point Mall Forsyth, IL 743,100 November
Triangle Town Center (50/50 joint venture) Raleigh, NC 1,279,200 November
Triangle Town Place (50/50 joint venture) Raleigh, NC 161,800 November
------------------
6,985,500
==================
Insurance
We carry a comprehensive blanket policy for general liability, property
casualty (including fire, earthquake and flood) and rental loss covering all of
the Properties, with specifications and insured limits customarily carried for
similar properties. The property and liability insurance policies on our
Properties currently include loss resulting from acts of terrorism, whether
foreign or domestic. We believe the Properties are adequately insured in
accordance with industry standards.
Environmental Matters
Under various federal, state and local laws, ordinances and regulations, a
current or previous owner or operator of real estate may be liable for the costs
of removal or remediation of petroleum, certain hazardous or toxic substances
on, under or in such real estate. Such laws typically impose such liability
without regard to whether the owner or operator knew of, or was responsible for,
the presence of such substances. The costs of remediation or removal of such
substances may be substantial. The presence of such substances, or the failure
to promptly remove or remediate such substances, may adversely affect the
owner's or operator's ability to lease or sell such real estate or to borrow
using such real estate as collateral. Persons who arrange for the disposal or
treatment of hazardous or toxic substances may also be liable for the costs of
removal or remediation of such substances at the disposal or treatment facility,
regardless of whether such facility is owned or operated by such person. Certain
laws also impose requirements on conditions and activities that may affect the
environment or the impact of the environment on human health. Failure to comply
with such requirements could result in the imposition of monetary penalties (in
addition to the costs to achieve compliance) and potential liabilities to third
parties. Among other things, certain laws require abatement or removal of
friable and certain non-friable asbestos-containing materials in the event of
demolition or certain renovations or remodeling. Certain laws regarding
asbestos-containing materials require building owners and lessees, among other
things, to notify and train certain employees working in areas known or presumed
to contain asbestos-containing materials. Certain laws also impose liability for
release of asbestos-containing materials into the air and third parties may seek
recovery from owners or operators of real properties for personal injury or
property damage associated with asbestos-containing materials. In connection
with the ownership and operation of properties, we may be potentially liable for
all or a portion of such costs or claims.
All of our properties (but not properties for which we hold an option to
purchase but do not yet own) have been subject to Phase I environmental
assessments or updates of existing Phase I environmental assessments within
approximately the last ten years. Such assessments generally consisted of a
visual inspection of the properties, review of federal and state environmental
databases and certain information regarding historic uses of the property and
adjacent areas and the preparation and issuance of written reports. Some of the
properties contain, or contained, underground storage tanks used for storing
petroleum products or wastes typically associated with automobile service or
other operations conducted at the properties. Certain properties contain, or
contained, dry-cleaning establishments utilizing solvents. Where believed to be
warranted, samplings of building materials or subsurface investigations were
undertaken. At certain properties, where warranted by the conditions, we have
10
developed and implemented an operations and maintenance program that establishes
operating procedures with respect to asbestos-containing materials. The costs
associated with the development and implementation of such programs were not
material.
We believe that our properties are in compliance in all material respects
with all federal, state and local ordinances and regulations regarding the
handling, discharge and emission of hazardous or toxic substances. We have
recorded in our financial statements a liability of $2.4 million related to
potential future asbestos abatement activities at our Properties which are not
expected to have a material impact on our financial condition or results of
operations. We have not been notified by any governmental authority, and are not
otherwise aware, of any material noncompliance, liability or claim relating to
hazardous or toxic substances in connection with any of our present or former
properties. Nevertheless, it is possible that the environmental assessments
available to us do not reveal all potential environmental liabilities. It is
also possible that subsequent investigations will identify material
contamination, that adverse environmental conditions have arisen subsequent to
the performance of the environmental assessments, or that there are material
environmental liabilities of which management is unaware. Moreover, no
assurances can be given that (i) future laws, ordinances or regulations will not
impose any material environmental liability or (ii) the current environmental
condition of the properties has not been or will not be affected by tenants and
occupants of the properties, by the condition of properties in the vicinity of
the properties or by third parties unrelated to us, the Operating Partnership or
the relevant property's partnership.
Competition
The Properties compete with various shopping facilities in attracting
retailers to lease space. In addition, retailers at our properties face
competition from discount shopping centers, outlet malls, wholesale clubs,
direct mail, television shopping networks, the internet and other retail
shopping developments. The extent of the retail competition varies from market
to market. We work aggressively to attract customers through marketing
promotions and campaigns.
Seasonality
Our business is somewhat seasonal in nature with tenant sales achieving the
highest levels during the fourth quarter because of the holiday season, which
results in higher percentage rent income in the fourth quarter. The Malls earn
most of their "temporary" rents (rents from short-term tenants) during the
holiday period. Thus, occupancy levels and revenue production are generally the
highest in the fourth quarter of each year. Results of operations realized in
any one quarter may not be indicative of the results likely to be experienced
over the course of the entire year.
Financial Information About Segments
See Note 12 to the consolidated financial statements for information about
our reportable segments.
Employees
We currently have 784 full-time and 699 part-time employees. None of our
employees are represented by a union.
Corporate Offices
Our principal executive offices are located at CBL Center, 2030 Hamilton
Place Boulevard, Suite 500, Chattanooga, Tennessee, 37421 and our telephone
number is (423) 855-0001.
11
Available Information
There is additional information about us on our web site at
cblproperties.com. Electronic copies of our Annual Report on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any
amendments to those reports, are available free of charge by visiting the
"investor relations" section of our web site. These reports are posted as soon
as reasonably practical after they are electronically filed with, or furnished
to, the Securities and Exchange Commission. The information on the web site is
not, and should not, be considered to be a part of this Form 10-K.
ITEM 1A. RISK FACTORS
RISKS RELATED TO REAL ESTATE INVESTMENTS
Real property investments are subject to various risks, many of which are beyond
our control, that could cause declines in the operating revenues and/or the
underlying value of one or more of our Properties.
A number of factors may decrease the income generated by a retail shopping
center property, including:
|X| National, regional and local economic climates, which may be
negatively impacted by plant closings, industry slowdowns, adverse
weather conditions, natural disasters, and other factors which tend to
reduce consumer spending on retail goods.
|X| Local real estate conditions, such as an oversupply of, or reduction
in demand for, retail space or retail goods, and the availability and
creditworthiness of current and prospective tenants.
|X| Increased operating costs, such as increases in real property taxes,
utility rates and insurance premiums.
|X| Perceptions by retailers or shoppers of the safety, convenience and
attractiveness of the shopping center.
|X| The willingness and ability of the shopping center's owner to provide
capable management and maintenance services.
|X| The convenience and quality of competing retail properties and other
retailing options, such as the Internet.
In addition, other factors may adversely affect the value of our Properties
without affecting their current revenues, including:
|X| Adverse changes in governmental regulations, such as local zoning and
land use laws, environmental regulations or local tax structures that
could inhibit our ability to proceed with development, expansion, or
renovation activities that otherwise would be beneficial to our
Properties.
|X| Potential environmental or other legal liabilities that reduce the
amount of funds available to us for investment in our Properties.
|X| Any inability to obtain sufficient financing (including both
construction financing and permanent debt), or the inability to obtain
such financing on commercially favorable terms, to fund new
developments, acquisitions, and property expansions and renovations
which otherwise would benefit our Properties.
|X| An environment of rising interest rates, which could negatively impact
both the value of commercial real estate such as retail shopping
centers and the overall retail climate.
12
The loss of one or more significant tenants, due to bankruptcies or as a result
of ongoing consolidations in the retail industry, could adversely affect both
the operating revenues and value of our Properties.
Regional malls are typically anchored by well-known department stores and
other significant tenants who generate shopping traffic at the mall. A decision
by an anchor tenant or other significant tenant to cease operations at one or
more Properties could have a material adverse effect on those Properties and, by
extension, on our financial condition and results of operations. The closing of
an anchor or other significant tenant may allow other anchors and/or tenants at
an affected Property to terminate their leases, to seek rent relief and/or cease
operating their stores or otherwise adversely affect occupancy at the Property.
In addition, key tenants at one or more Properties might terminate their leases
as a result of mergers, acquisitions, consolidations, dispositions or
bankruptcies in the retail industry. The bankruptcy and/or closure of one or
more significant tenants, if we are not able to successfully re-tenant the
affected space, could have a material adverse effect on both the operating
revenues and underlying value of the Properties involved.
We may incur significant costs related to compliance with environmental laws,
which could have a material adverse effect on our results of operations, cash
flow and the funds available to us to pay dividends.
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in that real property. These laws often impose liability whether or
not the owner or operator knew of, or was responsible for, the presence of
hazardous or toxic substances. The costs of investigation, removal or
remediation of hazardous or toxic substances may be substantial. In addition,
the presence of hazardous or toxic substances, or the failure to remedy
environmental hazards properly, may adversely affect the owner's or operator's
ability to sell or rent affected real property or to borrow money using affected
real property as collateral.
Persons or entities that arrange for the disposal or treatment of hazardous
or toxic substances may also be liable for the costs of removal or remediation
of hazardous or toxic substances at the disposal or treatment facility, whether
or not that facility is owned or operated by the person or entity arranging for
the disposal or treatment of hazardous or toxic substances. Laws exist that
impose liability for release of asbestos-containing materials into the air, and
third parties may seek recovery from owners or operators of real property for
personal injury associated with exposure to asbestos-containing materials. In
connection with our ownership, operation, management, development and
redevelopment of our Properties, or any other Properties we acquire in the
future, we may be potentially liable under these laws and may incur costs in
responding to these liabilities, which could have an adverse effect on our
results of operations, cash flow and the funds available to us to pay dividends.
RISKS RELATED TO OUR BUSINESS AND THE MARKET FOR OUR STOCK
We may elect not to proceed with certain development projects once they have
been undertaken, resulting in charges that could have a material adverse effect
on our results of operations for the period in which the charge is taken.
We intend to pursue development and expansion activities as opportunities
arise. In connection with any development or expansion, we will incur various
risks including the risk that development or expansion opportunities explored by
us may be abandoned and the risk that construction costs of a project may exceed
original estimates, possibly making the project not profitable. Other risks
include the risk that we may not be able to refinance construction loans which
are generally with full recourse to us, the risk that occupancy rates and rents
at a completed project will not meet projections and will be insufficient to
make the project profitable, and the risk that we will not be able to obtain
anchor, mortgage lender and property partner approvals for certain expansion
activities. In the event of an unsuccessful development project, our loss could
exceed our investment in the project.
13
We have in the past elected not to proceed with certain development
projects and anticipate that we will do so again from time to time in the
future. If we elect not to proceed with a development opportunity, the
development costs ordinarily will be charged against income for the then-current
period. Any such charge could have a material adverse effect on our results of
operations for the period in which the charge is taken.
Competition from other retail formats could adversely affect the revenues
generated by our properties, resulting in a reduction in funds available for
distribution to our stockholders.
There are numerous shopping facilities that compete with our Properties in
attracting retailers to lease space. In addition, retailers at our Properties
face competition for customers from:
|X| Discount shopping centers
|X| Outlet malls
|X| Wholesale clubs
|X| Direct mail
|X| Telemarketing
|X| Television shopping networks
|X| Shopping via the Internet
Each of these competitive factors could adversely affect the amount of
rents that we are able to collect from our tenants, thereby reducing our
revenues and the funds available for distribution to our stockholders.
Since our shopping center properties are located principally in the Southeastern
and Midwestern United States, our financial position, results of operations and
funds available for distribution to shareholders are subject generally to
economic conditions in these regions.
Our properties are located principally in the southeastern and midwestern
Unites States. Our properties located in the southeastern United States
accounted for approximately 52.6% of our total revenues from all properties for
the year ended December 31, 2005 and currently include 40 Malls, 20 Associated
Centers, five Community Centers and one Office Building. Our properties located
in the midwestern United States accounted for approximately 25.9% of our total
revenues from all properties for the year ended December 31, 2005 and currently
include 21 Malls and three Associated Centers. Our results of operations and
funds available for distribution to shareholders therefore will be subject
generally to economic conditions in the southeastern and midwestern United
States. We will continue to look for opportunities to geographically diversify
our portfolio in order to minimize dependency on any particular region; however,
the expansion of the portfolio through both acquisitions and developments is
contingent on many factors including consumer demand, competition and economic
conditions.
Certain of our shopping center properties are subject to ownership interests
held by third parties, whose interests may conflict with ours and thereby
constrain us from taking actions concerning these properties which otherwise
would be in the best interests of the Company and our stockholders.
We own partial interests in eight malls, six associated centers, three
community centers and one office building. We manage all of these properties
except for Governor's Square, Governor's Plaza and Kentucky Oaks. A property
manager affiliated with the managing general partner performs the property
management services for these properties and receives a fee for its services.
The managing partner of each of these three Properties controls the cash flow
distributions, although our approval is required for certain major decisions.
Springdale Center in Mobile, AL and Wilkes-Barre Township Marketplace in
Wilkes-Barre Township, PA, are managed by a third party that receives a fee for
its services.
14
Where we serve as managing general partner of the partnerships that own our
properties, we may have certain fiduciary responsibilities to the other partners
in those partnerships. In certain cases, the approval or consent of the other
partners is required before we may sell, finance, expand or make other
significant changes in the operations of such properties. To the extent such
approvals or consents are required, we may experience difficulty in, or may be
prevented from, implementing our plans with respect to expansion, development,
financing or other similar transactions with respect to such properties.
With respect to Governor's Square, Governor's Plaza and Kentucky Oaks we do
not have day-to-day operational control or control over certain major decisions,
including the timing and amount of distributions, which could result in
decisions by the managing general partner that do not fully reflect our
interests. This includes decisions relating to the requirements that we must
satisfy in order to maintain our status as a REIT for tax purposes. However,
decisions relating to sales, expansion and disposition of all or substantially
all of the assets and financings are subject to approval by the Operating
Partnership.
Certain agreements with prior owners of Properties that we have acquired may
inhibit our ability to enter into future sale or refinancing transactions
affecting such Properties, which otherwise would be in the best interests of the
Company and our stockholders.
Certain Properties that we originally acquired from third parties had
unrealized gain attributable to the difference between the fair market value of
such Properties and the third parties' adjusted tax basis in the Properties
immediately prior to their contribution of such Properties to the Operating
Partnership pursuant to our acquisition. For this reason, a taxable sale by us
of any of such Properties, or a significant reduction in the debt encumbering
such Properties, could result in adverse tax consequences to the third parties
who contributed these properties in exchange for interests in the Operating
Partnership. Under the terms of these transactions, we have generally agreed
that we either will not sell or refinance such an acquired Property for a number
of years in any transaction that would trigger adverse tax consequences for the
parties from whom we acquired such Property, or else we will reimburse such
parties for all or a portion of the additional taxes they are required to pay as
a result of the transaction. Accordingly, these agreements may cause us not to
engage in future sale or refinancing transactions affecting such Properties
which otherwise would be in the best interests of the Company and our
stockholders, or may increase the costs to us of engaging in such transactions.
The loss or bankruptcy of a major tenant could negatively affect our financial
position and results of operations.
In the year ended December 31, 2005, no tenant accounted for 5% or more of
revenues except for The Limited Stores Inc. (including Intimate Brands, Inc.),
which accounted for approximately 5.6% of our total revenues. The loss or
bankruptcy of this key tenant could negatively affect our financial position and
results of operations.
Our financial position, results of operations and funds available for
distribution to shareholders could be adversely affected by any economic
downturn affecting the operating results at our properties in the Nashville,
Tennessee area, which is our single largest market.
Our properties located in Nashville, TN accounted for 6.2% of our revenues
for the year ended December 31, 2005. No other market accounted for more than
3.5% of our revenues for the year ended December 31, 2005. Our financial
position and results of operations will therefore be affected by the results
experienced at properties located in the Nashville, TN area.
Rising interest rates could both increase our borrowing costs, thereby adversely
affecting our cash flow and the amounts available for distributions to our
stockholders, and decrease our stock price, if investors seek higher yields
through other investments.
15
An environment of rising interest rates could lead holders of our
securities to seek higher yields through other investments, which could
adversely affect the market price of our stock. One of the factors that may
influence the price of our stock in public markets is the annual distribution
rate we pay as compared with the yields on alternative investments. Numerous
other factors, such as governmental regulatory action and tax laws, could have a
significant impact on the future market price of our stock. In addition,
increases in market interest rates could result in increased borrowing costs for
us, which may adversely affect our cash flow and the amounts available for
distributions to our stockholders.
Recent changes in the U.S. federal income tax treatment of corporate dividends
may make our stock less attractive to investors, thereby lowering our stock
price.
In May 2003, the maximum U.S. federal income tax rate for dividends
received by individual taxpayers was reduced generally from 38.6% to 15% (from
January 1, 2003 through 2008). However, dividends payable by REITs are generally
not eligible for such treatment. Although this legislation did not have a
directly adverse effect on the taxation of REITs or dividends paid by REITs, the
more favorable treatment for non-REIT dividends could cause individual investors
to consider investments in non-REIT corporations as more attractive relative to
an investment in a REIT, which could have an adverse impact on the market price
of our stock.
Certain of our credit facilities, the loss of which could have a material,
adverse impact on our financial condition and results of operations, are
conditioned upon the Operating Partnership continuing to be managed by certain
members of its current senior management and by such members of senior
management continuing to own a significant direct or indirect equity interest in
the Operating Partnership.
Certain of the Operating Partnership's lines of credit are conditioned upon
the Operating Partnership continuing to be managed by certain members of its
current senior management and by such members of senior management continuing to
own a significant direct or indirect equity interest in the Operating
Partnership (including any shares of our common stock owned by such members of
senior management may hold in us). If the failure of one or more of these
conditions resulted in the loss of these credit facilities and we were unable to
obtain suitable replacement financing, such loss could have a material, adverse
impact on our financial position and results of operations.
Our insurance coverage may change in the future, and may not include coverage
for acts of terrorism.
The general liability and property casualty insurance policies on our
Properties currently include loss resulting from acts of terrorism, whether
foreign or domestic. The cost of general liability and property casualty
insurance policies that include coverage for acts of terrorism has risen
significantly post-September 11, 2001. The cost of coverage for acts of
terrorism is currently mitigated by the Terrorism Risk Insurance Act ("TRIA").
If TRIA is not extended beyond 2006, we may incur higher insurance costs and
greater difficulty in obtaining insurance that covers terrorist-related damages.
Our tenants may also experience similar difficulties. We are unable at this time
to predict whether we will continue our policy coverage as currently structured
when our policies are up for renewal on December 31, 2006.
RISKS RELATED TO FEDERAL INCOME TAX LAWS
If we fail to qualify as a REIT in any taxable year, our funds available for
distribution to stockholders will be reduced.
We intend to continue to operate so as to qualify as a REIT under the
Internal Revenue Code. Although we believe that we are organized and operate in
such a manner, no assurance can be given that we currently qualify and in the
future will continue to qualify as a REIT. Such qualification involves the
application of highly technical and complex Internal Revenue Code provisions for
16
which there are only limited judicial or administrative interpretations. The
determination of various factual matters and circumstances not entirely within
our control may affect our ability to qualify. In addition, no assurance can be
given that legislation, new regulations, administrative interpretations or court
decisions will not significantly change the tax laws with respect to
qualification or its corresponding federal income tax consequences.
If in any taxable year we were to fail to qualify as a REIT, we would not
be allowed a deduction for distributions to stockholders in computing our
taxable income and we would be subject to federal income tax on our taxable
income at regular corporate rates. Unless entitled to relief under certain
statutory provisions, we also would be disqualified from treatment as a REIT for
the four taxable years following the year during which qualification was lost.
As a result, the funds available for distribution to our stockholders would be
reduced for each of the years involved. We currently intend to operate in a
manner designed to qualify as a REIT. However, it is possible that future
economic, market, legal, tax or other considerations may cause our board of
directors, with the consent of a majority of our stockholders, to revoke the
REIT election.
Any issuance or transfer of our capital stock to any person in excess of the
applicable limits on ownership necessary to maintain our status as a REIT would
be deemed void ab initio, and those shares would automatically be transferred to
a non-affiliated charitable trust.
To maintain our status as a REIT under the Internal Revenue Code, not more
than 50% in value of our outstanding capital stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Internal Revenue
Code to include certain entities) during the last half of a taxable year. Our
certificate of incorporation generally prohibits ownership of more than 6% of
the outstanding shares of our capital stock by any single stockholder determined
by vote, value or number of shares (other than Charles Lebovitz, our Chief
Executive Officer, David Jacobs, Richard Jacobs and their affiliates under the
Internal Revenue Code's attribution rules). The affirmative vote of 66 (2)/3% of
our outstanding voting stock is required to amend this provision.
Our board of directors may, subject to certain conditions, waive the
applicable ownership limit upon receipt of a ruling from the IRS or an opinion
of counsel to the effect that such ownership will not jeopardize our status as a
REIT. Absent any such waiver, however, any issuance or transfer of our capital
stock to any person in excess of the applicable ownership limit or any issuance
or transfer of shares of such stock which would cause us to be beneficially
owned by fewer than 100 persons, will be null and void and the intended
transferee will acquire no rights to the stock. Instead, such issuance or
transfer with respect to that number of shares that would be owned by the
transferee in excess of the ownership limit provision would be deemed void ab
initio and those shares would automatically be transferred to a trust for the
exclusive benefit of a charitable beneficiary to be designated by us, with a
trustee designated by us, but who would not be affiliated with us or with the
prohibited owner. Any acquisition of our capital stock and continued holding or
ownership of our capital stock constitutes, under our certificate of
incorporation, a continuous representation of compliance with the applicable
ownership limit.
In order to maintain our status as a REIT avoid the imposition of certain
additional taxes under the Internal Revenue Code, we must satisfy minimum
requirements for distributions to shareholders, which may limit the amount of
cash we might otherwise have been able to retain for use in growing our
business.
To maintain our status as a REIT under the Internal Revenue Code, we
generally will be required each year to distribute to our stockholders at least
90% of our taxable income after certain adjustments. However, to the extent that
we do not distribute all of our net capital gain or distribute at least 90% but
less than 100% of our REIT taxable income, as adjusted, we will be subject to
tax on the undistributed amount at ordinary and capital gains corporate tax
rates, as the case may be. In addition, we will be subject to a 4% nondeductible
excise tax on the amount, if any, by which certain distributions paid by us
during each calendar year are less than the sum of 85% of our ordinary income
17
for such calendar year, 95% of our capital gain net income for the calendar year
and any amount of such income that was not distributed in prior years. In the
case of property acquisitions, including our initial formation, where individual
properties are contributed to our Operating Partnership for Operating
Partnership units, we have assumed the tax basis and depreciation schedules of
the entities' contributing properties. The relatively low tax basis of such
contributed properties may have the effect of increasing the cash amounts we are
required to distribute as dividends, thereby potentially limiting the amount of
cash we might otherwise have been able to retain for use in growing our
business. This low tax basis may also have the effect of reducing or eliminating
the portion of distributions made by us that are treated as a non-taxable return
of capital.
RISKS RELATED TO OUR ORGANIZATIONAL STRUCTURE
The ownership limit described above, as well as certain provisions in our
amended and restated certificate of incorporation and bylaws, our stockholder
rights plan, and certain provisions of Delaware law may hinder any attempt to
acquire us.
Certain provisions of Delaware law, as well as of our amended and restated
certificate of incorporation and bylaws, and agreements to which we are a party,
may have the effect of delaying, deferring or preventing a third party from
making an acquisition proposal for us and may inhibit a change in control that
some, or a majority, of our stockholders might believe to be in their best
interest or that could give our stockholders the opportunity to realize a
premium over the then-prevailing market prices for their shares. These
provisions and agreements may be summarized as follows:
|X| THE OWNERSHIP LIMIT - As described above, to maintain our status as a
REIT under the Internal Revenue Code, not more than 50% in value of
our outstanding capital stock may be owned, directly or indirectly, by
five or fewer individuals (as defined in the Internal Revenue Code to
include certain entities) during the last half of a taxable year. Our
certificate of incorporation generally prohibits ownership of more
than 6% of the outstanding shares of our capital stock by any single
stockholder determined by value (other than Charles Lebovitz, David
Jacobs, Richard Jacobs and their affiliates under the Internal Revenue
Code's attribution rules). In addition to preserving our status as a
REIT, the ownership limit may have the effect of precluding an
acquisition of control of us without the approval of our board of
directors.
|X| CLASSIFIED BOARD OF DIRECTORS; REMOVAL FOR CAUSE - Our certificate of
incorporation provides for a board of directors divided into three
classes, with one class elected each year to serve for a three-year
term. As a result, at least two annual meetings of stockholders may be
required for the stockholders to change a majority of our board of
directors. In addition, our stockholders can only remove directors for
cause and only by a vote of 75% of the outstanding voting stock.
Collectively, these provisions make it more difficult to change the
composition of our board of directors and may have the effect of
encouraging persons considering unsolicited tender offers or other
unilateral takeover proposals to negotiate with our board of directors
rather than pursue non-negotiated takeover attempts.
|X| ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS - Our bylaws
establish advance notice procedures with regard to stockholder
proposals relating to the nomination of candidates for election as
directors or new business to be brought before meetings of our
stockholders. These procedures generally require advance written
notice of any such proposals, containing prescribed information, to be
given to our Secretary at our principal executive offices not less
than 60 days nor more than 90 days prior to the meeting.
|X| VOTE REQUIRED TO AMEND BYLAWS - A vote of 66 (2)/3% of the outstanding
voting stock is necessary to amend our bylaws.
18
|X| STOCKHOLDER RIGHTS PLAN - We have a stockholder rights plan, which may
delay, deter or prevent a change in control unless the acquirer
negotiates with our board of directors and the board of directors
approves the transaction. The rights plan generally would be triggered
if an entity, group or person acquires (or announces a plan to
acquire) 15% or more of our common stock. If such transaction is not
approved by our board of directors, the effect of the stockholder
rights plan would be to allow our stockholders to purchase shares of
our common stock, or the common stock or other merger consideration
paid by the acquiring entity, at an effective 50% discount.
|X| DELAWARE ANTI-TAKEOVER STATUTE - We are a Delaware corporation and are
subject to Section 203 of the Delaware General Corporation Law. In
general, Section 203 prevents an "interested stockholder" (defined
generally as a person owning 15% or more of a company's outstanding
voting stock) from engaging in a "business combination" (as defined in
Section 203) with us for three years following the date that person
becomes an interested stockholder unless:
(a) before that person became an interested holder, our board of
directors approved the transaction in which the interested holder
became an interested stockholder or approved the business
combination;
(b) upon completion of the transaction that resulted in the
interested stockholder becoming an interested stockholder, the
interested stockholder owns 85% of our voting stock outstanding
at the time the transaction commenced (excluding stock held by
directors who are also officers and by employee stock plans that
do not provide employees with the right to determine
confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer); or
(c) following the transaction in which that person became an
interested stockholder, the business combination is approved by
our board of directors and authorized at a meeting of
stockholders by the affirmative vote of the holders of at least
two-thirds of our outstanding voting stock not owned by the
interested stockholder.
Under Section 203, these restrictions also do not apply to certain
business combinations proposed by an interested stockholder following
the announcement or notification of certain extraordinary transactions
involving us and a person who was not an interested stockholder during
the previous three years or who became an interested stockholder with
the approval of a majority of our directors, if that extraordinary
transaction is approved or not opposed by a majority of the directors
who were directors before any person became an interested stockholder
in the previous three years or who were recommended for election or
elected to succeed such directors by a majority of directors then in
office.
Certain ownership interests held by members of our senior management may tend to
create conflicts of interest between such individuals and the interests of the
Company and our Operating Partnership.
|X| RETAINED PROPERTY INTERESTS - Members of our senior management own
interests in certain real estate properties that were retained by them
at the time of our initial public offering. These consist primarily of
outparcels at certain of our properties, which are being offered for
sale through our management company. As a result, these members of our
senior management have interests that could conflict with the
interests of the Company, our shareholders and the Operating
Partnership with respect to any transaction involving these
properties.
|X| TAX CONSEQUENCES OF THE SALE OR REFINANCING OF CERTAIN PROPERTIES -
Since certain of our properties had unrealized gain attributable to
the difference between the fair market value and adjusted tax basis in
such properties immediately prior to their contribution to the
Operating Partnership, a taxable sale of any such properties, or a
19
significant reduction in the debt encumbering such properties, could
cause adverse tax consequences to the members of our senior management
who owned interests in our predecessor entities. As a result, members
of our senior management might not favor a sale of a property or a
significant reduction in debt even though such a sale or reduction
could be beneficial to us and the Operating Partnership. Our bylaws
provide that any decision relating to the potential sale of any
property that would result in a disproportionately higher taxable
income for members of our senior management than for us and our
stockholders, or that would result in a significant reduction in such
property's debt, must be made by a majority of the independent
directors of the board of directors. The Operating Partnership is
required, in the case of such a sale, to distribute to its partners,
at a minimum, all of the net cash proceeds from such sale up to an
amount reasonably believed necessary to enable members of our senior
management to pay any income tax liability arising from such sale.
|X| INTERESTS IN OTHER ENTITIES; POLICIES OF THE BOARD OF DIRECTORS -
Certain entities owned in whole or in part by members of our senior
management, including the construction company that built or renovated
most of our properties, may continue to perform services for, or
transact business with, us and the Operating Partnership. Furthermore,
certain property tenants are affiliated with members of our senior
management. Accordingly, although our bylaws provide that any contract
or transaction between us or the Operating Partnership and one or more
of our directors or officers, or between us or the Operating
Partnership and any other entity in which one or more of our directors
or officers are directors or officers or have a financial interest,
must be approved by our disinterested directors or stockholders after
the material facts of the relationship or interest of the contract or
transaction are disclosed or are known to them, these affiliations
could nevertheless create conflicts between the interests of these
members of senior management and the interests of the Company, our
shareholders and the Operating Partnership in relation to any
transactions between us and any of these entities.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
Refer to Item 7: Management's Discussion and Analysis for additional
information pertaining to the Properties' performance.
Malls
We own a controlling interest in 72 Malls and non-controlling interests in
seven Malls. We also own a controlling interest in three Malls and two Mall
expansions that are currently under construction. The Malls are primarily
located in middle markets and have strong competitive positions because they are
the only, or dominant, regional mall in their respective trade areas.
The Malls are generally anchored by two or more department stores and a
wide variety of mall stores. Anchor tenants own or lease their stores and
non-anchor stores (20,000 square feet or less) lease their locations. Additional
freestanding stores and restaurants that either own or lease their stores are
typically located along the perimeter of the Malls' parking areas.
We classify our regional malls into two categories - malls that have
completed their initial lease-up are referred to as stabilized malls and malls
that are in their initial lease-up phase and have not been open for three
calendar years are referred to as non-stabilized malls. The non-stabilized malls
currently include Parkway Place in Huntsville, AL, which opened in October 2002;
Coastal Grand-Myrtle Beach in Myrtle Beach, SC, which opened in March 2004;
Imperial Valley Mall in El Centro, CA, which opened in March 2005; Southaven
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Towne Center in Southaven, MS, which opened in October 2005; and Gulf Coast Town
Center (Phase I) in Ft. Myers, FL, which opened in November 2005.
We own the land underlying each Mall in fee simple interest, except for
Walnut Square, Westgate Mall, St. Clair Square, Bonita Lakes Mall, Meridian
Mall, Stroud Mall, Wausau Center, Chapel Hill Mall, Eastgate Mall, Eastland Mall
and Mall of Acadiana. We lease all or a portion of the land at each of these
Malls subject to long-term ground leases.
The following table sets forth certain information for each of the Malls as
of December 31, 2005.
Mall
Store
Year of Total Sales Percentage
Year of Most Mall per Mall
Opening/ Recent Company's Total Store Square Store GLA
Mall/Location Acquisition Expansion Ownership GLA(1) GLA(2) Foot(3) Leased(4) Anchors
------------------------ ------------ ----------- ----------- ------------- ------------- -------- ------------------------------
Coastal Grand-Myrtle Beach 2004 N/A 50% 997,838 452,670 $333 93% Bed Bath & Beyond, Belk,
Myrtle Beach, SC Books A Million, Dick's
Sporting Goods,
Dillard's, Sears
Gulf Coast Town Center 2005 N/A 50% 401,423 108,105 - 48% Babies R Us, Jo-Ann
Ft. Meyers, FL Fabrics, Linens N
Things, Staples,
Super Target
Imperial Valley Mall 2005 N/A 60% 761,790 269,433 281 83% Dillard's, JC Penney,
El Centro, CA(13) Robinsons-May, Sears
Parkway Place Mall 1957/1998 2002 45% 629,284 273,602 268 91% Dillard's, Parisian
Huntsville, AL
Southaven Towne Center 2005 N/A 100% 691,877 112,119 107 100% Circuit City, Cost Plus,
Southaven, MS(23) Linens N Things,
JC Penney
--------------- ------------ -------- ------
Total Non-Stabilized Malls 3,482,212 1,215,929 $308 89%
--------------- ------------ -------- ------
Stabilized Malls:
Arbor Place 1999 N/A 100% 1,176,365 378,280 $380 97% Bed Bath & Beyond,
Atlanta (Douglasville), GA Borders, Dillard's,
JC Penney, Macy's,
Old Navy, Parisian,
Sears
Asheville Mall 1972/2000 2000 100% 965,429 304,974 317 92% Belk, Dillard's,
Asheville, NC Dillard's West,
JC Penney, Sears
Bonita Lakes Mall(5) 1997 N/A 100% 634,012 185,871 280 98% Dillard's, Goody's,
Meridian, MS JC Penney, McRae's,
Sears
Brookfield Square 1967/2001 1997 100% 1,125,439 344,962 430 97% Barnes & Noble, Boston
Brookfield, WI Store, JC Penney, Old
Navy, Sears
Burnsville Center 1977/1998 N/A 100% 1,078,000 429,196 359 99% JC Penney, Marshall
Burnsville, MN Fields, Mervyn's(6),
Old Navy, Sears,
Steve & Barry's
Cary Towne Center 1979/2001 1993 100% 1,008,324 299,256 297 99% Belk, Dillard's,
Cary, NC Hecht's, JC Penney,
Sears
Chapel Hill Mall(7) 1966/2004 1995 100% 859,902 300,578 289 98% JC Penney, Kaufmann's,
Akron, OH Old Navy, Sears
Cherryvale Mall 1973/2001 2004 100% 786,396 302,836 328 99% Bergner's, JC Penney,
Rockford, IL Marshall Field's, Sears
Citadel Mall 1981/2001 2000 100% 1,117,380 321,610 273 92% Belk, Dillard's, Old
Charleston, SC Navy, Parisian, Sears,
Target
College Square 1988 1999 100% 475,974 153,505 253 99% Belk, Goody's, JC
Morristown, TN Penney, Proffitt's(21),
Sears
21
Mall
Store
Year of Total Sales Percentage
Year of Most Mall per Mall
Opening/ Recent Company's Total Store Square Store GLA
Mall/Location Acquisition Expansion Ownership GLA(1) GLA(2) Foot(3) Leased(4) Anchors
------------------------ ------------ ----------- ----------- ------------- ------------- -------- ------------------------------
Columbia Place 1977/2001 N/A 100% 1,094,772 329,160 269 95% Dillard's, JC
Columbia, SC Penney(22), Macy's,
Old Navy, Sears
CoolSprings Galleria 1991 1994 100% 1,115,678 361,042 414 99% Dillard's, Hecht's,
Nashville, TN JC Penney, Parisian,
Sears
Cross Creek Mall 1975/2003 2000 100% 1,036,305 255,023 482 100% Belk, Hecht's, JC
Fayetteville, NC Penney, Sears
East Towne Mall 1971/2001 2004 100% 842,426 336,064 319 94% Barnes & Noble, Boston
Madison, WI Store, Dick's Sporting
Goods, Gordman's, JC
Penney, Sears, Steve
& Barry's
Eastgate Mall(8) 1980/2003 1995 100% 1,110,157 273,438 307 98% Dillard's, JC Penney,
Cincinnati, OH Kohl's, Sears,
Steve & Barry's
Eastland Mall 1967/2005 N/A 100% 810,787 226,192 318 98% Bergner's, Famous Barr,
Bloomington, IL JC Penney, Kohl's,
Old Navy, Sears
Fashion Square 1972/2001 1993 100% 796,556 317,359 289 95% JC Penney, Marshall
Saginaw, MI Field's, Sears,
Steve & Barry's
Fayette Mall 1971/2001 1993 100% 1,193,441 352,043 490 96% Dick's, Dillard's, JC
Lexington, KY Penney, Macy's, Sears
Foothills Mall 1983/1996 2004 95% 482,571 155,875 245 96% Goody's, JC Penney,
Maryville, TN Proffitt's for Women,
Proffitt's for Men
Kids & Home, Sears,
TJ Maxx
Frontier Mall 1981 1997 100% 528,745 214,994 234 95% Dillard's I, Dillard's
Cheyenne, WY II, Gart Sports, JC
Penney, Sears
Georgia Square 1981 N/A 100% 674,210 252,656 272 98% Belk, JC Penney,
Athens, GA Macy's, Sears
Governor's Square 1986 1999 48% 742,517 310,892 294 90% Belk, Dillard's,
Clarksville, TN Goody's, JC Penney,
Sears
Greenbrier Mall 1981/2004 2004 100% 888,450 304,465 356 95% Dillard's, Hecht's,
Chesapeake, VA JC Penney, Sears
Hamilton Place 1987 1998 90% 1,152,172 371,124 376 99% Dillard's, JC Penney,
Chattanooga, TN Parisian, Proffitt's
for Men Kids & Home,
Proffitt's for Women,
Sears
Hanes Mall 1975/2001 1990 100% 1,482,583 553,395 340 96% Belk, Dillard's,
Winston-Salem, NC Hecht's, JC Penney,
Old Navy, Sears
Harford Mall 1973/2003 1999 100% 489,597 187,661 362 96% Hecht's, Old Navy,
Bel Air, MD Sears
Hickory Hollow Mall 1978/1998 1991 100% 1,098,052 427,863 251 94% Dillard's, Hecht's,
Nashville, TN JC Penney, Linens N
Things, Sears
Hickory Point Mall 1977/2005 N/A 100% 835,222 244,405 212 64% Bergner's, JC Penney,
Decatur, IL Kohl's, Old Navy,
Sears, Von Maur
Honey Creek Mall 1968/2004 1981 100% 678,305 212,182 326 96% Elder-Beerman,
Terre Haute, IN JC Penney, L.S. Ayers,
Sears
Janesville Mall 1973/1998 1998 100% 615,241 161,911 291 96% Boston Store,
Janesville, WI JC Penney, Kohl's,
Sears
22
Mall
Store
Year of Total Sales Percentage
Year of Most Mall per Mall
Opening/ Recent Company's Total Store Square Store GLA
Mall/Location Acquisition Expansion Ownership GLA(1) GLA(2) Foot(3) Leased(4) Anchors
------------------------ ------------ ----------- ----------- ------------- ------------- -------- ------------------------------
Jefferson Mall 1978/2001 1999 100% 987,863 272,650 312 91% Dillard's, JC Penney,
Louisville, KY Macy's, Sears
Kentucky Oaks Mall 1982/2001 1995 50% 1,125,723 354,671 267 94% Best Buy, Dillard's,
Paducah, KY Elder-Beerman, JC
Penney, K's Merchandise
Mart, Sears
The Lakes 2001 N/A 90% 592,756 261,502 260 100% Bed Bath & Beyond,
Muskegon, MI Dick's Sporting Goods,
JC Penney, Sears,
Younkers
Lakeshore Mall 1992 1999 100% 500,729 147,901 319 93% Beall's(9), Belk, JC
Sebring, FL Penney, Kmart, Sears
Laurel Park Place 1989/2005 1994 70% 502,927 204,117 410 88% Parisian, Von Maur
Livonia, MI
Layton Hills Mall 1980/2005 1998 100% 626,418 313,495 340 98% Gart Sports, JCPenney,
Layton, UT Meier & Frank, Mervyn's
Madison Square 1984 1985 100% 932,581 299,246 287 93% Dillard's, JC Penney,
Huntsville, AL McRae's, Parisian,
Sears, Steve & Barry's
Mall del Norte 1977/2004 1993 100% 1,207,719 377,836 421 93% Beall Bros.(9),
Laredo, TX Dillard's, Foley's,
Foley's Home Store,
JC Penney, Joe Brand,
Mervyn's, Sears,
Ward's(10)
Mall of Acadiana(24) 1979/2005 2004 100% 1,000,518 306,111 426 97% Dillard's, Foley's,
Lafayette, LA JCPenney, Sears
Meridian Mall(11) 1969/1998 2001 100% 979,861 500,868 272 97% Bed Bath & Beyond,
Lansing, MI Dick's Sporting Goods,
JC Penney, Marshall
Field's, Mervyn's, Old
Navy, Schuler Books,
Steve & Barry's,
Younkers
Midland Mall 1991/2001 N/A 100% 514,468 197,194 287 95% Barnes & Noble, Elder-
Midland, MI Beerman, JC Penney,
Sears, Steve & Barry's,
Target
Monroeville Mall 1969/2004 2003 100% 1,151,959 428,413 320 95% Macy's, JC Penney,
Pittsburgh, PA Kaufmann's(20)
Northpark Mall 1972/2004 1996 100% 978,850 377,255 296 86% Famous Barr, Famous
Joplin, MO Barr Home Store, JC
Penney, Old Navy,
Sears, Shopko(12),
Ward's(12)
Northwoods Mall 1972/2001 1995 100% 1,021,337 290,660 346 99% Belk, Books A Million,
Charleston, SC Dillard's, JC Penney,
Sears
Oak Hollow Mall 1995 N/A 75% 801,128 251,008 210 89% Belk, Dillard's,
High Point, NC JC Penney, Sears,
Steve & Barry's
Oak Park Mall 1974/2005 1998 100% 1,558,184 475,097 443 96% Dillard's North,
Overland Park, KS Dillard's South, JC
Penney, Nordstrom,
The Jones Store
Old Hickory Mall 1967/2001 1994 100% 546,907 166,812 322 93% Belk, JC Penney,
Jackson, TN Macy's, Sears
Panama City Mall 1976/2002 1984 100% 604,597 222,290 315 99% Dillard's, JC Penney,
Panama City, FL Linens N Things, Sears
23
Mall
Store
Year of Total Sales Percentage
Year of Most Mall per Mall
Opening/ Recent Company's Total Store Square Store GLA
Mall/Location Acquisition Expansion Ownership GLA(1) GLA(2) Foot(3) Leased(4) Anchors
------------------------ ------------ ----------- ----------- ------------- ------------- -------- ------------------------------
Park Plaza 1988/2004 N/A 100% 567,120 266,681 464 83% Dillard's I,
Little Rock, AR Dillard's II
Parkdale Mall 1972/2001 1986 100% 1,409,128 355,741 312 92% Beall Bros.(9), Books
Beaumont, TX A Million, Dillard's I,
Dillard's II(14),
Foley's, JC Penney,
Linens N Things, Old
Navy, Sears, Steve &
Barry's
Pemberton Square 1985 1999 100% 351,920 133,685 154 74% Hudson's/LA, Dillard's,
Vicksburg, MS JC Penney, McRae's
Plaza del Sol 1979 1996 51% 266,596 107,570 177 97% Beall Bros.(9), JC
Del Rio, TX Penney, Bel Furniture/
LA, Ross
Post Oak Mall 1982 1985 100% 777,628 290,102 296 96% Beall Bros.(9),
College Station, TX Dillard's, Dillard's
South, Foley's, JC
Penney, Sears,
Steve & Barry's
Randolph Mall 1982/2001 1989 100% 378,913 143,720 202 95% Belk, Books A Million,
Asheboro, NC Dillard's, JC Penney,
Sears
Regency Mall 1981/2001 1999 100% 928,305 294,897 282 92% Boston Store, JC
Racine, WI Penney, Linens N
Things, Sears, Steve &
Barry's, Target
Richland Mall 1980/2002 1996 100% 709,289 229,811 298 92% Beall Bros.(9),
Waco, TX Dillard's I, Dillard's
II, JC Penney, Sears
River Ridge Mall 1980/2003 2000 100% 786,440 204,870 317 99% Belk, Hecht's, JC
Lynchburg, VA Penney, Sears, Value
City
Rivergate Mall 1971/1998 1998 100% 1,129,491 347,662 314 99% Dillard's, Hecht's, JC
Nashville, TN Penney, Linens N
Things, Sears
Southpark Mall 1989/2003 N/A 100% 628,283 202,308 296 97% Hecht's, JC Penney,
Colonial Heights, VA Dillard's, Sears
St. Clair Square(15) 1974/1996 1993 100% 1,051,658 282,384 398 96% Dillard's, Famous Barr,
Fairview Heights, IL JC Penney, Sears
Stroud Mall(16) 1977/1998 2005 100% 425,947 152,024 314 99% JC Penney, Sears,
Stroudsburg, PA The Bon-Ton
Sunrise Mall 1979/2003 2000 100% 751,218 327,761 358 87% Beall Bros.(9),
Brownsville, TX Dillard's, JC Penney,
Linens N Things, Sears
Towne Mall 1977/2001 N/A 100% 465,598 155,284 217 92% Dillard's, Elder-
Franklin, OH Beerman, Sears
Triangle Town Center 2002/2005 N/A 50% 1,275,957 427,382 338 88% Barnes & Noble, Belk,
Raleigh, NC Dillard's, Hecht's,
Sak's Fifth Avenue,
Sears
Turtle Creek Mall 1994 1995 100% 846,098 223,004 412 96% Dillard's, Goody's,
Hattiesburg, MS JC Penney, McRae's I,
McRae's II, Sears
Twin Peaks Mall 1985 1997 100% 558,203 244,818 242 95% Dillard's I, Dillard's
Longmont, CO II, JC Penney, Sears,
Steve & Barry's
Valley View Mall 1985/2003 1999 100% 1,241,173 313,079 348 99% Belk, Hecht's,
Roanoke, VA JC Penney, Old Navy,
Sears
Volusia Mall 1974/2004 1982 100% 1,060,489 241,946 441 98% Macy's, Dillard's East,
Daytona Beach, FL Dillard's West,
Dillard's South,
JC Penney, Sears
24
Mall
Store
Year of Total Sales Percentage
Year of Most Mall per Mall
Opening/ Recent Company's Total Store Square Store GLA
Mall/Location Acquisition Expansion Ownership GLA(1) GLA(2) Foot(3) Leased(4) Anchors
------------------------ ------------ ----------- ----------- ------------- ------------- -------- ------------------------------
Walnut Square(17) 1980 1992 100% 449,160 169,965 260 95% Belk, Belk Home & Kids,
Dalton, GA Goody's, JC Penney,
Sears
Wausau Center(18) 1983/2001 1999 100% 427,244 154,044 269 94% JC Penney, Sears,
Wausau, WI Younkers
West Towne Mall 1970/2001 2004 100% 905,324 270,419 428 93% Boston Store, Dick's
Madison, WI Sporting Goods,
JC Penney, Sears,
Steve & Barry's
Westgate Mall(19) 1975/1995 1996 100% 1,102,444 340,316 272 98% Bed Bath & Beyond,
Spartanburg, SC Belk, Dick's Sporting
Goods, Dillard's,
JC Penney, Sears
Westmoreland Mall 1977/2002 1994 100% 1,012,794 312,339 309 99% JC Penney, Kaufmann's,
Greensburg, PA Kaufmann's Home Store,
Old Navy, Sears, Steve
& Barry's, The Bon-Ton
York Galleria 1989/1999 N/A 100% 770,462 233,245 321 96% Boscov's, JC Penney,
York, PA Sears, The Bon-Ton
------------- ------------- -------- --------
Total Stabilized Malls 62,806,415 20,740,995 $331 95%
------------- ------------- -------- --------
Grand total 66,288,627 21,956,924 $330 94%
============= ============= ======== ========
(1) Includes total square footage of the Anchors (whether owned or leased by
the Anchor) and Mall Stores. Does not include future expansion areas.
(2) Excludes Anchors.
(3) Totals represent weighted averages.
(4) Includes tenants paying rent for executed leases as of December 31, 2005.
(5) Bonita Lakes - We are the lessee under a ground leases for 82 acres, which
extends through June 30, 2060, including one 25-year renewal option. The
annual base rent at December 31, 2005 is $31,341 increasing by an average
of 2% per year.
(6) Burnsville Center - The former Mervyn's building is being redeveloped. The
lower level is now occupied by Steve & Barry's and the upper level is
scheduled to open as Dick's Sporting Goods in April 2006.
(7) Chapel Hill Mall - Ground rent is $10,000 per year. The lease extends
through September 29, 2016 and has no renewal options.
(8) Eastgate Mall - Ground rent is $24,000 per year. The lease extends through
January 31, 2022 and has no renewal options.
(9) Lakeshore Mall, Mall del Norte, Parkdale Mall, Plaza del Sol, Post Oak
Mall, Richland Mall, and Sunrise Mall - Beall Bros. operating in Texas is
unrelated to Beall's operating in Florida.
(10) Mall del Norte - Ward's is vacant and is currently being redeveloped.
Circuit City will open in a portion of this space in February 2006.
(11) Meridian Mall - We are the lessee under several ground leases in effect
through March 2067, with one 99-year extension option. Fixed rent is
$18,700 per year plus 3% to 4% of all rents.
(12) Northpark Mall - Shopko and Ward's are vacant.
(13) Imperial Valley - Mall opened in March 2005. Sales PSF is for a partial
year.
(14) Parkdale Mall - Dillard's II is closed due to Hurricane Rita.
(15) St. Clair Square - We are the lessee under a ground lease for 20 acres,
which extends through January 31, 2073, including 14 five-year renewal
options and one four-year renewal option. The rental amount is $40,500 per
year. In addition to base rent, the landlord receives .25% of Dillard's
sales in excess of $16,200,000.
(16) Stroud Mall - We are the lessee under a ground lease, which extends through
July, 2089. The current rental amount is $50,000 per year, increasing by
$10,000 every ten years through 2059. An additional $100,000 is paid every
10 years.
(17) Walnut Square - We are the lessee under several ground leases, which extend
through March 14, 2078, including six ten-year renewal options and one
eight-year renewal option. The rental amount is $149,450 per year. In
addition to base rent, the landlord receives 20% of the percentage rents
collected. The Company has a right of first refusal to purchase the fee.
(18) Wausau Center - Ground rent is $76,000 per year plus 10% of net taxable
cash flow. The lease extends through May 31, 2067 and has no renewal
options.
(19) Westgate Mall - We are the lessee under several ground leases for
approximately 53% of the underlying land. The leases extend through October
31, 2084, including six ten-year renewal options. The rental amount is
$130,000 per year. In addition to base rent, the landlord receives 20% of
the percentage rents collected. The Company has a right of first refusal to
purchase the fee.
(20) Monroeville Mall - The Kaufmann's store has been purchased by Boscov's.
(21) College Square - Proffitt's closed in December 2005. Kohl's has purchased
the building and is expected to open in this space in October 2006.
(22) Columbia Place - JC Penney closed on October 10, 2005.
(23) Southaven Towne Center - Opened in October 2005. Sales PSF is for a partial
year.
(24) Mall of Acadiana - Ground rent was $10,000 for 2005, will be $50,000 for
2006 and will increase to $500,000 per year through July 31, 2015. There
are no renewal options.
25
Anchors
Anchors are an important factor in a Mall's successful performance. The
public's identification with a mall property typically focuses on the anchor
tenants. Mall anchors are generally a department store whose merchandise appeals
to a broad range of shoppers and plays a significant role in generating customer
traffic and creating a desirable location for the mall store tenants.
Anchors may own their stores and the land underneath, as well as the
adjacent parking areas, or may enter into long-term leases with respect to their
stores. Rental rates for anchor tenants are significantly lower than the rents
charged to mall store tenants. Anchors account for 5.8% of the total revenues
from our Properties. Each anchor that owns its store has entered into an
operating and reciprocal easement agreement with us covering items such as
operating covenants, reciprocal easements, property operations, initial
construction and future expansion.
During 2005, we added the following anchors and junior anchor boxes (i.e.,
non-traditional anchors) to the following Malls:
Anchor Property Location
----------------------------------------------------------------------------------
J.C. Penney Greenbrier Mall Chesapeake, VA
Steve & Barry's West Towne Mall Madison, WI
Steve & Barry's Fashion Square Mall Saginaw, MI
Steve & Barry's Post Oak Mall College Station, TX
Steve & Barry's Parkdale Mall Beaumont, TX
Steve & Barry's Burnsville Mall Burnsville, MN
Steve & Barry's Oak Hollow Mall High Point, NC
Steve & Barry's Twin Peaks Mall Longmont, CO
Dick's Sporting Goods Westmoreland South Greensburg, PA
Dick's Sporting Goods Citadel Mall Charleston, SC
Dick's Sporting Goods Fayette Mall Lexington, KY
Linens `N' Things Panama City Mall Panama City, FL
Linens `N' Things Sunrise Mall Brownsville, TX
Ross Dress For Less Plaza del Sol Del Rio, TX
Barnes & Noble Brookfield Square Brookfield, WI
As of December 31, 2005, the Malls had a total of 400 anchors and junior
anchors including seven vacant anchor locations. The mall anchors and junior
anchors and the amount of GLA leased or owned by each as of December 31, 2005 is
as follows:
Number of
Anchor Stores Leased GLA Owned GLA Total GLA
------------------------------ -------------- ----------------- ------------------ -----------------
JCPenney 69 4,087,506 3,599,091 7,686,597
Sears 68 1,694,281 7,088,265 8,782,546
Dillard's 54 481,759 6,951,701 7,433,460
Sak's
Boston Store 5 96,000 599,280 695,280
Bergner's 3 - 385,401 385,401
Parisian 7 281,431 647,633 929,064
Sak's 1 - 83,066 83,066
Younkers 3 194,161 106,131 300,292
Subtotal 19 571,592 1,821,511 2,393,103
Belk
Belk 20 624,928 1,947,054 2,571,982
McRae's 5 - 511,359 511,359
Proffitt's 5 - 540,483 540,483
Subtotal 30 624,928 2,998,896 3,623,824
Bon-Ton
Bon-Ton 3 87,024 231,715 318,739
Elder-Beerman 4 194,613 117,888 312,501
Subtotal 7 281,637 349,603 631,240
Federated Department Stores
Famous Barr 4 371,830 121,231 493,061
26
Number of
Anchor Stores Leased GLA Owned GLA Total GLA
------------------------------ -------------- ----------------- ------------------ -----------------
Foley's 5 146,725 460,278 607,003
Hecht's 13 413,707 1,377,646 1,791,353
Jones Store 1 - 181,373 181,373
Kaufmann's 4 189,554 402,879 592,433
L.S. Ayres 1 173,000 - 173,000
Macy's 8 360,226 1,007,470 1,367,696
Marshall Fields 4 147,632 494,299 641,931
Meier & Frank 1 162,240 - 162,240
Robinsons-May 1 - 138,193 138,193
Subtotal 42 1,964,914 4,183,369 6,148,283
Babies R Us 1 30,700 - 30,700
Barnes & Noble 4 118,360 - 118,360
Beall Bros. 6 222,440 - 222,440
Beall's (FL) 1 45,844 - 45,844
Bed, Bath & Beyond 5 154,835 - 154,835
Bel Furniture 1 29,998 - 29,998
Best Buy 1 34,262 - 34,262
Books A Million 4 69,765 - 69,765
Borders 1 25,814 - 25,814
Boscov's 1 - 150,000 150,000
Circuit City 1 33,887 - 33,887
Cost Plus 1 18,243 - 18,243
Dick's Sporting Goods 7 419,551 - 419,551
Gart Sports 2 41,287 - 41,287
Goody's 6 204,249 - 204,249
Gordman's 1 47,943 - 47,943
Hudson's 1 20,269 - 20,269
Jo-Ann Fabrics 1 35,330 - 35,330
Joe Brand 1 29,413 - 29,413
Kmart 1 86,479 - 86,479
Kohl's 4 357,091 - 357,091
Linens N Things 8 222,034 - 222,034
Mervyn's 3 242,389 - 242,389
Nordstrom 1 - 200,000 200,000
Old Navy 15 310,739 - 310,739
Ross 1 30,307 - 30,307
Schuler Books 1 24,116 - 24,116
Shopko/K's Merchandise Mart 1 - 85,229 85,229
Staples 1 20,388 - 20,388
Steve & Barry's 14 519,940 - 519,940
Target 4 - 490,476 490,476
TJ Maxx 1 30,000 - 30,000
Value City 1 97,411 - 97,411
Von Maur 2 - 233,280 233,280
Vacant Anchors:
Shopko (1) 1 - 90,000 90,000
Ward's 2 212,226 - 212,226
JC Penney 1 - 120,532 120,532
Proffit's (2) 1 - 50,000 50,000
Mervyn's (3) 1 62,419 - 62,419
Vacant 1 - 158,857 158,857
--------------------------------------------------- -----------------
400 13,504,346 28,570,810 42,075,156
=================================================== =================
(1) Although store is vacant, rental payments continue to be made.
(2) The Proffitt's store at College Square Mall has been purchased by Kohl's,
which is expanding the store for an October 2006 opening.
(3) We have purchased this space and are redeveloping it.
27
Mall Stores
The Malls have approximately 10,376 mall stores. National and regional
retail chains (excluding local franchises) lease approximately 76.1% of the
occupied mall store GLA. Although mall stores occupy only 28.7% of the total
mall GLA, the Malls received 90.7% of their revenues from mall stores for the
year ended December 31, 2005.
Mall Lease Expirations
The following table summarizes the scheduled lease expirations for mall
stores as of December 31, 2005:
Expiring
Average Leases as % Expiring
Number of GLA of Annualized of Total Leases as a
Year Ending Leases Annualized Expiring Base Rent Per Annualized % of Total
December 31, Expiring Base Rent (1) Leases Square Foot Base Rent (2) Leased GLA(3)
----------------- -------------- --------------- -------------- --------------- -------------- --------------
2006 768 $39,905,000 1,713,000 $23.30 9.1% 10.0%
2007 901 56,291,000 2,422,000 23.24 12.8% 14.2%
2008 822 52,376,000 2,167,000 24.17 12.0% 12.7%
2009 708 48,848,000 1,847,000 26.45 11.1% 10.8%
2010 751 53,644,000 1,959,000 27.38 12.2% 11.5%
2011 557 43,950,000 1,610,000 27.30 10.0% 9.4%
2012 438 32,614,000 1,110,000 29.38 7.4% 6.5%
2013 417 34,490,000 1,240,000 27.82 7.9% 7.3%
2014 345 26,177,000 898,000 29.15 6.0% 5.3%
2015 377 32,610,000 1,232,000 26.47 7.4% 7.2%
(1) Total annualized contractual base rent in effect at December 31, 2005 for
all leases that had been executed as of December 31, 2005, including rent
for space that is leased but not occupied.
(2) Total annualized contractual base rent of expiring leases as a percentage
of the total annualized base rent of all leases that were executed as of
December 31, 2005.
(3) Total GLA of expiring leases as a percentage of the total GLA of all leases
that were executed as of December 31, 2005.
Mall Tenant Occupancy Costs
Occupancy cost is a tenant's total cost of occupying its space, divided by
sales. The following table summarizes tenant occupancy costs as a percentage of
total mall store sales for the last three years:
Year Ended December 31, (1)
---------------------------------------------
2005 2004 2003
-------------- -------------- ---------------
Mall store sales (in millions)(1) $4,367.0 $3,453.0 $3,199.9
============== ============== ===============
Minimum rents 8.2% 8.3% 8.5%
Percentage rents 0.4% 0.3% 0.3%
Tenant reimbursements (2) 3.2% 3.4% 3.4%
-------------- -------------- ---------------
Mall tenant occupancy costs 11.8% 12.0% 12.2%
============== ============== ===============
(1) Consistent with industry practice, sales are based on reports by retailers
(excluding theaters) leasing mall store GLA of 10,000 square feet or less.
Represents 100% of sales for the Malls. In certain cases, the Company and
the Operating Partnership own less than a 100% interest in the Malls.
(2) Represents reimbursements for real estate taxes, insurance, common area
maintenance charges and certain capital expenditures.
Associated Centers
We own a controlling interest in 27 Associated Centers and a
non-controlling interest in three Associated Centers. We also own a controlling
interest in two Associated Centers that were under construction at December 31,
2005.
Associated Centers are retail properties that are adjacent to a regional
mall complex and include one or more anchors, or big box retailers, along with
smaller tenants. Anchor tenants typically include tenants such as TJ Maxx,
Target, Toys R Us and Goody's. Associated Centers are managed by the staff at
the Mall it is adjacent to and usually benefit from the customers drawn to the
Mall.
28
We own the land underlying the Associated Centers in fee simple interest,
except for Bonita Lakes Crossing, which is subject to a long-term ground lease.
The following table sets forth certain information for each of the
Associated Centers as of December 31, 2005:
Year of
Opening/ Total Percentage
Associated Center/ Most Recent Company's Leasable GLA
Location Expansion Ownership Total GLA(1) GLA(2) Occupied(3) Anchors
-----------------------------------------------------------------------------------------------------------------------------------
Annex at Monroeville 1969 100% 185,309 185,309 99% Burlington Coat Factory, Dick's
Pittsburgh, PA Sporting Goods, Guitar Center,
Office Max
Bonita Lakes Crossing(4) 1997/1999 100% 138,150 138,150 100% Books-A-Million, Office Max,
Meridian, MS Old Navy, Shoe Carnival, TJ Maxx,
Toys 'R' Us
Chapel Hill Suburban 1969 100% 117,088 117,088 99% H.H. Gregg, Value City
Akron, OH
Coastal Grand Crossing 2005 50% 14,907 14,907 89% Lifeway Christian Store
Myrtle Beach, SC
CoolSprings Crossing 1992 100% 366,466 184,905 100% American Signature(5), H.H.
Nashville, TN Gregg(6), Lifeway Christian Store,
Target(5), Toys "R" Us(5),
Wild Oats(6)
Courtyard at Hickory Hollow 1979 100% 77,560 77,560 67% Carmike Cinemas, Just for Feet(7)
Nashville, TN
The District at Monroeville 2004 100% 70,039 70,039 88% Barnes & Noble
Pittsburgh, PA
Eastgate Crossing 1991 100% 195,112 195,112 97% Borders, Circuit City, Kroger,
Cincinnati, OH Office Depot, Office Max(5)
Foothills Plaza 1983/1986 100% 71,216 71,216 98% Carmike Cinemas, Dollar General,
Maryville, TN Foothill's Hardware, Fowler's
Furniture, Hall's Salvage and
Surplus
Frontier Square 1985 100% 186,552 16,527 100% PetCo(8), Ross(8), Target(5),
Cheyenne, WY TJ Maxx(8)
Georgia Square Plaza 1984 100% 15,393 15,393 100% Georgia Theatre Company
Athens, GA
Governor's Square Plaza 1985(9) 49% 189,930 57,351 100% Best Buy, Lifeway Christian Store,
Clarksville, TN Premier Medical Group, Target
Gunbarrel Pointe 2000 100% 281,525 155,525 99% David's Bridal, Goody's, Kohl's,
Chattanooga, TN Target(5)
Hamilton Corner 1990/2005 90% 69,695 69,695 86% PetCo
Chattanooga, TN
Hamilton Crossing 1987/2005 92% 194,592 101,479 94% Home Goods(10), Guitar Center,
Chattanooga, TN Lifeway Christian Store, Michaels
(10), TJ Maxx, Toys "R" Us(5)
Harford Annex 1973/2003 100% 107,903 107,903 100% Best Buy, Dollar Tree, Gardiner's
Bel Air, MD Furniture, PetsMart
The Landing at Arbor Place 1999 100% 169,523 91,836 85% Circuit City(5), Lifeway Christian
Atlanta(Douglasville), GA Store, Michael's, Shoe Carnival,
Toys "R" Us(5)
Layton Hills Convenience Center 1980 100% 93,892 93,892 93% Big Lots, Dollar Tree,
Layton, UT Downeast Outfitters
Layton Hills Plaza 1989 100% 19,500 19,500 76% None
Layton, UT
Madison Plaza 1984 100% 153,085 98,690 93% Food World, Design World,
Huntsville, AL H.H. Gregg(11), TJ Maxx
Parkdale Crossing 2002 100% 96,102 96,102 98% Barnes & Noble, Lifeway Christian
Beaumont, TX Store, Office Depot, PetCo
Pemberton Plaza 1986 10% 77,894 26,948 75% Blockbuster, Kroger(5)
Vicksburg, MS
The Shoppes at Hamilton Place 2003 92% 125,301 125,301 98% Bed Bath & Beyond, Marshall's, Ross
Chattanooga, TN
29
Year of
Opening/ Total Percentage
Associated Center/ Most Recent Company's Leasable GLA
Location Expansion Ownership Total GLA(1) GLA(2) Occupied(3) Anchors
-----------------------------------------------------------------------------------------------------------------------------------
The Shoppes at Panama City 2004 100% 66,503 66,503 86% Best Buy
Panama City, FL
Sunrise Commons 2001 100% 100,567 100,567 100% K-Mart(5), Marshall's, Old Navy,
Brownsville, TX Ross, Staples(5)
The Terrace 1997 92% 156,297 117,025 100% Barnes & Noble, Circuit City(5),
Chattanooga, TN Linens 'N Things, Old Navy,
Party City, Staples
Triangle Town Place 2004 50% 149,471 149,471 100% Bed, Bath & Beyond, Dick's
Raleigh, NC Sporting Goods, DSW Shoes,
Party City
Village at Rivergate 1981/1998 100% 166,366 66,366 75% Circuit City, Target(5)
Nashville, TN
West Towne Crossing 1980 100% 436,878 169,195 100% Barnes & Noble, Best Buy,
Madison, WI Kohl's(5), Cub Foods(5), Gander
Mountain(5), Office Max(5),
Shopko(5)
Westgate Crossing 1985/1999 100% 157,838 157,838 95% Goody's, Old Navy, Toys "R" Us
Spartanburg, SC
Westmoreland Crossing 2002 100% 277,483 277,483 86% Carmike Cinema, Dick's Sporting
Greensburg, PA Goods, Michaels(12), Shop N'
Save(13), T.J. Maxx
------------ ------------- --------
Total Associated Centers 4,528,137 3,234,876 84%
============ ============= ========
(1) Includes total square footage of the Anchors (whether owned or leased by
the Anchor) and shops. Does not include future expansion areas.
(2) Includes leasable Anchors.
(3) Includes tenants with executed leases as of December 31, 2005, and includes
leased anchors.
(4) Bonita Lakes Crossing - The land is ground leased through June 2035 with
options to extend through June 2060. The annual rent at December 31, 2005
was $21,779, increasing by an average of 2% each year.
(5) Owned by the tenant.
(6) CoolSprings Crossing - Space is owned by Developers Diversified and
subleased to H.H. Gregg and Wild Oats.
(7) Courtyard at Hickory Hollow - Just for Feet is vacant.
(8) Frontier Square - Space is owned by Clifford Enterprises and subleased to
PetCo, Ross, and TJ Maxx.
(9) Governor's Square Plaza - Originally opened in 1985, and was acquired by
the Company in June 1997.
(10) Hamilton Crossing - Former Service Merchandise space is owned by Developers
Diversified and subleased to Home Goods and Michaels.
(11) Madison Plaza - Former Service Merchandise space is owned by Developers
Diversified and subleased to H.H. Gregg.
(12) Westmoreland Crossing - Former Service Merchandise space is owned by
Developers Diversified and subleased to Michaels.
(13) Westmoreland Crossing - Shop N' Save closed February 4, 2006.
Associated Centers Lease Expirations
The following table summarizes the scheduled lease expirations for
Associated Center tenants in occupancy as of December 31, 2005.
Expiring
Annualized Average Leases as % Expiring
Number of Base Rent of GLA of Annualized of Total Leases as a
Year Ending Leases Expiring Expiring Base Rent Per Annualized % of Total
December 31, Expiring Leases (1) Leases Square Foot Base Rent (2) Leased GLA(3)
----------------- -------------- --------------- -------------- --------------- -------------- --------------
2006 28 $1,156,000 83,000 $13.99 4.2% 3.3%
2007 36 1,794,000 165,000 10.87 6.5% 6.5%
2008 32 2,217,000 218,000 10.19 8.1% 8.6%
2009 27 2,602,000 230,000 11.33 9.5% 9.1%
2010 27 3,058,000 335,000 9.12 11.2% 13.2%
2011 11 2,924,000 301,000 9.73 10.7% 11.9%
2012 18 3,470,000 282,000 12.32 12.7% 11.1%
2013 10 1,246,000 101,000 12.34 4.5% 4.0%
2014 15 2,432,000 236,000 10.29 8.9% 9.3%
2015 18 2,310,000 448,000 17.01 8.4% 5.4%
(1) Total annualized contractual base rent in effect at December 31, 2005 for
all leases that had been executed as of December 31, 2005, including rent
for space that is leased but not occupied.
(2) Total annualized contractual base rent of expiring leases as a percentage
of the total annualized base rent of all leases that were executed as of
December 31, 2005.
(3) Total GLA of expiring leases as a percentage of the total GLA of all leases
that were executed as of December 31, 2005.
30
Community Centers
We own a controlling interest in seven Community Centers. We also own a
non-controlling interest in one Community Center and a controlling interest in
one community center expansion that are currently under construction.
Community Centers typically have less development risk because of shorter
development periods and lower costs. While Community Centers generally maintain
higher occupancy levels and are more stable, they typically have slower rent
growth because the anchor stores' rents are typically fixed and are for longer
terms.
Community Centers are designed to attract local and regional area customers
and are typically anchored by a combination of supermarkets, or value-priced
stores that attract shoppers to each center's small shops. The tenants at our
Community Centers typically offer necessities, value-oriented and convenience
merchandise.
We own the land underlying the Community Centers in fee simple interest,
except for Massard Crossing and Wilkes-Barre Township Marketplace, which are
subject to long-term ground leases for all or a portion of the land underlying
these properties.
The following tables sets forth certain information for each of our
Community Centers at December 31, 2005:
Year of
Opening/ Total Percentage
Community Center/ Most Recent Company's Total Leasable GLA
Location Expansion Ownership GLA(1) GLA(2) Occupied(3) Anchors
-----------------------------------------------------------------------------------------------------------------------------------
Chicopee Marketplace 2005 100% 439,602 151,263 100% iParty, Marshall's,
Chicopee, MA Ocean State Job Lot,
Staples
Cobblestone at Royal Palm 2005 100% 33,207 33,207 100% Target(4)
Royal Palm Beach, FL
Fashion Square(5) 2004 100% 30,368 30,368 79% None
Orange Park, FL
Massard Crossing 2001 10% 300,717 98,410 100% Goody's, TJ Maxx,
Ft. Smith, AR Wal*Mart(4)
Springdale Center 1960/2002 100% 780,041 644,155 96% Barnes & Noble, Best
Mobile, AL Buy, Burlington Coat
Factory, David's
Bridal, Goody's,
Linens N Things,
Marquee Cinemas(6),
McRae's, Old Navy,
Sam's Club, Staples,
Wherehouse Music
Wilkes-Barre Township Marketplace 2004 100% 305,770 100,770 100% A.C. Moore Crafts,
Wilkes-Barre Township, PA Fashion Bug,
Wal*Mart(4)
Willowbrook Plaza 1999 10% 386,185 292,635 87% American
Houston, TX Multi-Cinema, Home
Depot(7), Lane Home
Furnishings, Linens
'N Things
-----------------------------------
Total Community Centers 2,275,890 1,350,808 95%
===================================
(1) Includes total square footage of the Anchors (whether owned or leased by
the Anchor) and shops. Does not include future expansion areas.
(2) Includes leasable Anchors.
(3) Includes tenants with executed leases as of December 31, 2005, and includes
leased anchors.
(4) Owned by the tenant.
(5) Fashion Square - 18,125 square feet under construction.
(6) Springdale Center - Former Marquee Cinemas space is vacant.
(7) Willowbrook Plaza - Home Depot is vacant and owns its space.
31
Community Centers Lease Expirations
The following table summarizes the scheduled lease expirations for tenants
in occupancy at Community Centers as of December 31, 2005:
Expiring
Annualized Average Leases as % Expiring
Number of Base Rent of GLA of Annualized of Total Leases as a
Year Ending Leases Expiring Expiring Base Rent Per Annualized % of Total
December 31, Expiring Leases (1) Leases Square Foot Base Rent (2) Leased GLA(3)
----------------- -------------- --------------- -------------- --------------- -------------- --------------
2006 5 $ 247,906 13,824 $17.93 3.4% 2.9%
2007 14 1,047,349 117,513 8.91 14.4% 24.3%
2008 9 341,212 18,172 18.78 4.7% 3.8%
2009 5 174,462 8,504 20.52 2.4% 1.8%
2010 19 1,091,688 61,914 17.63 15.0% 12.8%
2011 5 375,922 21,263 17.68 5.2% 4.4%
2012 3 117,273 8,943 13.11 1.6% 1.8%
2013 1 69,000 4,000 17.25 0.9% 0.8%
2014 3 469,199 29,215 16.06 6.4% 6.0%
2015 9 1,396,763 103,297 13.52 19.2% 21.3%
(1) Total annualized contractual base rent in effect at December 31, 2005 for
all leases that had been executed as of December 31, 2005, including rent
for space that is leased but not occupied.
(2) Total annualized contractual base rent of expiring leases as a percentage
of the total annualized base rent of all leases that were executed as of
December 31, 2005.
(3) Total GLA of expiring leases as a percentage of the total GLA of all leases
that were executed as of December 31, 2005.
Mortgages
We own eight mortgages that are collateralized by first mortgages or
wrap-around mortgages on the underlying real estate and related improvements.
The mortgages are more fully described on Schedule IV in Part IV of this report.
Office Buildings
We own a 92% interest in the 128,000 square foot office building where our
corporate headquarters is located. As of December 31, 2005, we occupied 65% of
the total square footage of the building.
Mortgage Loans Outstanding At December 31, 2005 (in thousands)
Our
Ownership
Interest Principal Balloon Open to
in the Interest Balance as of Annual Debt Maturity Payment Due Prepayment
Property Property Rate 12/31/05 (1) Service Date on Maturity Date (2)
-------------------------------------------------------------------------------------------------------------------------------
Consolidated Debt
Malls:
Arbor Place 100% 6.51% $ 76,525 $ 6,610 Jul-12 $ 63,397 Open (4)
Asheville Mall 100% 6.98% 67,780 5,677 Sep-11 61,229 Open
Bonita Lakes Mall 100% 6.82% 25,789 2,503 Oct-09 22,539 Open
Brookfield Square 100% 5.08% 104,876 6,822 Nov-15 85,601 Nov-08 (4)
Burnsville Center 100% 8.00% 68,272 6,900 Aug-10 60,341 Open
Cary Towne Center 100% 6.85% 86,114 7,077 Mar-09 81,961 Open
Chapel Hill Mall 100% 5.32% (3) 64,000 3,405 May-06 64,000 Open
Cherryvale Mall 100% 5.00% 93,774 6,055 Nov-15 76,647 Nov-08 (4)
Citadel Mall 100% 7.39% 29,939 3,174 May-07 28,700 Open
Columbia Place 100% 5.45% 32,471 2,493 Oct-13 25,512 Sep-06 (4)
Coolsprings Galleria 100% 6.22% 128,574 9,618 Sep-10 112,700 Open
Cross Creek Mall 100% 5.00% 62,645 5,401 Apr-12 56,520 Open
32
Our
Ownership
Interest Principal Balloon Open to
in the Interest Balance as of Annual Debt Maturity Payment Due Prepayment
Property Property Rate 12/31/05 (1) Service Date on Maturity Date (2)
-------------------------------------------------------------------------------------------------------------------------------
East Towne Mall 100% 5.00% 79,807 5,153 Nov-15 65,231 Nov-08 (4)
Eastgate Mall 100% 4.55% (5) 56,335 3,501 Dec-09 52,321 Dec-07 (4)
Eastland Mall 100% 5.85% 59,400 3,475 Dec-15 59,400 Dec-08 (4)
Fashion Square 100% 6.51% 58,591 5,061 Jul-12 48,540 Jul-06 (4)
Fayette Mall 100% 7.00% 93,028 7,824 Jul-11 84,096 Open
Greenbrier Mall 100% 5.37% (3) 92,650 4,975 Apr-06 92,650 Open
Hamilton Place 90% 7.00% 61,640 6,361 Mar-07 59,505 Open
Hanes Mall 100% 7.31% 105,990 10,726 Jul-08 97,551 Open
Hickory Hollow Mall 100% 6.77% 86,136 7,723 Aug-08 80,847 Open (9)
Hickory Point Mall 100% 5.85% 33,116 2,347 Dec-15 27,690 Dec-08 (4)
Honey Creek Mall 100% 4.75% 32,178 2,786 Apr-09 30,122 Open
Janesville Mall 100% 8.38% 12,816 1,857 Apr-16 0 Open
Jefferson Mall 100% 6.51% 42,629 3,682 Jul-12 35,316 Open
Laurel Park Place 100% 8.50% 50,297 4,985 Dec-12 44,096 Open (4)
Layton Hills Mall 100% 5.29% (3) 102,850 5,441 Jul-06 102,850 Open
Mall del Norte 100% 5.04% 113,400 5,715 Dec-14 113,400 Dec-07 (4)
Meridian Mall 100% 4.52% (3) 91,090 6,416 Oct-08 84,588 Sep-06 (4)
Midland Mall 100% 5.38% 30,000 1,613 Jun-06 30,000 Open
Monroeville Mall 100% 5.30% 129,990 10,363 Jan-13 105,507 Jan-06 (4)
Northpark Mall 100% 5.50% 40,682 3,171 Mar-09 37,829 Open (4)
Northwoods Mall 100% 6.51% 61,033 5,271 Jul-12 50,562 Open (4)
Oak Hollow Mall 75% 7.31% 43,073 4,709 Feb-08 39,567 Open
Oak Park Mall 100% 5.85% 275,700 16,128 Dec-15 275,700 Dec-08 (4)
Old Hickory Mall 100% 6.51% 33,803 2,920 Jul-12 28,004 Open (4)
Panama City Mall 100% 7.30% 39,290 3,373 Aug-12 36,089 Open (4)
Park Plaza Mall 100% 4.90% 40,757 3,943 May-10 38,606 Open (4)
Parkdale Mall 100% 5.01% 54,274 4,003 Sep-10 47,408 Sep-06 (4)
Randolph Mall 100% 6.50% 14,740 1,272 Jul-12 12,209 Open (4)
Regency Mall 100% 6.51% 33,427 2,887 Jul-12 27,693 Open (4)
Rivergate Mall 100% 6.77% 69,614 6,240 Aug-08 65,479 Open (9)
Southpark Mall 100% 5.10% 36,655 3,308 May-12 30,763 Open
St. Clair Square 100% 7.00% 65,596 6,361 Apr-09 58,975 Open
Stroud Mall 100% 8.42% 31,252 2,977 Dec-10 29,385 Open (4)
Valley View Mall 100% 5.10% 43,840 4,362 Sep-10 40,495 Open
Volusia Mall 100% 4.75% 53,721 4,259 Mar-09 51,265 Open
Wausau Center 100% 6.70% 12,927 1,238 Dec-10 10,725 Open
West Towne Mall 100% 5.00% 112,728 7,279 Nov-15 92,139 Nov-08 (4)
Westgate Mall 100% 6.50% 52,953 4,570 Jul-12 43,860 Open (4)
Westmoreland Mall 100% 5.05% 79,996 5,993 Jan-13 63,175 Feb-06 (4)
York Galleria 100% 8.34% 49,965 4,727 Dec-10 46,932 Open (4)
--------------------------------
3,418,728 264,730
--------------------------------
Associated Centers:
Bonita Lakes Crossing 100% 6.82% 8,081 784 Oct-09 7,062 Open
Chapel Hill Suburban 100% 5.37% (3) 2,500 134 May-06 2,500 Open
Courtyard At Hickory Hollow 100% 6.77% 4,010 360 Aug-08 3,764 Open (9)
Eastgate Crossing 100% 6.38% 9,980 1,018 Apr-07 9,674 Open (6)
Hamilton Corner 90% 10.13% 2,023 471 Aug-11 0 Open
Parkdale Crossing 100% 5.01% 8,570 632 Sep-10 7,507 Sep-06 (4)
The Landing At Arbor Place 100% 6.51% 8,638 746 Jul-12 7,157 Open (4)
33
Our
Ownership
Interest Principal Balloon Open to
in the Interest Balance as of Annual Debt Maturity Payment Due Prepayment
Property Property Rate 12/31/05 (1) Service Date on Maturity Date (2)
-------------------------------------------------------------------------------------------------------------------------------
Village At Rivergate 100% 6.77% 3,288 295 Aug-08 3,086 Open (9)
Westgate Crossing 100% 8.42% 9,483 907 Jul-10 8,954 Open (4)
--------------------------------
56,573 5,347
--------------------------------
Community Centers:
Massard Crossing,
Pemberton Plaza and
Willowbrook Plaza 10% 7.54% 37,407 3,264 Feb-12 34,230 Open (10)
--------------------------------
37,407 3,264
--------------------------------
Other:
CBL Center 92% 6.25% 14,369 1,108 Aug-12 12,662 Open (4)
Secured Credit Facilities 100% 5.29% (7) 412,285 21,795 (8) 412,285 Open
Unsecured Credit Facility 100% 5.29% (3) 278,000 14,705 Aug-06 278,000 Open
--------------------------------
704,654 37,608
--------------------------------
Construction Properties:
The Plaza at Fayette 100% 5.91% (3) 8,550 505 Dec-06 8,550 Open
Southaven Towne Center 100% 5.97% (3) 23,649 1,412 June-07 23,649 Open
Gulf Coast Town Center 50% 5.63% (3) 42,020 2,364 Sep-08 42,020 Open
Lakeview Pointe 100% 5.49% (3) 2,612 143 Nov-08 2,612 Open
--------------------------------
76,831 4,424
--------------------------------
Unamortized Premiums and Other: 46,862(11)
--------------------------------
Total Consolidated Debt $4,341,055 $ 315,373
================================
Unconsolidated Debt:
Coastal Grand-Myrtle Beach 50% 5.09% $ 97,615 $ 7,078 Oct-14 74,423 Oct-07 (4)
Governor's Square Mall 48% 8.23% 30,584 3,476 Sep-16 14,144 Open
Imperial Valley Mall 60% 4.99% (12) 59,855 3,859 Sep-15 49,019 Sep-08 (4)
Kentucky Oaks Mall 50% 9.00% 30,507 3,573 Jun-07 29,439 Open
Parkway Place 45% 5.30% (13) 53,200 2,820 Jun-08 53,200 Open (13)
Plaza del Sol 51% 9.15% 3,012 796 Aug-10 0 Open
Triangle Town Center 50% 5.74% 200,000 14,367 Sec-15 170,715 Dec-08 (4)
--------------------------------
Total Unconsolidated Debt $ 474,773 $ 35,969
================================
Total Consolidated and Unconsolidated Debt $4,815,828 $351,342
================================
Company's Pro-Rata Share of Total Debt (14) $4,531,731 $327,472
================================
(1) The amount listed includes 100% of the loan amount even though the Company
may have less than a 100% ownership interest in the property.
(2) Prepayment premium is based on yield maintenance, unless otherwise noted.
(3) The interest rate is variable at various spreads over LIBOR priced at the
rates in effect at December 31, 2005. The note is prepayable at any time
without prepayment penalty.
(4) Loan may be defeased.
(5) The Company holds a B-Note in the amount of $7.75 million on Eastgate Mall.
The Company and its joint venture partner each hold a B-Note in the amount
of $9.0 million for Coastal Grand - Myrtle Beach.
(6) The loan has three five-year options based on a rate reset.
(7) Represents the weighted average interest rate on four secured credit
facilities. The interest rates on the largest two secured facilities are at
a spread 0.90% over LIBOR and the other two are at 1.00% over LIBOR.
(8) The four secured credit facilities mature at various dates from February
2006 to June 2007.
(9) The mortgages are cross-collateralized and cross-defaulted.
(10) The mortgages are cross-collateralized and cross-defaulted and are
prepayable by defeasance
(11) Represents premiums related to debt assumed to acquire real estate assets,
which had stated interest rates that were above the estimated market rates
for similar debt instruments at the respective acquisition date.
(12) The Company owns 60% of Imperial Valley Mall but guarantees 100% of the
debt.
(13) The Company owns 45% of Parkway Place but guarantees 50% of the debt.
34
(14) Represents the Company's pro rata share of debt, including our share of
unconsolidated affiliates' debt and excluding minority investors' share of
consolidated debt on shopping center properties.
The following table is a reconciliation of consolidated debt to the Company's
pro rata share of total debt. We present our share of total consolidated and
unconsolidated debt because we believe it provides investors and lenders a
clearer understanding of our total debt obligations and liquidity.
Total consolidated debt $ 4,341,055
Minority investors share of consolidated debt (51,950)
Company's share of unconsolidated debt 242,626
---------------------
Company's pro rata share of total debt $ 4,531,731
=====================
ITEM 3. LEGAL PROCEEDINGS
We are currently involved in certain litigation that arises in the ordinary
course of our business. We believe that the pending litigation will not
materially affect our financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
(a) Market Information
-------------------
The New York Stock Exchange is the principal United States market in
which our common stock is traded.
The high and low sales prices for our common stock for each quarter of
our two most recent fiscal years were as follows, as adjusted for the
2-for-1 stock split in June 2005:
Quarter Ended High Low
------------------------------------------- ----------- ----------
2005:
March 31 $39.03 $33.32
June 30 $44.05 $35.33
September 30 $46.80 $39.30
December 31 $42.15 $35.15
2004:
March 31 $31.05 $27.73
June 30 $31.09 $22.90
September 30 $31.83 $26.41
December 31 $38.57 $30.40
Holders
-------
There were approximately 643 shareholders of record for our common
stock as of March 10, 2006.
Dividends
---------
The frequency and amounts of dividends declared and paid on the common
stock for each quarter of our two most recent fiscal years were as
follows, as adjusted for the 2-for-1 stock split in June 2005:
Quarter Ended 2005 2004
------------------------------------------ -------------- ----------
March 31 $0.40625 $0.3625
June 30 $0.40625 $0.3625
September 30 $0.40625 $0.3625
December 31 $0.54750(1) $0.40625
(1) Includes a one-time cash dividend of $0.09 per share.
35
Future dividend distributions are subject to our actual results of
operations, economic conditions and such other factors as our board of
directors deems relevant. Our actual results of operations will be
affected by a number of factors, including the revenues received from
the Properties, our operating expenses, interest expense, the ability
of the anchors and tenants at the Properties to meet their obligations
and unanticipated capital expenditures.
Securities Authorized For Issuance Under Equity Compensation Plans
------------------------------------------------------------------
See Part III, Item 12.
Recent Sales Of Unregistered Securities; Use Of Proceeds From
----------------------------------------------------------------------
Registered Securities
---------------------
None
Report Of Offering Of Securities And Use Of Proceeds Therefrom
(b) None
Purchases Of Equity Securities By The Issuer And Affiliated Purchasers
----------------------------------------------------------------------
(c) The following table presents information with respect to repurchases
of common stock made by us during the three months ended December 31,
2005:
Approximate Dollar
Average Total Number of Value of
Total Number Price Shares Purchased as Shares that May Yet
of Shares Paid per Part of a Publicly Be Purchased
Period Purchased Share Announced Plan (6) Under the Plan (6)
--------------- -------------- --------------- ----------------------- ---------------------
Oct. 1-31, 2005 10,399(1) $37.77(2) -- --
Nov. 1-30, 2005 796,301(3) $39.89(3) 794,460 $28,308,307.74 (7)
Dec. 1-31, 2005 576,574 $40.42(4) 576,574 $ 5,002,034.58 (7)
-------------- --------------- ----------------------- ---------------------
Total 1,383,274 $40.09(5) 1,371,034 $ 5,002,034.58 (7)
============== =============== ======================= =====================
(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. Amended and Restated Stock Incentive Plan, as amended.
(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.
(3) Includes: (i) 1,841 shares surrendered to the Company to satisfy tax
withholding requirements, as described in note (1), at an average value of
$41.31 per share determined as described in note (2); and (ii) 794,460
shares repurchased pursuant to the program described in note (6) at an
average price of $39.89 per share (including brokerage commissions).
(4) Includes brokerage commissions.
(5) See notes (2), (3) and (4) above.
(6) Our Board of Directors approved a plan, announced November 1, 2005, to
repurchase up to $60.0 million of our common stock by December 31, 2006. We
had repurchased 1,371,034 shares of common stock under this program as of
December 31, 2005 for a total of approximately $55.0 million, or a weighted
average cost of $40.11 per share. We do not intend to repurchase any
additional shares subsequent to December 31, 2005.
(7) Remaining authorization as of the end of each period.
36
(In thousands, except per share data)
Year Ended December 31, (1)
-------------------------------------------------------------------
2005 2004 2003 2002 2001
---------- ---------- ---------- ---------- ----------
Total revenues(2) $908,712 $781,433 $690,127 $607,018 $546,735
Total expenses(2) 505,581 437,745 374,399 324,229 289,186
---------- ---------- ---------- ---------- ----------
Income from operations 403,131 343,688 315,728 282,789 257,549
Interest income 6,831 3,355 2,485 1,853 1,891
Interest expense (208,183) (177,219) (153,321) (142,908) (156,404)
Loss on extinguishment of debt (6,171) - (167) (3,872) (13,558)
Gain on sales of real estate assets 53,583 29,272 77,765 2,804 10,649
Gain on sale of management contracts 21,619 - - - -
Equity in earnings of unconsolidated affiliates 8,495 10,308 4,941 8,215 7,155
Minority interest in earnings:
Operating partnership (112,061) (85,186) (106,532) (64,251) (49,643)
Shopping center properties (4,879) (5,365) (2,758) (3,280) (1,654)
---------- ---------- ---------- ---------- ----------
Income before discontinued operations 162,365 118,853 138,141 81,350 55,985
Discontinued operations 110 2,258 5,998 3,556 4,923
---------- ---------- ---------- ---------- ----------
Net income 162,475 121,111 144,139 84,906 60,908
Preferred dividends (30,568) (18,309) (19,633) (10,919) (6,468)
---------- ---------- ---------- ---------- ----------
Net income available to common shareholders $131,907 $102,802 $124,506 $ 73,987 $ 54,440
========== ========== ========== ========== ==========
Basic earnings per common share:
Income before discontinued operations, net
of preferred dividends $ 2.10 $ 1.63 $ 1.98 $ 1.23 $ 0.98
========== ========== ========== ========== ==========
Net income available to common shareholders $ 2.10 $ 1.67 $ 2.08 $ 1.29 $ 1.07
========== ========== ========== ========== ==========
Weighted average shares outstanding 62,721 61,602 59,872 57,380 50,716
Diluted earnings per common share:
Income before discontinued operations, net
of preferred dividends $ 2.03 $ 1.57 $ 1.90 $ 1.19 $ 0.96
========== ========== ========== ========== ==========
Net income available to common shareholders $ 2.03 $ 1.61 $ 2.00 $ 1.25 $ 1.05
========== ========== ========== ========== ==========
Weighted average shares and potential dilutive
common shares outstanding 64,880 64,004 62,386 59,336 51,666
Dividends declared per common share $ 1.77 $ 1.49 $ 1.35 $ 1.16 $ 1.07
December 31, (1)
------------------------------------------------------------------
2005 2004 2003 2002 2001
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Net investment in real estate assets $5,944,428 $4,894,780 $3,912,220 $3,611,485 $3,201,622
Total assets 6,352,322 5,204,500 4,264,310 3,795,114 3,372,851
Total mortgage and other notes payable 4,341,055 3,371,679 2,738,102 2,402,079 2,315,955
Minority interests 609,475 566,606 527,431 500,513 431,101
Shareholders' equity 1,081,522 1,054,151 837,300 741,190 522,008
OTHER DATA:
Cash flows provided by (used in):
Operating activities $389,574 $339,197 $274,349 $273,923 $213,075
Investing activities (712,508) (608,651) (312,366) (274,607) (201,245)
Financing activities 326,006 274,888 44,994 3,902 (6,877)
Funds From Operations (FFO) (3)
of the Operating Partnership $389,958 $310,405 $271,589 $235,474 $182,687
FFO applicable to the Company 213,596 169,725 146,552 126,127 94,945
(1) Please refer to Notes 3 and 5 to the consolidated financial statements for
a description of acquisitions and joint venture transactions that have
impacted the comparability of the financial information presented.
(2) Certain prior period amounts have been reclassified to present marketing
fund revenues and expenses on a gross basis in accordance with Emerging
Issues Task Force Issue No. 99-19, Reporting Revenue Gross as a Principal
versus Net as an Agent. As a result, both total revenues and total expenses
increased from previously reported amounts by $24,188, $25,884, $23,058 and
$12,513 for the years ended December 31, 2004, 2003, 2002 and 2001,
respectively. Additionally, certain prior period amounts have been
reclassified to present the results of operations of long-lived assets
disposed of as discontinued operations for all periods presented. These
reclassifications did not change previously reported amounts of net income
available to common shareholders.
(3) Please refer to Management's Discussion and Analysis of Financial Condition
and Results of Operations for the definition of FFO. FFO does not represent
cash flow from operations as defined by accounting principles generally
accepted in the United States and is not necessarily indicative of the cash
available to fund all cash requirements.
37
Item 7: 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 annual report.
Capitalized terms used, but not defined, in this Management's Discussion and
Analysis of Financial Condition and Results of Operations have the same meanings
as defined in the notes to the consolidated financial statements. In this
discussion, the terms "we", "us", "our" and the "Company" refer to CBL &
Associates Properties, Inc. and its subsidiaries.
Certain statements made in this section or elsewhere in this report may be
deemed "forward looking statements" within the meaning of the federal securities
laws. Although we believe the expectations reflected in any forward-looking
statements are based on reasonable assumptions, we can give no assurance that
these expectations will be attained, and it is possible that actual results may
differ materially from those indicated by these forward-looking statements due
to a variety of risks and uncertainties. In addition to the risk factors
discussed in Item 1A of our annual report on Form 10-K for the year ending
December 31, 2005, 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 our
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 centers are located in 27 states, but primarily
in the southeastern and midwestern United States.
As of December 31, 2005, we owned controlling interests in 72 regional
malls (we include large open-air centers in malls), 27 associated centers (each
adjacent to a regional mall), seven community centers, and three office
buildings, including our corporate office building. We consolidate the financial
statements of all entities in which we have a controlling financial interest or
where we are the primary beneficiary of a variable interest entity. As of
December 31, 2005, we owned non-controlling interests in seven regional malls
and three 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
partnerships and joint ventures and, accordingly, account for these investments
using the equity method. We had two mall expansions, two open-air shopping
centers, one open-air shopping center expansion, two associated centers, one
community center, which is owned in a joint venture, and one community center
expansion under construction as of December 31, 2005.
The majority of our revenues are derived from leases with retail tenants
and generally include minimum rents, percentage rents based on tenants' sales
volumes and reimbursements from tenants for expenditures related to property
operating expenses, real estate taxes and maintenance and repairs, as well as
certain capital expenditures. We also generate revenues from sales of peripheral
land at the properties and from sales of real estate assets when it is
determined that we can realize a premium value for the assets. Proceeds from
such sales are generally used to reduce borrowings on our credit facilities.
38
We expanded our portfolio in 2005 with the acquisition of six malls and
one associated center, representing a total investment of $884.7 million. We
also formed a 50/50 joint venture to own one mall and its associated center,
which was valued at $283.5 million. We opened seven new developments and seven
property expansions totaling 2.4 million square feet, including the 754,000
square foot regional mall Imperial Valley Mall in El Centro, CA, which we own in
a joint venture. We have approximately 1.7 million square feet of new
developments, which represent $191.1 million of net investment, that are
scheduled to open during 2006. We also added a total of 14 big box tenants and
an anchor retailer to our malls, which have made positive contributions by
strengthening the tenant mix of these properties.
Results of Operations
Comparison of the Year Ended December 31, 2005 to the Year Ended December 31,
2004
The following significant transactions impacted the consolidated results of
operations for the year ended December 31, 2005, compared to the year ended
December 31, 2004:
|X| Since January 1, 2004, we have acquired or opened 17 malls, two
open-air centers, five associated centers and three community centers
(collectively referred to as the "2005 New Properties"). The 2005 New
Properties are as follows:
Property 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
Fashion Square Orange Park, FL April 2004
Chapel Hill Mall Akron, OH May 2004
Chapel Hill Suburban Akron, OH May 2004
Park Plaza Mall Little Rock, AR 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
Layton Hills Mall Layton, UT November 2005
Layton Hills Convenience Center Layton, UT November 2005
Oak Park Mall Overland Park, KS November 2005
Eastland Mall Bloomington, IL November 2005
Hickory Point Mall Forsyth, IL November 2005
Triangle Town Center (50/50 joint venture) Raleigh, NC November 2005
Triangle Town Place (50/50 joint venture) Raleigh, NC November 2005
New Developments:
-----------------
Coastal Grand-Myrtle Beach Myrtle Beach, SC March 2004
The Shoppes at Panama City Panama City, FL March 2004
Imperial Valley Mall El Centro, CA March 2005
Cobblestone Village at Royal Palm Beach Royal Palm Beach, FL June 2005
Chicopee Marketplace Chicopee, MA September 2005
Southaven Towne Center Southaven, MS October 2005
Gulf Coast Town Center - Phase I (50/50 joint
venture) Ft. Myers, FL November 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
39
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 year ended December 31, 2005,
does not include a significant amount of revenues and expenses related
to these properties, whereas the year ended December 31, 2004 includes
a full period of revenues and expenses related to these properties.
|X| 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 New Plan Excel Realty Trust, Inc. ("New Plan"). See
Note 5 to the consolidated financial statements for a more thorough
discussion of these transactions.
Properties that were in operation for the entire period during 2005 and
2004 are referred to as the "2005 Comparable Properties" in this section.
Revenues
The $127.3 million increase in revenues was primarily attributable to
increases of $93.2 million from the 2005 New Properties and $30.4 million from
the 2005 Comparable Properties. These increases were offset by a reduction in
revenues of $7.0 million related to the community centers that were sold to
Galileo America in January 2005.
The increase in revenues of the 2005 Comparable Properties was driven by
our ability to maintain high occupancy levels while achieving a weighted average
increase of 6.5% in rents from both new leases and lease renewals for comparable
small shop spaces, as well as an increase in percentage rents.
The increase in management, development and leasing fees of $10.7 million
was primarily attributable to management and leasing fees received from Galileo
America prior to the redemption of our interest in Galileo America, plus an $8.0
million acquisition fee received from Galileo America that was related to
Galileo America's acquisition of an approximately $1.0 billion portfolio of
shopping center properties from New Plan.
Operating Expenses
Property operating expenses including real estate taxes and maintenance and
repairs, increased as a result of increases of $30.0 million from the 2005 New
Properties and $1.6 million from the 2005 Comparable Properties. This was offset
by a decrease of $2.6 million related to the community centers that were sold to
Galileo America in January 2005.
The increase in depreciation and amortization expense resulted from
increases of $28.7 million from the 2005 New Properties and $8.9 million from
the 2005 Comparable Properties. The increase attributable to the 2005 Comparable
Properties is due to ongoing capital expenditures for renovations, expansions,
tenant allowances and deferred maintenance.
General and administrative expenses increased $3.9 million during 2005.
Severance packages for individuals affected by the sale of our management and
advisory contracts with Galileo America contributed $1.3 million to the
increase. The remainder of the increase is related to additional salaries and
benefits for the personnel added to manage the properties acquired during 2005
and 2004 combined with annual compensation increases for existing personnel. As
a percentage of revenues, general and administrative expenses decreased to 4.3%
in 2005 compared with 4.5% in 2004.
We recognized a loss on impairment of real estate assets of $1.3 million
during 2005, which was related to a $1.0 million reduction in the carrying value
40
of assets identified as held for sale at December 31, 2005, and an additional
loss of $0.3 million related to the properties that were sold to Galileo America
in January 2005. The additional impairment loss of $0.3 million was related the
adjustment of certain estimated amounts when the actual amounts became known in
2005. We recognized a loss on impairment of real estate assets of $3.1 million
during 2004 when we reduced the carrying value of ten community centers to their
respective estimated fair values. The ten community centers included four
community centers that were sold to Galileo America in January 2005, five
community centers that were sold to a third party during March 2005 and one
community center that was sold for a loss during the fourth quarter of 2004.
Other Income and Expenses
Interest expense increased $31.0 million primarily due to the debt on the
2005 New Properties, the refinancings that were completed on the 2005 Comparable
Properties and an increase in variable interest rates.
Gain on sales of real estate assets of $53.6 million in 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 on properties that
were previously sold to Galileo America and $8.4 million of gains on the sales
of eleven outparcels. The gain on sales of real estate assets of $29.3 million
in 2004 included $26.8 million of gain related to the second phase of the
Galileo America joint venture and $2.5 million of gain on sales of seven
outparcels at various 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 New Plan in August 2005.
Equity in earnings of unconsolidated affiliates decreased by $1.8 million
in 2005 as a result the redemption of our interest in Galileo America in August
2005. Additionally, 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.
Discontinued operations for 2005 represent the operations of the six
community centers we sold during 2005 as well as the operations of the two
community centers that were classified as held for sale as of December 31, 2005.
Discontinued operations during 2004 reflect the results of two community centers
that we sold during 2004, as well as the results of the properties described in
the previous sentence.
Comparison of the Year Ended December 31, 2004 to the Year Ended December 31,
2003
The following significant transactions impacted the consolidated results of
operations for the year ended December 31, 2004, compared to the year ended
December 31, 2003:
|X| Since January 1, 2003, we have acquired or opened 15 malls, six
associated centers and four community centers (collectively referred
to as the "2004 New Properties"). The 2004 New Properties are as
follows:
41
Property Location Date Acquired / Opened
----------------------------------------------------------------------------------------------------
Acquisitions:
-------------
Sunrise Mall Brownsville, TX April 2003
Sunrise Commons Brownsville, TX April 2003
Cross Creek Mall Fayetteville, NC September 2003
River Ridge Mall Lynchburg, VA October 2003
Valley View Mall Roanoke, VA October 2003
Southpark Mall Colonial Heights, VA December 2003
Harford Mall Bel Air, MD December 2003
Harford Annex Bel Air, MD December 2003
Honey Creek Mall Terre Haute, IN March 2004
Volusia Mall Daytona Beach, FL March 2004
Greenbrier Mall Chesapeake, VA April 2004
Fashion Square Orange Park, FL April 2004
Chapel Hill Mall Akron, OH May 2004
Chapel Hill Suburban Akron, OH May 2004
Park Plaza Mall Little Rock, AR 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
New Developments:
-----------------
The Shoppes at Hamilton Place Chattanooga, TN May 2003
Cobblestone Village St. Augustine, FL May 2003
Waterford Commons Waterford, CT September 2003
Wilkes-Barre Township Marketplace Wilkes-Barre Township, PA March 2004
Coastal Grand-Myrtle Beach Myrtle Beach, SC March 2004
The Shoppes at Panama City Panama City, FL March 2004
|X| In October 2003, we sold 41 community centers to Galileo America. We
sold six additional community centers to Galileo America in January
2004. Since we had continuing involvement with these properties
through our ownership interest in Galileo America and our role as
manager of the properties, the results of operations of these
properties were not reflected in discontinued operations. Therefore,
the year ended December 31, 2003 includes results of operations for
these properties through the dates they were sold.
|X| Effective January 1, 2004, we began to consolidate the results of
operations of PPG Venture I Limited Partnership, which owns two
community centers and one associated center (the "PPG Properties"), as
a result of the adoption of a new accounting pronouncement. The PPG
Properties were accounted for as unconsolidated affiliates using the
equity method of accounting prior to January 1, 2004.
Properties that were in operation for the entire period during 2004 and
2003 are referred to as the "2004 Comparable Properties" in this section.
Revenues
The $87.6 million increase in revenues was primarily attributable to
increases of $116.2 million from the 2004 New Properties, $7.5 million related
to the PPG Properties and $2.1 million from the 2004 Comparable Properties.
These increases were offset by a reduction in revenues of $42.5 million related
to the community centers that were sold to Galileo America in October 2003 and
January 2004.
The increase in revenues of the 2004 Comparable Properties was driven by
our ability to maintain high occupancy levels, while achieving an increase of
3.3% in rents from both new leases and lease renewals for comparable small shop
spaces.
An increase in management and leasing fees of $2.8 million received from
Galileo America was the primary contributor to the $4.3 million increase in
42
management, development and leasing fees. The $2.8 million increase in other
revenues is primarily attributable to a growth in revenues that we receive from
providing security and maintenance services to third parties.
Operating Expenses
Property operating expenses including real estate taxes and maintenance and
repairs, increased as a result of increases of $39.9 million from the 2004 New
Properties and $2.2 million from the PPG Properties, offset by decreases of $9.4
million related to the community centers that were sold to Galileo America and
$15.1 million in operating expenses of the 2004 Comparable Properties.
The increase in depreciation and amortization expense resulted from
increases of $29.0 million from the 2004 New Properties, $1.0 million related to
the PPG Properties and $6.6 million from the 2004 Comparable Properties. These
increases were offset by a decrease of $7.4 million related to the community
centers that we sold to Galileo America in October 2003 and January 2004. The
increase attributable to the 2004 Comparable Properties is due to ongoing
capital expenditures for renovations, expansions, tenant allowances and deferred
maintenance.
General and administrative expenses increased $4.9 million during 2004. As
a percentage of revenues, this was only a 0.1% increase over the comparable 2003
amount. General and administrative expenses were significantly impacted by an
additional $1.1 million of expenses in 2004 related to compliance with Section
404 of the Sarbanes-Oxley Act of 2002. State tax expenses also increased $1.8
million as a result of our continued growth. The remainder of the increase is
attributable to additional salaries and benefits for the personnel added to
manage the properties acquired during 2004 and 2003 combined with annual
compensation increases for existing personnel.
We identified ten community centers and recorded a loss on impairment of
real estate assets of $3.1 million to reduce the carrying value of these
properties to their respective estimated fair values based on estimates of the
selling prices to be received from the sales of nine centers in 2005. One
community center was sold for a loss during the fourth quarter of 2004.
Other Income and Expenses
Interest expense increased $23.9 million primarily due to the debt on the
2004 New Properties and the PPG Properties, as well as the additional financings
that were obtained on the 2004 Comparable Properties. The increase was offset by
a reduction in interest expense related to the Galileo Transaction as well as
normal principal amortization.
The gain on sales of real estate assets of $29.3 million in 2004 included
$26.8 million of gain related to the Galileo Transaction and $2.5 million of
gain on sales of seven outparcels at various properties.
Equity in earnings of unconsolidated affiliates increased by $5.4 million
in 2004 as a result of our interest in Galileo America and the opening of
Coastal Grand-Myrtle Beach in March 2004.
We sold two community centers during 2004 for a gain on discontinued
operations of $0.9 million. We sold one community center for a loss of $0.1
million, which was included in loss on impairment of real estate assets.
Operating income from discontinued operations decreased in 2004 because the
properties were owned for a shorter period of time in 2004 than in 2003, and
because 2003 includes the operations of properties that were sold during 2003.
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
43
of the holiday season, which results in higher percentage rent income in the
fourth quarter. Additionally, the malls earn most of their short-term rents
during the holiday period. Thus, occupancy levels and revenue production are
generally the highest in the fourth quarter of each year. Results of operations
realized in any one quarter may not be indicative of the results likely to be
experienced over the course of the fiscal year.
We classify our regional malls into two categories - malls that have
completed their initial lease-up are referred to as stabilized malls and malls
that are in their initial lease-up phase and have not been open for three
calendar years are referred to as non-stabilized malls. The non-stabilized malls
currently include Parkway Place in Huntsville, AL, which opened in October 2002;
Coastal Grand-Myrtle Beach in Myrtle Beach, SC, which opened in March 2004;
Imperial Valley Mall in El Centro, CA, which opened in March 2005; Southaven
Towne Center in Southaven, MS, which opened in October 2005; and Gulf Coast Town
Center (Phase I) in Ft. Myers, FL, which opened in November 2005.
We derive a significant amount of our revenues from the mall properties.
The sources of our revenues by property type were as follows:
Year Ended December 31,
---------------------------------
2005 2004
----------------- ---------------
Malls 91.1% 90.2%
Associated centers 3.8% 4.1%
Community centers 1.0% 2.3%
Mortgages, office building and other 4.1% 3.4%
Sales and Occupancy Costs
Mall store sales (for those tenants who occupy 10,000 square feet or less
and have reported sales) in the stabilized malls increased 4.1% on a comparable
per square foot basis to $330 per square foot for 2005 compared with $317 per
square foot for 2004.
Occupancy costs as a percentage of sales for the stabilized malls were
11.8% and 12.0% for 2005 and 2004, respectively.
Occupancy
Our portfolio occupancy is summarized in the following table:
December 31,
---------------------------------
2005 2004
----------------- ---------------
Total portfolio 94.5% 94.0%
Total mall portfolio 94.4% 94.3%
Stabilized malls 94.7% 94.4%
Non-stabilized malls 89.4% 92.8%
Associated centers 94.1% 91.8%
Community centers (1) 95.3% 94.0%
(1) Excludes the community centers that were sold to Galileo America.
44
Leasing
Average annual base rents per square foot were as follows for each property
type:
December 31,
------------------------------------
2005 2004
----------------- ------------------
Stabilized malls $26.87 $25.60
Non-stabilized malls 27.41 26.33
Associated centers 10.55 9.77
Community centers (1) 9.61 8.12
Other 19.33 19.10
(1) Excludes the community centers that were sold to Galileo America.
During 2005, we achieved positive results from new and renewal leasing of
comparable small shop space for spaces that were previously occupied as
summarized in the following table:
Base Rent Initial Base Average Base
Per Rent Per Rent Per
Square Foot Square Foot % Change Square Foot % Change
Square Feet Prior Lease New Lease Initial New Lease Average
------------- ------------- --------------- ----------- -------------- -----------
Year-To-Date:
Stabilized Malls 2,235,715 $25.18 $26.10 3.7% $26.72 6.1%
Associated centers 101,624 13.54 16.91 24.9% 17.26 27.5%
Community centers (1) 54,469 16.56 16.67 0.7% 16.69 0.8%
Other 8,364 15.69 17.66 12.5% 17.89 14.0%
------------- ------------- --------------- ----------- -------------- -----------
2,400,172 $24.46 $25.47 4.1% $26.06 6.5%
============= ============= =============== =========== ============== ===========
(1) Excludes the community centers that were sold to Galileo America.
Liquidity and Capital Resources
There was $28.8 million of unrestricted cash and cash equivalents as of
December 31, 2005, an increase of $3.1 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 provided by operating activities increased $50.4 million to $389.6
million for the year ended December 31, 2005. The increase was primarily
attributable to the operations of the 2005 New Properties plus the acquisition
fee earned in connection with Galileo America's transaction with New Plan.
Debt
During 2005, we borrowed $946.8 million under mortgage and other notes
payable and paid $353.8 million to reduce outstanding borrowings. We also
assumed $385.8 million in debt and recorded a debt premium of $10.6 million in
connection with the acquisitions of six malls and two associated centers. We
paid $6.5 million in connection with the extinguishment of certain mortgage
notes payable during 2005 and paid $3.4 million in financing costs in connection
with the new borrowings.
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 consolidated properties, because we believe this provides
investors and lenders a clearer understanding of our total debt obligations and
liquidity (in thousands):
45
Weighted
Average
Minority Unconsolidated Interest
Consolidated Interests Affiliates Total Rate(1)
-------------- --------------- ----------------- --------------- ---------------
December 31, 2005:
Fixed-rate debt:
Non-recourse loans on operating properties $ 3,281,939 $ (51,950) $ 216,026 $3,446,015 5.99%
-------------- --------------- ----------------- --------------- ---------------
Variable-rate debt:
Recourse term loans on operating properties 292,000 - 26,600 318,600 5.33%
Construction loans 76,831 - - 76,831 5.76%
Lines of credit 690,285 - - 690,285 5.29%
-------------- --------------- ----------------- --------------- ---------------
Total variable-rate debt 1,059,116 - 26,600 1,085,716 5.33%
-------------- --------------- ----------------- --------------- ---------------
Total $ 4,341,055 $ (51,950) $ 242,626 $4,531,731 5.83%
============== =============== ================= =============== ===============
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% until it was reduced to LIBOR plus 0.9% in December 2005.
As of December 31, 2005, we had four secured lines of credit with total
availability of $503.0 million that are used for construction, acquisition and
working capital purposes. Each of these lines is secured by mortgages on certain
of our operating properties. There were total borrowings of $412.3 million
outstanding at a weighted average interest rate of 5.29% as of December 31,
2005. In February 2006, we amended one of our secured credit facilities to
increase the maximum availability from $373.0 million to $476.0 million, extend
the maturity date from February 28, 2006 to February 28, 2009 plus a one-year
extension option, increase the minimum tangible net worth requirement, as
defined, from $1.0 billion to $1.37 billion and increase the limit on the
maximum availability that the Company may request from $500.0 million to $650.0
million.
In March 2005, we retired a mortgage note payable of $11.1 million and
recognized a loss on extinguishment of $0.9 million, which consisted of a
prepayment fee of $0.8 million and the write-off of unamortized deferred
financing costs of $0.1 million.
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.
Also in September 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 recognized a loss on extinguishment of debt of $5.2 million in October
46
2005, which includes prepayment fees of $4.6 million and the write-off of
unamortized deferred financings costs of $0.8 million.
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 December 31, 2005. Additionally,
certain property-specific mortgage notes payable require the maintenance of debt
service coverage ratios on their respective properties. At December 31, 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 four years with replacement loans. Based on our pro rata
share of total debt, there is $978.7 million of debt that is scheduled to mature
in 2006. In January 2006, we extended the maturity of $358.2 million of this
debt to 2009. There are extension options in place to extend the maturity of
$509.1 million of this debt to 2007. We expect to repay or refinance the
remaining $111.4 million of maturing loans.
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, our 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
annual 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.
In October 2005, our board of directors declared a special one-time cash
dividend for our common stock of $0.09 per share. The dividend was 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 5 to the consolidated financial statements.
In November 2005, our board of directors approved a plan to repurchase up
to $60.0 million of our common stock by December 31, 2006. The stock repurchase
plan was adopted to provide us the opportunity to repurchase shares relatively
equivalent to the Series K Special Common Units that were issued in connection
with the acquisition of the three-mall portfolio that is discussed in Note 3 to
the consolidated financial statements. We had repurchased 1,371,034 shares of
our common stock as of December 31, 2005 for a total of $55.0 million, or a
weighted average cost of $40.11 per share. As of December 31, 2005, we had paid
$48.3 million of this amount and had a payable of $6.7 million for the
remainder. We do not intend to repurchase any additional shares subsequent to
December 31, 2005.
In October 2005, we issued 174,403 shares of common stock to one of our
officers when the officer's deferred compensation agreement was terminated. We
had accrued all compensation expense related to the agreement as it was earned
during the term of the agreement.
47
We received $10.2 million in proceeds from issuances of common stock during
2005 from exercises of employee stock options and our dividend reinvestment
plan.
During 2005 we paid dividends of $133.7 million to holders of our common
stock and our preferred stock, as well as $89.5 million in distributions to the
minority interest investors in our Operating Partnership and certain shopping
center properties.
Subsequent to December 31, 2005, holders of 1,507,649 units of limited
partnership interest in the Operating Partnership exercised their conversion
rights, which are described in Note 9 to the consolidated financial statements.
We have elected to issue 1,480,067 shares of common stock and $1,112 in cash in
exchange for these units.
As a publicly traded company, we have access to capital through both the
public equity and debt markets. In January 2006, we filed a shelf registration
statement with the Securities and Exchange Commission authorizing us to publicly
issue shares of preferred stock, common stock and warrants to purchase shares of
common stock. There is no limit to the offering price or number of shares that
we may issue under this shelf registration statement.
We anticipate that the combination of equity and debt sources will, for the
foreseeable future, provide adequate liquidity to continue our capital programs
substantially as in the past and make distributions to our shareholders in
accordance with the requirements applicable to real estate investment trusts.
Our strategy is to maintain a conservative debt-to-total-market
capitalization ratio in order to enhance our access to the broadest range of
capital markets, both public and private. Based on our share of total
consolidated and unconsolidated debt and the market value of our equity, our
debt-to-total-market capitalization (debt plus market-value equity) ratio was as
follows at December 31, 2005 (in thousands, except stock prices):
Shares
Outstanding Stock Price (1) Value
------------------ ----------------- -----------------
Common stock and operating partnership units 115,438 $ 39.51 $4,560,955
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 4,950,955
Our share of total debt 4,531,731
-----------------
Total market capitalization $9,482,686
=================
Debt-to-total-market capitalization ratio 47.8%
=================
(1) Stock price for common stock and operating partnership units equals the
closing price of our common stock on December 30, 2005. The stock price
for the preferred stock represents the liquidation preference of each
respective series of preferred stock.
48
Contractual Obligations
The following table summarizes our significant contractual obligations as
of December 31, 2005 (dollars in thousands):
Payments Due By Period
-----------------------------------------------------------------
Less Than 1 - 3 3 - 5 More Than
Total 1 Year Years Years 5 Years
------------ ------------ ------------ ----------- -------------
Long-term debt:
Total consolidated debt service (1) $5,543,721 $1,227,126 $1,104,912 $1,130,390 $2,081,293
Minority investors' share in shopping center properties (69,712) (4,887) (23,432) (6,147) (35,246)
Our share of unconsolidated affiliates debt service (2) 380,079 16,240 60,725 30,049 273,065
------------ ------------ ------------ ----------- -------------
Our share of total debt service obligations 5,854,088 1,238,479 1,142,205 1,154,292 2,319,112
------------ ------------ ------------ ----------- -------------
Operating leases: (3)
Ground leases on consolidated properties 58,901 1,321 3,549 3,560 50,471
Minority investors' share in shopping center properties (2,376) (32) (68) (73) (2,203)
------------ ------------ ------------ ----------- -------------
Our share of total ground lease obligations 56,525 1,289 3,481 3,487 48,268
------------ ------------ ------------ ----------- -------------
Purchase obligations: (4)
------------ ------------ ------------ ----------- -------------
Construction contracts on consolidated properties 46,208 46,208 - - -
------------ ------------ ------------ ----------- -------------
Total contractual obligations $5,956,821 $1,285,976 $1,145,686 $1,157,779 $2,367,380
============ ============ ============ =========== =============
(1) Represents principal and interest payments due under terms of mortgage and
other notes payable and includes $1,059,116 of variable-rate debt on seven
operating properties, two construction loans, four secured credit
facilities and one unsecured credit facility. The variable-rate loans on
the operating properties call for payments of interest only with the total
principal due at maturity. The construction loans and credit facilities do
not require scheduled principal payments. The future contractual
obligations for all variable-rate indebtedness reflect payments of interest
only throughout the term of the debt with the total outstanding principal
at December 31, 2005 due at maturity. The future interest payments are
projected based on the interest rates that were in effect at December 31,
2005. See Note 6 to the consolidated financial statements for additional
information regarding the terms of long-term debt.
(2) Includes $26,600 of variable-rate indebtedness. Future contractual
obligations have been projected using the same assumptions as used in (1)
above.
(3) Obligations where we own the buildings and improvements, but lease the
underlying land under long-term ground leases. The maturities of these
leases range from 2006 to 2091 and generally provide for renewal options.
Renewal options have not been included in the future contractual
obligations.
(4) Represents the remaining balance to be incurred under construction
contracts that had been entered into as of December 31, 2005, but were not
complete. The contracts are primarily for development, renovation and
expansion of properties.
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 activities unless adequate sources of financing are available and we can
achieve satisfactory returns on our investments.
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.
49
Developments and Expansions
The following is a summary of the projects currently under construction
(dollars in thousands):
Our Share of
Gross Costs as of
Leasable Our Share of December 31, Scheduled
Property Location Area Total Costs 2005 Opening Date
--------------------------------- ------------------- ------------ --------------- --------------- ---------------
Mall Expansions:
Burnsville Center (Phase II) Burnsville, MN 82,900 $ 13,000 $ 1,244 April-06
Hanes Mall (Dick's Sporting Goods) Winston-Salem, NC 66,000 10,150 3,632 July-06
Open-Air Centers:
Southaven Towne Center (Gordman's) Southaven, MS 59,400 7,190 1,405 April-06
Lakeview Point Stillwater, OK 207,300 21,095 5,940 October-06
Gulf Coast Town Center (Phase II) Ft. Myers, FL 739,000 109,641(1) 14,500(1) October-06
Associated Centers:
The Plaza at Fayette (Phase I) Lexington, KY 73,400 24,414 15,058 July-06
The Shoppes at St. Clair Fairview Heights, IL 75,000 26,957 9,933 March-07
Community Center:
High Pointe Commons Harrisburg, PA 297,100 7,271 2,787 October-06
--------------- --------------- ---------------
1,600,100 $219,718 $54,499
=============== =============== ===============
(1) Amounts shown are 100% of the cost and cost to date.
There are construction loans in place for the costs of Gulf Coast Town
Center and Lakeview Pointe. We have commitments for construction loans that will
cover the costs of The Plaza at Fayette and the Shoppes at St. Clair. The
remaining 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 and community centers. Except for the projects listed in
the above table, we do not have any other material capital commitments.
Acquisitions
We acquired six malls and one associated center during 2005 for an
aggregate purchase price of $884.7 million, including transaction costs. We paid
$426.1 million in cash, assumed $385.8 million of debt and issued limited
partnership interests in the Operating Partnership valued at $72.9 million to
fund these acquisitions. The total cash paid was funded with borrowings under
our credit facilities and two new loans totaling $136.0 million. These
acquisitions are expected to generate an initial weighted-average, unleveraged
return of 6.2%.
We acquired a 50/50 joint venture interest in an open-air center that was
under development. We initially contributed $40.3 million for our 50% interest,
which was used to refund the aggregate acquisition and development costs
incurred with respect to the project that were previously paid by our joint
venture partner.
We acquired a 50/50 joint venture interest in a mall and its associated
center, which were valued at $283.5 million. Our initial capital contribution to
this joint venture was $1.6 million of cash.
50
Dispositions
We received a total of $64.4 million in net cash proceeds from the sales of
real estate assets during 2005. The third phase of the joint venture transaction
with Galileo America, which is discussed in Note 5 to the consolidated financial
statements, closed in January 2005 and generated net cash proceeds of $42.5
million. We received $8.3 million in cash proceeds and took a note receivable
for $2.6 million from the sale of six community centers. We also received $13.6
million in cash proceeds from the sales of eleven 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 5 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, we
spent $52.8 million in 2005 for tenant allowances, which generate increased
rents from tenants over the terms of their leases. Deferred maintenance
expenditures were $31.5 million for 2005 and included $12.4 million for
resurfacing and improved lighting of parking lots, $11.7 million for roof
repairs and replacements and $7.4 million for various other expenditures.
Renovation expenditures were $27.5 million in 2005.
Deferred maintenance expenditures are billed to tenants as common area
maintenance expense, and most are recovered over a 5- to 15-year period.
Renovation expenditures are primarily for remodeling and upgrades of malls, of
which approximately 30% is recovered from tenants over a 5- to 15-year period.
We expect to renovate seven malls during 2006 at a total estimated cost of
$53.6 million, which will be funded from operating cash flows and availability
under our credit facilities.
Off-Balance Sheet Arrangements
Unconsolidated Affiliates
We have ownership interests in eleven unconsolidated affiliates that are
described in Note 5 to the consolidated financial statements. The unconsolidated
affiliates are accounted for using the equity method of accounting and are
reflected in the consolidated balance sheets as "Investments in Unconsolidated
Affiliates." The following are circumstances when we may consider entering into
a joint venture with a third party:
|X| Third parties may approach us with opportunities where they have
obtained land and performed some pre-development activities, but they
may not have sufficient access to the capital resources or the
development and leasing expertise to bring the project to fruition. We
enter into such arrangements when we determine such a project is
viable and we can achieve a satisfactory return on our investment. We
typically earn development fees from the joint venture and provide
management and leasing services to the property for a fee once the
property is placed in operation.
|X| We determine that we may have the opportunity to capitalize on the
value we have created in a property by selling an interest in the
property to a third party. This provides us with an additional source
of capital that can be used to develop or acquire additional real
estate assets that we believe will provide greater potential for
growth. When we retain an interest in an asset rather than selling a
100% interest, it is typically because this allows us to continue to
manage the property, which provides us the ability to earn fees for
management, leasing, development, financing and acquisition services
provided to the joint venture.
51
Guarantees
We may issue guarantees on the debt of a joint venture primarily because it
allows the joint venture to obtain funding at a lower cost than could be
obtained otherwise. This results in a higher return for the joint venture on its
investment, and in a higher return on our investment in the joint venture. We
may receive a fee from the joint venture for providing the guaranty.
Additionally, when we issue a guaranty, the terms of the joint venture agreement
typically provide that we may receive indemnification from the joint venture.
As of December 31, 2005, we have guaranteed 50% of the debt of Parkway
Place L.P. The total amount outstanding at December 31, 2005, was $53.2 million,
of which we have guaranteed $26.6 million. The guaranty will expire when the
related debt matures in June 2008.
The Company's guarantees and the related accounting are more fully
described in Note 17 to the consolidated financial statements.
Critical Accounting Policies
Our significant accounting policies are disclosed in Note 2 to the
consolidated financial statements. 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 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, 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.
52
Real Estate Assets
We capitalize predevelopment project costs paid to third parties. All
previously capitalized predevelopment costs are expensed when it is no longer
probable that the project will be completed. Once development of a project
commences, all direct costs incurred to construct the project, including
interest and real estate taxes, are capitalized. Additionally, certain general
and administrative expenses are allocated to the projects and capitalized based
on the amount of time applicable personnel work on the development project.
Ordinary repairs and maintenance are expensed as incurred. Major replacements
and improvements are capitalized and depreciated over their estimated useful
lives.
All acquired real estate assets are accounted for using the purchase method
of accounting and accordingly, the results of operations are included in the
consolidated statements of operations from the respective dates of acquisition.
The purchase price is allocated to (i) tangible assets, consisting of land,
buildings and improvements, as if vacant, and tenant improvements and (ii)
identifiable intangible assets and liabilities generally consisting of above-
and below-market leases and in-place leases. We use estimates of fair value
based on estimated cash flows, using appropriate discount rates, and other
valuation methods to allocate the purchase price to the acquired tangible and
intangible assets. Liabilities assumed generally consist of mortgage debt on the
real estate assets acquired. Assumed debt with a stated interest rate that is
significantly different from market interest rates is recorded at its fair value
based on estimated market interest rates at the date of acquisition.
Depreciation is computed on a straight-line basis over estimated lives of
40 years for buildings, 10 to 20 years for certain improvements and 7 to 10
years for equipment and fixtures. Tenant improvements are capitalized and
depreciated on a straight-line basis over the term of the related lease.
Lease-related intangibles from acquisitions of real estate assets are amortized
over the remaining terms of the related leases. The amortization of above- and
below-market leases is recorded as an adjustment to minimum rental revenue,
while the amortization of all other lease-related intangibles is recorded as
amortization expense. 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
their 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 is charged to operations. We recorded losses
on the impairment of real estate assets of $1.3 million and $3.1 million in 2005
and 2004, respectively, which are discussed in Note 2 to the consolidated
financial statements. There were no impairment charges in 2003.
Recent Accounting Pronouncements
In December 2004, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 153, "Exchanges of Nonmonetary Assets, an amendment of
APB No. 29, Accounting for Nonmonetary Transactions." SFAS No. 153 requires
exchanges of productive assets to be accounted for at fair value, rather than at
carryover basis, unless (1) neither the asset received nor the asset surrendered
has a fair value that is determinable within reasonable limits or (2) the
transactions lack commercial substance. SFAS No. 153 became effective for
nonmonetary asset exchanges occurring in fiscal periods that began after June
15, 2005.
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
53
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 issued a Staff Accounting Bulletin
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. We 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. We will adopt
SFAS No. 123(R) on January 1, 2006, using a modified prospective application. We
estimate that this will result in the recognition of additional compensation
expense of approximately $0.3 million and $0.1 million during the years ending
December 31, 2006 and 2007, which represents the unamortized deferred
compensation expense associated with all remaining stock options that were not
vested as of December 31, 2005.
In May 2005, the FASB issued Statement No. 154 entitled, "Accounting
Changes and Error Corrections," which will be effective in the first quarter of
fiscal year 2006. This statement addresses the retrospective application of such
changes and corrections and we will follow the provision of this standard in the
event of any future accounting changes.
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 FASB Staff Position ("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 for EITF Issue No. 04-05 described above. 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.
In March 2005, the FASB issued Interpretation No. 47 ("FIN 47"),
"Accounting for Conditional Asset Retirement Obligations," which clarifies the
accounting for conditional asset retirement obligations as used in SFAS No. 143,
"Accounting for Asset Retirement Obligations." A conditional asset retirement
obligation is an unconditional legal obligation to perform an asset retirement
activity in which the timing and (or) method of settlement are conditional on a
future event that may or may not be within the control of the entity. Therefore,
an entity is required to recognize a liability for the fair value of a
conditional asset retirement obligation under SFAS No. 143 if the fair value of
the liability can be reasonably estimated. FIN 47 permits, but does not require,
restatement of interim financial information. The provisions of FIN 47 are
effective for reporting periods ending after December 15, 2005.In accordance
with the transition provisions of FIN 47, we recorded an asset of $1.9 million
and a liability of $2.4 million related to conditional asset retirement
obligations as of December 31, 2005. The difference between the amounts of the
asset and liability of $0.5 million was recognized as maintenance and repairs
expense in our consolidated statement of operations for the year ended December
31, 2005.
54
Impact of Inflation
In the last three years, inflation has not had a significant impact on our
operations because of the relatively low inflation rate. Substantially all
tenant leases do, however, contain provisions designed to protect us from the
impact of inflation. These provisions include clauses enabling us to receive
percentage rent based on tenants' gross sales, which generally increase as
prices rise, and/or escalation clauses, which generally increase rental rates
during the terms of the leases. In addition, many of the leases are for terms of
less than 10 years which may provide us the opportunity to replace existing
leases with new leases at higher base and/or percentage rent if rents of the
existing leases are below the then existing market rate. Most of the leases
require the tenants to pay their share of operating expenses, including common
area maintenance, real estate taxes and insurance, which reduces our exposure to
increases in costs and operating expenses resulting from inflation.
Funds From Operations
Funds From Operations ("FFO") is a widely used measure of the operating
performance of real estate companies that supplements net income determined in
accordance with generally accepted accounting principles ("GAAP"). The National
Association of Real Estate Investment Trusts ("NAREIT") defines FFO as net
income (computed in accordance with GAAP) excluding gains or losses on sales of
operating properties, plus depreciation and amortization of real estate assets,
and after adjustments for unconsolidated partnerships and joint ventures.
Adjustments for unconsolidated partnerships and joint ventures are calculated on
the same basis. We compute FFO 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
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 25.6% in 2005 to $390.0 million compared to $310.4 million in
2004. The 2005 New Properties generated 59% of the growth in FFO, while
consistently high portfolio occupancy, increases in rental rates from new and
renewal leasing and increased recoveries of operating expenses at the 2005
Comparable Properties accounted for 25% of the growth in FFO. The remaining 16%
of growth is primarily attributable to the gain from the sale of the Galileo
America management contracts to New Plan and the acquisition fee related to
Galileo America's acquisition of New Plan's portfolio.
55
The reconciliation of FFO to net income available to common shareholders is
as follows (in thousands):
Year Ended December 31,
-------------------------------------------------
2005 2004 2003
-------------------------------------------------
Net income available to common shareholders $ 131,907 $ 102,802 $ 124,506
Depreciation and amortization from:
Consolidated properties 179,651 142,012 112,826
Unconsolidated affiliates 9,210 6,144 4,307
Discontinued operations 1,860 618 965
Minority interest in earnings of operating partnership 112,061 85,186 106,532
Gain on sales of operating real estate assets (42,562) (23,696) (71,886)
Minority investors' share of depreciation and amortization (1,390) (1,230) (1,111)
(Gain) loss on discontinued operations 82 (845) (4,042)
Depreciation and amortization of non-real estate assets (861) (586) (508)
------------- ------------- -------------
FFO $ 389,958 $ 310,405 $ 271,589
============= ============= =============
FFO applicable to our shareholders $ 213,596 $ 169,725 $ 146,552
============= ============= =============
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate risk on our debt obligations. Our interest
rate risk management policy requires that we use derivative financial
instruments for hedging purposes only and that, if we do enter into a derivative
financial instrument, the derivative financial instrument be entered into with
only major financial institutions based on their credit ratings and other
factors. We did not have any derivative financial instruments at December 31,
2005 and 2004.
Based on our proportionate share of consolidated and unconsolidated
variable-rate debt at December 31, 2005, a 0.5% increase or decrease in interest
rates on variable rate debt would increase or decrease annual cash flows by
approximately $5.4 million and, after the effect of capitalized interest, annual
earnings by approximately $4.8 million.
Based on our proportionate share of total consolidated and unconsolidated
debt at December 31, 2005, a 0.5% increase in interest rates would decrease the
fair value of debt by approximately $76.4 million, while a 0.5% decrease in
interest rates would increase the fair value of debt by approximately $78.9
million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the Index to Financial statements contained in Item 15
on page 60.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
ITEM 9A. 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
56
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 annual report, an evaluation
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(e). 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 fourth fiscal quarter of
the period covered by this annual report that materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
Report Of Management On Internal Control Over Financial Reporting
Management of CBL & Associates Properties, Inc. and its consolidated
subsidiaries (the "Company"), is responsible for establishing and maintaining
adequate internal control over financial reporting. The Company's internal
control over financial reporting is a process designed under the supervision of
the Company's chief executive officer and chief financial officer to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of the Company's financial statements for external reporting
purposes in accordance with U.S. generally accepted accounting principles.
As of December 31, 2005, management conducted an assessment of the
effectiveness of the Company's internal control over financial reporting based
on the framework established in Internal Control -- Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on this assessment, management has determined that the Company's internal
control over financial reporting as of December 31, 2005 is effective.
The Company's internal control over financial reporting includes policies
and procedures that pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect transactions and dispositions of assets;
provide reasonable assurances that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures are being
made only in accordance with authorizations of management and the directors of
the Company; and provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on its financial statements.
Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2005 has been audited by
Deloitte & Touche LLP, an independent registered public accounting firm, as
stated in their report appearing herein, which expresses an unqualified opinion
on management's assessment of the effectiveness of the Company's internal
control over financial reporting and an unqualified opinion on the effectiveness
of the Company's internal control over financial reporting as of December 31,
2005.
Report Of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
CBL & Associates Properties, Inc.:
57
We have audited management's assessment, included in the accompanying
Report of Management on Internal Control over Financial Reporting, that CBL &
Associates Properties, Inc. and subsidiaries (the "Company") maintained
effective internal control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process designed
by, or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2005, is
fairly stated, in all material respects, based on the criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2005, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated financial
statements and financial statement schedules as of and for the year ended
December 31, 2005 of the Company and our report dated March 10, 2006 expressed
an unqualified opinion on those financial statements and financial statement
schedules.
/s/ DELOITTE & TOUCHE LLP
58
Atlanta, Georgia
March 10, 2006
ITEM 9B. OTHER INFORMATION
At a meeting held on October 26, 2005, the Compensation Committee of the
Company's board of directors approved the following actions affecting the
compensation of our executive officers:
2005 Base Salaries for Named Executive Officers
------------------------------------------------
The Compensation Committee approved 2006 Base Salary levels for the
Company's officers and members of senior management, including setting the
following 2006 Base Salary levels for those individuals who qualify as "named
executive officers" (pursuant to Item 402(a)(3) of Securities and Exchange
Commission Regulation S-K):
Name: Title: 2006 Base Salary
--------------------------- ----------------------------------------- -----------------
Charles B. Lebovitz Chairman of the Board and $558,802
Chief Executive Officer
John N. Foy Vice Chairman of the Board, Chief $486,320
Financial Officer and Treasurer
Stephen D. Lebovitz Director, President and Secretary $475,000
Eric P. Snyder Senior Vice President and $446,000
Director of Corporate Leasing
Augustus N. Stephas Senior Vice President - Accounting $456,600
and Controller
In the case of Charles B. Lebovitz, John N. Foy and Stephen D. Lebovitz,
these base salaries were approved to take effect as of January 1, 2006. In the
case of Mr. Stephas, the effective date is February 28, 2006, and in the case of
Mr. Snyder, the effective date is September 15, 2006.
Each of Charles B. Lebovitz, John N. Foy and Stephen D. Lebovitz are
parties to deferred compensation agreements issued under the Amended and
Restated Stock Incentive Plan, as amended (the "Stock Incentive Plan"), pursuant
to which the amounts representing annual increases over their base salaries
since 1995 are paid in quarterly installments in the form of the Company's
Common Stock rather than cash.
Revisions to 2005 Executive Bonus Opportunities
-----------------------------------------------
The Compensation Committee also approved certain adjustments to the
criteria or matters pursuant to which designated Company executives are eligible
to earn bonuses during the 2005 fiscal year based upon the successful
continuation and/or completion of development, financing, leasing and
re-leasing, temporary leasing, sponsorships, management, accounting, marketing,
remodelings, expansions, peripheral property sales, acquisitions and joint
ventures with respect to the Company and its properties identified by the
Compensation Committee as being within each such executive's areas of
responsibility. These adjustments affected the maximum potential bonuses that
could be earned by two of the three executives covered by these bonus criteria
who are named executive officers of the Company as follows: the maximum
potential bonus payments that could be earned by John N. Foy and Stephen D.
Lebovitz for specified projects completed during 2005 was increased from
$575,000 to $675,000 for each of such named executive officers. The actual
amount of any bonus payouts will be dependent on the successful continuation or
completion of the projects or matters upon which each such officer's bonus is
based, as well as the officer's continued employment with the Company at such
time.
In addition to the adjustments to the potential bonus levels approved as
described above for certain officers, the Compensation Committee also approved
an increase from $1,000,000 to $1,075,000 in the amount of a separate allocation
of funds to be available as bonus compensation for payment to three designated
59
senior executives, in conjunction with the Compensation Committee's decision
concerning the actual bonuses to be paid to such officers based upon the
Committee's evaluation of their performance during 2005. Two of the officers who
participated in such bonus pool for fiscal 2005 are named executive officers,
and the Compensation Committee approved the following 2005 bonus amounts for
such officers: Charles B. Lebovitz - $675,000 and Augustus N. Stephas -
$225,000.
In the case of both of the bonus mechanisms described above for 2005, each
officer who receives a bonus has the option of electing whether to have his or
her bonus paid in cash or in shares of the Company's Common Stock pursuant to
the terms of the Stock Incentive Plan. The number of shares issued with respect
to any bonus that an officer elects to receive in the Company's Common Stock
will be determined based on the market value of the Common Stock on the date
when such bonus becomes payable.
Approval of 2006 Executive Bonus Opportunities
----------------------------------------------
The Compensation Committee also approved the criteria or matters pursuant
to which designated Company executives will be eligible to earn bonuses for the
2006 fiscal year. The amount of the bonus paid to each executive will be based
upon the successful continuation and/or completion of development, financing,
leasing and re-leasing, temporary leasing, sponsorships, management, accounting,
marketing, remodelings, expansions, peripheral property sales, acquisitions and
joint ventures with respect to the Company and its properties identified by the
Compensation Committee as being within each such executive's areas of
responsibility. Three of the executives covered by these bonus criteria are
named executive officers of the Company. The potential bonuses that the
Compensation Committee provided that such named executive officers could earn
pursuant to the above-stated criteria or matters are as follows: John N. Foy -
$725,000; Stephen D. Lebovitz - $725,000; and Eric P. Snyder - $325,000. The
actual amount of any bonus payouts will be dependent on the successful
continuation or completion of the projects or matters upon which each such
officer's bonus is based, as well as the officer's continued employment with the
Company at such time.
In addition to the potential bonus levels approved as described above for
certain officers, the Compensation Committee also approved a separate allocation
of up to an aggregate of $1,325,000 to be available as bonus compensation for
payment to three designated senior executives, consisting of specified maximum
bonuses that could be earned by each of the three executives totaling $1,175,000
plus the opportunity to share in an unallocated discretionary bonus pool of up
to $150,000. The actual bonus payments to such officers, including the amount
(if any) to be paid out of the $150,000 unallocated pool, will be determined
during the fourth quarter of 2006 by the Compensation Committee, based upon its
evaluation of such officers' performance during the year. Two of the officers
for whom any fiscal 2006 bonuses will be determined pursuant to this method are
named executive officers, and the potential bonus payouts set by the
Compensation Committee for each of these officers is as follows: Charles B.
Lebovitz - $725,000 plus any additional participation in the unallocated
$150,000 pool, and Augustus N. Stephas - $250,000 plus any additional
participation in the unallocated $150,000 pool.
As with the 2005 bonuses, in the case of both of the bonus mechanisms
described above for 2006, each officer who receives a bonus will have the option
of electing whether to have his or her bonus paid in cash or in shares of the
Company's Common Stock pursuant to the terms of the Stock Incentive Plan. The
number of shares issued with respect to any bonus that an officer elects to
receive in the Company's Common Stock will be determined based on the market
value of the Common Stock on the date when such bonus becomes payable.
60
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated herein by reference to the sections entitled "Election of
Directors," "Directors and Executive Officers," "Certain Terms of the Jacobs
Acquisition," "Corporate Governance Matters," "Board of Directors' Meetings and
Committees - Audit Committee," and "Section 16(a) Beneficial Ownership Reporting
Compliance" in our most recent definitive proxy statement filed with the
Securities and Exchange Commission (the "Commission") with respect to our Annual
Meeting of Stockholders to be held on May 8, 2006.
Our board of directors has determined that Winston W. Walker, an
independent director and chairman of the audit committee, qualifies as an "audit
committee financial expert" as such term is defined by the rules of the
Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated herein by reference to the sections entitled "Compensation of
Directors," "Executive Compensation" and "Compensation Committee Interlocks and
Insider Participation" in our most recent definitive proxy statement filed with
the Commission with respect to our Annual Meeting of Stockholders to be held on
May 8, 2006.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Incorporated herein by reference to the sections entitled "Security
Ownership of Certain Beneficial Owners and Management" and "Equity Compensation
Plan Information as of December 31, 2005", in our most recent definitive proxy
statement filed with the Commission with respect to our Annual Meeting of
Stockholders to be held on May 8, 2006.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated herein by reference to the section entitled "Certain
Relationships and Related Transactions" in our most recent definitive proxy
statement filed with the Commission with respect to our Annual Meeting of
Stockholders to be held on May 8, 2006.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Incorporated herein by reference to the section entitled "Independent
Registered Public Accountants' Fees and Services" under "RATIFICATION OF THE
SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS" in our most recent
definitive proxy statement filed with the Commission with respect to our Annual
Meeting of Stockholders to be held on May 8, 2006.
61
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(1) Financial Statements Page Number
Report Of Independent Registered Public Accounting Firm 65
CBL & Associates Properties, Inc. Consolidated Balance Sheets
as of December 31, 2005 and 2004 66
CBL & Associates Properties, Inc. Consolidated Statements of
Operations for the Years Ended December 31, 2005, 2004 and 2003 67
CBL & Associates Properties, Inc. Consolidated Statements of
Shareholders' Equity for the Years Ended December 31, 2005,
2004 and 2003 68
CBL & Associates Properties, Inc. Consolidated Statements of
Cash Flows for the Years Ended December 31, 2005, 2004 and 2003 69
Notes to Consolidated Financial Statements 70
(2) Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts 102
Schedule III Real Estate and Accumulated Depreciation 103
Schedule IV Mortgage Loans on Real Estate 114
Financial statement schedules not listed herein are either not required or
are not present in amounts sufficient to require submission of the schedule
or the information required to be included therein is included in our
consolidated financial statements in Item 15 or are reported elsewhere.
(3) Exhibits
The Exhibit Index attached to this report is incorporated by reference into
this Item 15(a)(3).
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant)
By: __/s/ John N. Foy_________
---------------
John N. Foy
Vice Chairman of the Board, Chief Financial
Officer and Treasurer (Principal Financial
Officer and Principal Accounting Officer)
Dated: March 15, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Charles B. Lebovitz Chairman of the Board, and Chief Executive March 15, 2006
--------------------------------
Charles B. Lebovitz Officer (Principal Executive Officer)
/s/ John N. Foy Vice Chairman of the Board, Chief Financial March 15, 2006
--------------------------------
Officer and Treasurer (Principal Financial
John N. Foy Officer and Principal Accounting Officer)
/s/ Stephen D. Lebovitz* Director, President and Secretary March 15, 2006
--------------------------------
Stephen D. Lebovitz
/s/ Claude M. Ballard* Director March 15, 2006
--------------------------------
Claude M. Ballard
/s/ Leo Fields* Director March 15, 2006
--------------------------------
Leo Fields
/s/ Matthew S. Dominski* Director March 15, 2006
--------------------------------
Matthew S. Dominski
/s/ Winston W. Walker* Director March 15, 2006
--------------------------------
Winston W. Walker
/s/ Gary L. Bryenton* Director March 15, 2006
--------------------------------
Gary L. Bryenton
/s/ Martin J. Cleary* Director March 15, 2006
--------------------------------
Martin J. Cleary
*By: /s/ John N. Foy Attorney-in-Fact March 15, 2006
--------------------------------
John N. Foy
63
INDEX TO FINANCIAL STATEMENTS
Report Of Independent Registered Public Accounting Firm 65
CBL & Associates Properties, Inc. Consolidated Balance Sheets as of
December 31, 2005 and 2004 66
CBL & Associates Properties, Inc. Consolidated Statements of Operations
for the Years Ended December 31, 2005, 2004 and 2003 67
CBL & Associates Properties, Inc. Consolidated Statements of Cash Flows
for the Years Ended December 31, 2005, 2004 and 2003 68
CBL & Associates Properties, Inc. Consolidated Statements of
Shareholders' Equity for the Years Ended December 31,
2005, 2004 and 2003 69
Notes to Consolidated Financial Statements 70
Schedule II Valuation and Qualifying Accounts 102
Schedule III Real Estate and Accumulated Depreciation 103
Schedule IV Mortgage Loans on Real Estate 114
64
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
CBL & Associates Properties, Inc.:
We have audited the accompanying consolidated balance sheets of CBL & Associates
Properties, Inc. and subsidiaries (the "Company") as of December 31, 2005 and
2004, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 2005. Our audits also included the financial statement schedules listed in
the Index at Item 15. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of CBL and Associates Properties, Inc.
and subsidiaries as of December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2005, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2005, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 10, 2006 expressed an unqualified opinion on management's assessment
of the effectiveness of the Company's internal control over financial reporting
and an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 10, 2006
65
CBL & Associates Properties, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
December 31,
---------------------------------------
2005 2004
ASSETS ---------------------------------------
Real estate assets:
Land $ 776,989 $ 659,782
Buildings and improvements 5,698,669 4,670,462
---------------------------------------
6,475,658 5,330,244
Accumulated depreciation (727,907) (575,464)
---------------------------------------
5,747,751 4,754,780
Real estate assets held for sale 63,168 61,607
Developments in progress 133,509 78,393
---------------------------------------
Net investment in real estate assets 5,944,428 4,894,780
Cash and cash equivalents 28,838 25,766
Receivables:
Tenant, net of allowance for doubtful accounts
of $3,439 in 2005 and $3,237 in 2004 55,056 38,409
Other 6,235 13,706
Mortgage notes receivable 18,117 27,804
Investments in unconsolidated affiliates 84,138 84,782
Other assets 215,510 119,253
---------------------------------------
$ 6,352,322 $ 5,204,500
=======================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage and other notes payable $ 4,341,055 $ 3,359,466
Mortgage notes payable on real estate assets held for sale - 12,213
Accounts payable and accrued liabilities 320,270 212,064
---------------------------------------
Total liabilities 4,661,325 3,583,743
---------------------------------------
Commitments and contingencies (Notes 3, 5 and 17)
Minority interests 609,475 566,606
---------------------------------------
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,
62,512,816 and 62,667,104 shares issued and outstanding
in 2005 and 2004, respectively 625 627
Additional paid-in capital 1,037,764 1,025,478
Deferred compensation (8,895) (3,081)
Other comprehensive income 288 -
Retained earnings 51,708 31,095
---------------------------------------
Total shareholders' equity 1,081,522 1,054,151
---------------------------------------
$ 6,352,322 $ 5,204,500
=======================================
The accompanying notes are an integral part of these balance sheets.
66
CBL & Associates Properties, Inc.
Consolidated Statements of Operations
(In thousands, except per share amounts)
Year Ended December 31,
-------------------------------------
2005 2004 2003
-------------------------------------
REVENUES:
Minimum rents $ 549,368 $ 476,568 $ 426,247
Percentage rents 23,166 15,951 12,900
Other rents 17,674 16,102 12,633
Tenant reimbursements 278,498 246,016 218,646
Management, development and leasing fees 20,521 9,791 5,525
Other 19,485 17,005 14,176
-------------------------------------
Total revenues 908,712 781,433 690,127
-------------------------------------
EXPENSES:
Property operating 151,280 139,349 128,782
Depreciation and amortization 179,651 142,012 112,825
Real estate taxes 68,116 58,066 51,319
Maintenance and repairs 50,559 43,527 39,589
General and administrative 39,197 35,338 30,395
Loss on impairment of real estate assets 1,334 3,080 -
Other 15,444 16,373 11,489
-------------------------------------
Total expenses 505,581 437,745 374,399
-------------------------------------
Income from operations 403,131 343,688 315,728
Interest income 6,831 3,355 2,485
Interest expense (208,183) (177,219) (153,321)
Loss on extinguishment of debt (6,171) - (167)
Gain on sales of real estate assets 53,583 29,272 77,765
Gain on sales of management contracts 21,619 - -
Equity in earnings of unconsolidated affiliates 8,495 10,308 4,941
Minority interest in earnings:
Operating Partnership (112,061) (85,186) (106,532)
Shopping center properties (4,879) (5,365) (2,758)
-------------------------------------
Income before discontinued operations 162,365 118,853 138,141
Operating income of discontinued operations 192 1,413 1,956
Gain (loss) on discontinued operations (82) 845 4,042
-------------------------------------
Net income 162,475 121,111 144,139
Preferred dividends (30,568) (18,309) (19,633)
-------------------------------------
Net income available to common shareholders $ 131,907 $ 102,802 $ 124,506
=====================================
Basic per share data:
Income before discontinued operations, net of preferred dividends $ 2.10 $ 1.63 $ 1.98
Discontinued operations - 0.04 0.10
-------------------------------------
Net income available to common shareholders $ 2.10 $ 1.67 $ 2.08
=====================================
Weighted average common shares outstanding 62,721 61,602 59,872
Diluted per share data:
Income before discontinued operations, net of preferred dividends $ 2.03 $ 1.57 $ 1.90
Discontinued operations - 0.04 0.10
-------------------------------------
Net income available to common shareholders $ 2.03 $ 1.61 $ 2.00
=====================================
Weighted average common and potential dilutive
common shares outstanding 64,880 64,004 62,386
The accompanying notes are an integral part of these statements.
67
CBL & Associates Properties, Inc.
Consolidated Statement Of Shareholders' Equity
(In thousands, except share data)
Accumulated Retained
Additional Other Earnings
Preferred Common Paid-in Comprehensive Deferred (Accumulated
Stock Stock Capital Loss Compensation Deficit) Total
--------- ------ ---------- ------------- ----------- ----------- ----------
Balance, December 31, 2002 $ 47 $ 596 $ 765,388 $ - $ (2,397) $(22,444) $ 741,190
Net income - - - - - 144,139 144,139
Gain on current period cash flow hedges - - - - 2,397 - 2,397
---------
Total comprehensive income 146,536
Dividends declared - common stock - - - - - (81,096) (81,096)
Dividends declared - preferred stock - - - - - (17,453) (17,453)
Issuance of 460,000 shares of Series C preferred -
stock 5 - 111,222 - - 111,227
Redemption of 2,675,000 shares of Series A -
preferred stock (27) - (64,668) - - (2,180) (66,875)
Issuance of 405,676 shares of common stock - 4 8,753 (1,855) - - 6,902
Exercise of stock options - 6 7,756 - - - 7,762
Accrual under deferred compensation arrangements - - 618 - - - 618
248
Amortization of deferred compensation - - - - - - 248
Adjustment for minority interest in Operating
Partnership - - (11,759) - - - (11,759)
--------- ------ ---------- ------------- ----------- ----------- ----------
Balance, December 31, 2003 25 606 817,310 (1,607) - 20,966 837,300
Net income and total comprehensive income - - - - - 121,111 121,111
Dividends declared - common stock - - - - - (92,678) (92,678)
Dividends declared - preferred stock - - - - - (18,304) (18,304)
Issuance of 700,000 shares of Series D preferred -
stock 7 - 169,326 - - - 169,333
Issuance of 169,962 shares of common stock - 2 4,526 (2,129) - - 2,399
Exercise of stock options - 14 15,254 - - - 15,268
Accrual under deferred compensation arrangements - - 776 - - - 776
Amortization of deferred compensation - - - 655 - - 655
Conversion of Operating Partnership units into
525,636 shares of common stock - 5 5,625 - - - 5,630
Adjustment for minority interest in Operating
Partnership - - 12,661 - - - 12,661
--------- ------ ---------- ------------- ----------- ----------- ----------
Balance, December 31, 2004 32 627 1,025,478 (3,081) - 31,095 1,054,151
Net income - - - - - 162,475 162,475
Unrealized gain on available for sale securities - - - - 288 - 288
-----------
Total comprehensive income - - - - - - 162,763
Dividends declared - common stock - - - - - (111,294) (111,294)
Dividends declared - preferred stock - - - - - (30,568) (30,568)
Additional costs of issuing 700,000 shares of
Series D preferred stock - - (193) - - - (193)
Issuance of 230,041 shares of common stock - 2 9,011 (7,896) - - 1,117
Repurchase of 1,371,034 shares of common stock - (14) (54,984) - - - (54,998)
Exercise of stock options - 8 9,733 - - - 9,741
Accelerated vesting of stock-based compensation - - 480 256 - - 736
Accrual under deferred compensation arrangements - - 780 - - - 780
Issuance of stock under deferred compensation -
arrangement - 2 (2) - - - -
Amortization of deferred compensation - - - 1,826 - - 1,826
Conversion of Operating Partnership units into
52,136 shares of common stock - - 10,304 - - - 10,304
Adjustment for minority interest in Operating
Partnership - - 37,157 - - - 37,157
--------- ------ ---------- ------------- ----------- ------------ ---------
Balance, December 31, 2005 $ 32 $ 625 $1,037,764 $(8,895) $288 $51,708 $1,081,522
========= ====== ========== ============= =========== =========== ==========
The accompanying notes are an integral part of these statements.
68
CBL & Associates Properties, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
-----------------------------------------------
2005 2004 2003
-----------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $162,475 $121,111 $144,139
Adjustments to reconcile net income to net cash provided
by operating activities:
Minority interest in earnings 116,940 90,551 109,331
Depreciation 133,834 100,667 85,584
Amortization 55,381 49,162 34,301
Net amortization of above and below market leases (6,434) (3,515) (311)
Amortization of debt premiums (7,347) (5,262) (646)
Gain on sales of real estate assets (53,583) (29,583) (77,775)
(Gain) loss on discontinued operations 82 (845) (4,042)
Gain on sales of management contracts (21,619) - -
Stock-based compensation expense 2,125 2,646 2,494
Amortization of deferred compensation 1,826 655 248
Equity in earnings of unconsolidated affiliates in
excess of distributions received (1,148) - -
Write-off of development projects 560 3,714 2,056
Extinguishment of debt (353) - 167
Loss on impairment of real estate assets 1,334 3,080 -
Changes in assets and liabilities:
Tenant and other receivables (9,879) (1,678) (9,773)
Other assets (1,116) (3,413) (12,770)
Accounts payable and accrued liabilities 16,496 11,907 1,346
-----------------------------------------------
Net cash provided by operating activities 389,574 339,197 274,349
-----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate assets (361,285) (219,383) (227,362)
Acquisitions of real estate assets and other assets (426,537) (587,163) (273,265)
Proceeds from sales of real estate assets 64,350 113,565 284,322
Proceeds from sale of management contracts 22,000 - -
Costs related to sale of management contracts (381) - -
Cash in escrow - 78,476 (78,476)
Additions to mortgage notes receivable (859) (9,225) (10,000)
Payments received on mortgage notes receivable 13,173 17,590 1,840
Distributions in excess of equity in earnings of
unconsolidated affiliates 15,523 28,908 9,740
Additional investments in and advances to unconsolidated
affiliates (27,840) (27,112) (15,855)
Changes in other assets (10,652) (4,307) (3,310)
-----------------------------------------------
Net cash used in investing activities (712,508) (608,651) (312,366)
-----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage and other notes payable 946,825 642,743 572,080
Principal payments on mortgage and other notes payable (353,806) (355,651) (390,115)
Additions to deferred financing costs (3,407) (6,029) (4,830)
Repurchase of common stock (48,292) - -
Proceeds from issuance of common stock 508 529 5,026
Proceeds from exercise of stock options 9,741 15,268 7,762
Proceeds from issuance of preferred stock - 169,333 111,227
Redemption of preferred stock - - (64,695)
Additional costs of preferred stock offerings (193) - -
Purchase of minority interest in the Operating Partnership (2,172) (5,949) (21,013)
Distributions to minority interests (89,459) (78,493) (72,186)
Dividends paid to holders of preferred stock (31,214) (17,633) (19,633)
Dividends paid to common shareholders (102,525) (89,230) (78,629)
-----------------------------------------------
Net cash provided by financing activities 326,006 274,888 44,994
-----------------------------------------------
Net change in cash and cash equivalents 3,072 5,434 6,977
Cash and cash equivalents, beginning of period 25,766 20,332 13,355
-----------------------------------------------
Cash and cash equivalents, end of period $ 28,838 $ 25,766 $ 20,332
===============================================
The accompanying notes are an integral part of these statements.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
NOTE 1. ORGANIZATION
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 shopping
centers. CBL's shopping center properties are located in 27 states, but are
primarily in the southeastern and midwestern United States.
CBL conducts substantially all of its business through CBL & Associates
Limited Partnership (the "Operating Partnership"). As of December 31, 2005, the
Operating Partnership owned controlling interests in 72 regional malls, 27
associated centers (each located adjacent to a regional mall), seven community
centers and CBL's corporate office building. The Operating Partnership
consolidates the financial statements of all entities in which it has a
controlling financial interest or where it is the primary beneficiary of a
variable interest entity. The Operating Partnership owned non-controlling
interests in seven regional malls and three 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,
the Operating Partnership does not control these partnerships and joint ventures
and, accordingly, accounts for these investments using the equity method. The
Operating Partnership had two mall expansions, two open-air shopping centers,
one open-air shopping center expansion, two associated centers, one community
center, which is owned in a joint venture, and one community center expansion
under construction at December 31, 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 December 31, 2005, CBL Holdings I, Inc., the
sole general partner of the Operating Partnership, owned a 1.6% general
partnership interest in the Operating Partnership and CBL Holdings II, Inc.
owned a 52.6% limited partnership interest for a combined interest held by CBL
of 54.2%.
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 partnership 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 a limited partnership interest 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 December 31,
2005, CBL's Predecessor owned a 15.2% limited partnership interest, Jacobs owned
a 20.6% limited partnership interest and third parties owned a 10.0% limited
partnership interest in the Operating Partnership. CBL's Predecessor also owned
5.6 million shares of CBL's common stock at December 31, 2005, for a combined
total 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 its common stock.
CBL, the Operating Partnership and the Management Company are collectively
referred to herein as "the Company." All significant intercompany balances and
transactions have been eliminated in the consolidated presentation.
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
70
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 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Real Estate Assets
------------------
The Company capitalizes predevelopment project costs paid to third parties.
All previously capitalized predevelopment costs are expensed when it is no
longer probable that the project will be completed. Once development of a
project commences, all direct costs incurred to construct the project, including
interest and real estate taxes, are capitalized. Additionally, certain general
and administrative expenses are allocated to the projects and capitalized based
on the amount of time applicable personnel work on the development project.
Ordinary repairs and maintenance are expensed as incurred. Major replacements
and improvements are capitalized and depreciated over their estimated useful
lives.
All acquired real estate assets have been 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 Company allocates the purchase price to (i) tangible assets,
consisting of land, buildings and improvements, as if vacant, and tenant
improvements, and (ii) identifiable intangible assets and liabilities, generally
consisting of above-market leases, in-place leases and tenant relationships,
which are included in other assets, and below-market leases, which are included
in accounts payable and accrued liabilities. The Company uses estimates of fair
value based on estimated cash flows, using appropriate discount rates, and other
valuation techniques 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 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. The amortization of above- and
below-market leases is recorded as an adjustment to minimum rental revenue,
while the amortization of all other lease-related intangibles is recorded as
amortization expense. 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.
71
The Company's acquired intangibles and their balance sheet classifications
as of December 31, 2005 and 2004, are summarized as follows:
December 31, 2005 December 31, 2004
------------------------------- --------------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
-------------- -------------- ------------- --------------
Other assets:
Above-market leases $42,026 $(4,921) $12,250 $ (1,335)
In-place leases 72,584 (14,992) 53,850 (5,810)
Tenant relationships 49,796 (53) -- --
Accounts payable and accrued liabilities:
Below-market leases 91,148 (14,816) 38,967 (4,870)
The total net amortization expense of the above acquired intangibles for
the next five succeeding years will be $3,420 in 2006, $3,236 in 2007, $3,334 in
2008, $2,148 in 2009 and $1,021 in 2010.
Total interest expense capitalized was $8,385, $4,517 and $5,974 in 2005,
2004 and 2003, respectively.
Carrying Value of Long-Lived Assets
-----------------------------------
The Company evaluates the carrying value of long-lived assets to be held
and used when events or changes in circumstances warrant such a review. The
carrying value of a long-lived asset is considered impaired when its estimated
future undiscounted cash flows are less than its carrying value. If it is
determined that an impairment has occurred, the excess of the asset's carrying
value over its estimated fair value is charged to operations.
The Company determined that two community centers met the criteria to be
reflected as held for sale as of December 31, 2005 and recognized a loss on
impairment of $1,029.
During 2004, the Company recognized a loss of $114 on the sale of one
community center as a loss on impairment of real estate assets.
During 2004, the Company determined that the carrying value of a vacant
community center exceeded the community center's estimated fair value by $402.
The Company recorded the reduction in the carrying value of the related real
estate assets to their estimated fair value as a loss on impairment of real
estate assets. The Company sold this community center in October 2005 and
recognized an additional impairment of $43.
In January 2005, the Company made the decision to sell five community
centers and, as a result, recognized an aggregate loss on impairment of real
estate assets of $617 on these community centers in 2004 to reduce the carrying
values of these centers to their estimated fair values based on their selling
prices.
In January 2005, the Company completed the third phase of the Galileo
America joint venture transaction discussed in Note 5. The Company recognized a
loss of $1,947 on this transaction as an impairment of real estate assets in
2004 and reduced the carrying value of the related assets, which were classified
as real estate assets held for sale as of December 31, 2004. The Company
recognized an additional impairment loss of $262 in the first quarter of 2005
related to these centers when certain estimated amounts were adjusted when the
actual amounts became known.
There were no impairment charges in 2003.
72
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with original
maturities of three months or less as cash equivalents.
Restricted Cash
---------------
Restricted cash of $34,448 and $29,337 was included in other assets at
December 31, 2005 and 2004, respectively. Restricted cash consists primarily of
cash held in escrow accounts for debt service, insurance, real estate taxes,
capital improvements and deferred maintenance as required by the terms of
certain mortgage notes payable, as well as contributions from tenants to be used
for future marketing activities.
Joint Ventures
--------------
Initial investments in joint ventures that are in economic substance a
capital contribution to the joint venture are recorded in an amount equal to the
Company's historical carryover basis in the real estate contributed. Initial
investments in joint ventures that are in economic substance the sale of a
portion of the Company's interest in the real estate are accounted for as a
contribution of real estate recorded in an amount equal to the Company's
historical carryover basis in the ownership percentage retained and as a sale of
real estate with profit recognized to the extent of the other joint venturers'
interests in the joint venture. Profit recognition assumes the Company has no
commitment to reinvest with respect to the percentage of the real estate sold
and the accounting requirements of the full accrual method under SFAS No. 66 are
met.
The Company accounts for its investment in joint ventures where it owns a
non-controlling interest using the equity method of accounting. Under the equity
method, the Company's cost of investment is adjusted for its share of equity in
the earnings of the unconsolidated affiliate and reduced by distributions
received. Generally, distributions of cash flows from operations and capital
events are first made to partners to pay cumulative unpaid preferences on
unreturned capital balances and then to the partners in accordance with the
terms of the joint venture agreements.
Any differences between the cost of the Company's investment in an
unconsolidated affiliate and its underlying equity as reflected in the
unconsolidated affiliate's financial statements generally result from costs of
the Company's investment that are not reflected on the unconsolidated
affiliate's financial statements, capitalized interest on its investment and the
Company's share of development and leasing fees that are paid by the
unconsolidated affiliate to the Company for development and leasing services
provided to the unconsolidated affiliate during any development periods. At
December 31, 2005 and 2004, the difference between the Company's investment in
unconsolidated affiliates and the underlying equity of unconsolidated affiliates
was $4,323 and $18,730, respectively, which is generally amortized over a period
of 40 years.
Deferred Financing Costs
------------------------
Net deferred financing costs of $10,849 and $13,509 were included in other
assets at December 31, 2005 and 2004, respectively. Deferred financing costs
include fees and costs incurred to obtain financing and are amortized to
interest expense over the terms of the related notes payable. Amortization
expense was $5,031, $4,390, and $3,268 in 2005, 2004 and 2003, respectively.
Accumulated amortization was $11,532 and $7,815 as of December 31, 2005 and
2004, respectively.
73
Revenue Recognition
-------------------
Minimum rental revenue from operating leases is recognized on a
straight-line basis over the initial terms 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.
The Company receives reimbursements from tenants for real estate taxes,
insurance, common area maintenance, 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.
The Company receives 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 only to the extent of the
third-party partners' ownership interest. Development and leasing fees during
the development period to the extent of the Company's ownership interest are
recorded as a reduction to the Company's investment in the unconsolidated
affiliate.
Gain on Sales of Real Estate Assets
-----------------------------------
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, the Company's 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 the Company has 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 the Company's ownership interest is
deferred.
Income Taxes
------------
The Company is qualified as a REIT under the provisions of the Code. To
maintain qualification as a REIT, the Company is required to distribute at least
90% of its taxable income to shareholders and meet certain other requirements.
As a REIT, the Company is generally not liable for federal corporate income
taxes. If the Company fails to qualify as a REIT in any taxable year, the
Company will be subject to federal and state income taxes on its taxable income
at regular corporate tax rates. Even if the Company maintains its qualification
as a REIT, the Company may be subject to certain state and local taxes on its
income and property, and to federal income and excise taxes on its undistributed
income. State income taxes were not material in 2005, 2004 and 2003.
The Company has also elected taxable REIT subsidiary status for some of its
subsidiaries. This enables the Company to receive income and provide services
that would otherwise be impermissible for REITs. For these entities, deferred
tax assets and liabilities are established for temporary differences between the
financial reporting basis and the tax basis of assets and liabilities at the
enacted tax rates expected to be in effect when the temporary differences
reverse. A valuation allowance for deferred tax assets is provided if the
Company believes all or some portion of the deferred tax asset may not be
realized. An increase or decrease in the valuation allowance that results from
the change in circumstances that causes a change in our judgment about the
realizability of the related deferred tax asset is included in income. The
Company had a net deferred tax asset of $1,541 and $16,636 at December 31, 2005
and 2004, respectively, which consisted primarily of net operating loss
74
carryforwards, that were reduced to zero by a valuation allowance because of
uncertainty about the realization of the net deferred tax asset considering all
available evidence.
Derivative Financial Instruments
--------------------------------
The Company records derivative financial instruments as either an asset or
liability measured at the instrument's fair value. Any fair value adjustments
affect either shareholders' equity or net income depending on whether the
derivative instrument qualifies as a hedge for accounting purposes and, if so,
the nature of the hedging activity. See Note 15 for more information.
Concentration of Credit Risk
----------------------------
The Company's tenants include national, regional and local retailers.
Financial instruments that subject the Company to concentrations of credit risk
consist primarily of tenant receivables. The Company generally does not obtain
collateral or other security to support financial instruments subject to credit
risk, but monitors the credit standing of tenants.
The Company derives a substantial portion of its rental income from various
national and regional retail companies; however, no single tenant collectively
accounted for more than 10.0% of the Company's total revenues in 2005, 2004 and
2003.
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 (Note 9). The following summarizes
the impact of potential dilutive common shares on the denominator used to
compute earnings per share:
Year Ended December 31,
--------------------------------------------------
2005 2004 2003
---------------- ----------------- ---------------
Weighted average shares 63,004 61,878 60,108
Effect of nonvested stock awards (283) (276) (236)
---------------- ----------------- ---------------
Denominator - basic earnings per share 62,721 61,602 59,872
Dilutive effect of:
Stock options 1,741 1,970 2,106
Nonvested stock awards 223 232 236
Deemed shares related to deferred compensation
arrangements 195 200 172
---------------- ----------------- ---------------
Denominator - diluted earnings per share 64,880 64,004 62,386
================ ================= ===============
Stock-Based Compensation
------------------------
Historically, the Company accounted for its stock-based compensation plans,
which are described in Note 19, 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 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." There were no stock options granted during 2005, 2004 and
2003.
No stock-based compensation expense related to stock options granted prior
to January 1, 2003, 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
75
income available to common shareholders in 2005, 2004 and 2003 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:
Year Ended December 31,
-------------------------------------------------
2005 2004 2003
---------------- ---------------- ---------------
Net income available to common shareholders, as reported $131,907 $ 102,802 $124,506
Add: Stock-based compensation expense included in
reported net income available to common
shareholders 4,775 2,890 2,742
Less: Total stock-based compensation expense determined
under fair value method (5,186) (3,398) (3,344)
---------------- ---------------- ---------------
Pro forma net income available to common shareholders $131,496 $ 102,294 $123,904
================ ================ ===============
Earnings per share:
Basic, as reported $ 2.10 $ 1.67 $ 2.08
================ ================ ===============
Basic, pro forma $ 2.10 $ 1.66 $ 2.07
================ ================ ===============
Diluted, as reported $ 2.03 $ 1.61 $ 2.00
================ ================ ===============
Diluted, pro forma $ 2.03 $ 1.60 $ 1.99
================ ================ ===============
Comprehensive Income
--------------------
Comprehensive income includes all changes in shareholders' equity during
the period, except those resulting from investments by shareholders and
distributions to shareholders.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from those
estimates.
Recent Accounting Pronouncements
--------------------------------
In December 2004, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 153, "Exchanges of Nonmonetary Assets, an amendment of
APB No. 29, Accounting for Nonmonetary Transactions." SFAS No. 153 requires
exchanges of productive assets to be accounted for at fair value, rather than at
carryover basis, unless (1) neither the asset received nor the asset surrendered
has a fair value that is determinable within reasonable limits or (2) the
transactions lack commercial substance. SFAS No. 153 became effective for
nonmonetary asset exchanges occurring in fiscal periods that began after June
15, 2005. See Note 5.
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 issued a Staff Accounting Bulletin
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
as amended by SFAS No. 148 effective January 1, 2003. The Company will adopt
SFAS No. 123(R) on January 1, 2006, using a modified prospective application.
The Company estimates that this will result in the recognition of additional
76
compensation expense of approximately $310 and $91 during the years ending
December 31, 2006 and 2007, respectively, which represents the unamortized
deferred compensation expense associated with all remaining stock options that
were not vested as of December 31, 2005.
In May 2005, the FASB issued SFAS No. 154 entitled, "Accounting Changes and
Error Corrections," which will be effective in the first quarter of fiscal year
2006. This statement addresses the retrospective application of such changes and
corrections and the Company will follow the provision of this standard in the
event of any future accounting changes.
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 FASB Staff Position ("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 for EITF Issue No. 04-05 described above. 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.
In March 2005, the FASB issued Interpretation No. 47 ("FIN 47"),
"Accounting for Conditional Asset Retirement Obligations," which clarifies the
accounting for conditional asset retirement obligations as used in SFAS No. 143,
"Accounting for Asset Retirement Obligations." A conditional asset retirement
obligation is an unconditional legal obligation to perform an asset retirement
activity in which the timing and (or) method of settlement are conditional on a
future event that may or may not be within the control of the entity. Therefore,
an entity is required to recognize a liability for the fair value of a
conditional asset retirement obligation under SFAS No. 143 if the fair value of
the liability can be reasonably estimated. FIN 47 permits, but does not require,
restatement of interim financial information. The provisions of FIN 47 are
effective for reporting periods ending after December 15, 2005. In accordance
with the transition provisions of FIN 47, the Company recorded an asset of
$1,906 and a liability of $2,358 related to conditional asset retirement
obligations as of December 31, 2005. The difference between the amounts of the
asset and liability of $452 was recognized as maintenance and repairs expense in
the accompanying consolidated statement of operations for the year ended
December 31, 2005. Had the Company applied the provisions of FIN 47
retroactively, the liability for conditional asset retirement obligations would
have been $2,254, $2,153 and $2,057 at December 31, 2004, 2003 and January 1,
2003, respectively.
Reclassifications
-----------------
Certain prior period amounts in the consolidated statements of operations
have been reclassified to present marketing fund revenues and expenses on a
gross basis in accordance with Emerging Issues Task Force Issue No. 99-19,
"Reporting Revenue Gross as a Principal versus Net as an Agent." As a result,
the following amounts in the consolidated statements of operations have changed
from the previously reported amounts for the years ended December 31, 2004 and
2003: tenant reimbursements have increased by $27,281 and $25,884, respectively,
77
other revenues have decreased by $3,093 and $0, respectively, and property
operating expenses have increased by $24,188 and $25,884, respectively. This
reclassification did not change previously reported amounts of net income
available to common shareholders.
NOTE 3. ACQUISITIONS
The Company includes the results of operations of real estate assets
acquired in the consolidated statement of operations from the date of the
related acquisition.
2005 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 non-recourse 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 (the "L-SCUs") in the Operating Partnership with a fair value of $26,881.
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 terms of the L-SCUs are described in Note 9.
The Company may elect to acquire the remaining 30% ownership interest in
the joint venture, or a portion thereof, at any time 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 by December 2012, then the joint venture partner owning
that interest will thereafter 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.
On November 7, 2005, the Company acquired Layton Hills Mall in Salt Lake
City, UT, for a cash purchase price, including transaction costs, of $120,926.
The Company funded a portion of the purchase price with a new, short-term loan
of $102,850 that bears interest at the London Interbank Offered Rate ("LIBOR")
plus 95 basis points and has a maturity of March 2006 plus a 60-day extension
option. The Company intends to retire or refinance this short-term loan.
On November 16, 2005, the Company acquired Oak Park Mall in Overland, KS,
Hickory Point Mall in Forsyth, IL, and Eastland Mall in Bloomington, IL, for a
purchase price, including transaction costs, of $508,180, which consisted of
$127,111 in cash, the assumption of $335,100 of interest-only, non-recourse
loans that bear interest at a stated rate of 5.85% and mature in November 2015
and the issuance of 1,144,924 Series K special common units (the "K-SCUs") of
78
limited partner interest in the Operating Partnership with a fair value of
$45,969. The Company funded part of the cash portion of the purchase price with
a new, non-recourse loan of $33,150 that bears interest at 5.85% and matures in
November 2015. The terms of the K-SCUs are described in Note 9.
The results of operations of the acquired properties have been included in
the consolidated financial statements since their respective dates of
acquisition. The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed as of the respective acquisition dates
during the year ended December 31, 2005:
Land $ 95,863
Buildings and improvements 763,523
Above-market leases 30,759
Tenant relationships 49,796
In-place leases 24,021
---------------
Total assets 963,962
Mortgage note payables assumed (385,754)
Premiums on mortgage note payables assumed (10,552)
Below-market leases (54,263)
Other long-term liabilities (14,474)
---------------
Net assets acquired $498,919
===============
The following unaudited pro forma financial information is for the years
ended December 31, 2005 and 2004. It presents the results of the Company as if
each of the 2005 acquisitions had occurred on January 1, 2004. However, the
unaudited pro forma financial information does not represent what the
consolidated results of operations or financial condition actually would have
been if the acquisitions had occurred on January 1, 2004. The pro forma
financial information also does not project the consolidated results of
operations for any future period. The pro forma results for the years ended
December 31, 2005 and 2004 are as follows:
2005 2004
-------------- -------------
Total revenues $972,900 $867,948
Total expenses (550,526) (499,528)
-------------- -------------
Income from operations $422,374 $368,420
============== =============
Income before discontinued operations $153,984 $109,200
============== =============
Net income available to common shareholders $123,526 $ 93,149
============== =============
Basic per share data:
Income before discontinued operations, net of preferred dividends $ 1.96 $ 1.48
Net income available to common shareholders $ 1.96 $ 1.51
Diluted per share data:
Income before discontinued operations, net of preferred dividends $ 1.90 $ 1.42
Net income available to common shareholders $ 1.90 $ 1.46
2004 Acquisitions
-----------------
On March 12, 2004, the Company acquired Honey Creek Mall in Terre Haute,
IN, for a purchase price, including transaction costs, of $83,114, which
consisted of $50,114 in cash and the assumption of $33,000 of non-recourse debt
that bears interest at a stated rate of 6.95% and matures in May 2009. The
Company recorded a debt premium of $3,146, computed using an estimated market
interest rate of 4.75%, since the debt assumed was at an above-market interest
rate compared to similar debt instruments at the date of acquisition.
On March 12, 2004, the Company acquired Volusia Mall in Daytona Beach, FL,
for a purchase price, including transaction costs, of $118,493, which consisted
of $63,686 in cash and the assumption of $54,807 of non-recourse debt that bears
interest at a stated rate of 6.70% and matures in March 2009. The Company
79
recorded a debt premium of $4,615, computed using an estimated market interest
rate of 4.75%, since the debt assumed was at an above-market interest rate
compared to similar debt instruments at the date of acquisition.
On April 8, 2004, the Company acquired Greenbrier Mall in Chesapeake, VA,
for a cash purchase price, including transaction costs, of $107,450. The
purchase price was partially financed with a new recourse term loan of $92,650
that bears interest at LIBOR plus 100 basis points, matures in April 2006 and
has three one-year extension options that are at the Company's election.
On April 21, 2004, the Company acquired Fashion Square, a community center
in Orange Park, FL, for a cash purchase price, including transaction costs, of
$3,961.
On May 20, 2004, the Company acquired Chapel Hill Mall and its associated
center, Chapel Hill Suburban, in Akron, OH, for a cash purchase price, including
transaction costs, of $78,252. The purchase price was partially financed with a
new recourse term loan of $66,500 that bears interest at LIBOR plus 100 basis
points, matures in May 2006 and has three one-year extension options that are at
the Company's election.
On June 22, 2004, the Company acquired Park Plaza Mall in Little Rock, AR,
for a purchase price, including transaction costs, of $77,526, which consisted
of $36,213 in cash and the assumption of $41,313 of non-recourse debt that bears
interest at a stated rate of 8.69% and matures in May 2010. The Company recorded
a debt premium of $7,737, computed using an estimated market interest rate of
4.90%, since the debt assumed was at an above-market interest rate compared to
similar debt instruments at the date of acquisition.
On July 28, 2004, the Company acquired Monroeville Mall, and its associated
center, the Annex, in the eastern Pittsburgh suburb of Monroeville, PA, for a
total purchase price, including transaction costs, of $231,621, which consisted
of $39,455 in cash, the assumption of $134,004 of non-recourse debt that bears
interest at a stated rate of 5.73% and matures in January 2013, an obligation of
$11,950 to pay for the fee interest in the land underlying the mall and
associated center on or before July 28, 2007, and the issuance of 780,470 Series
S Special Common Units (the "S-SCUs") in the Operating Partnership with a fair
value of $46,212. The Company recorded a debt premium of $3,270, computed using
an estimated market interest rate of 5.30%, since the debt assumed was at an
above-market interest rate compared to similar debt instruments at the date of
acquisition.
On November 22, 2004, the Company acquired Mall del Norte in Laredo, TX,
for a cash purchase price, including transaction costs, of $170,413. The
purchase price was partially financed with a new non-recourse, interest-only
loan of $113,400 that bears interest at 5.04% and matures in December 2014.
On November 22, 2004, the Company acquired Northpark Mall in Joplin, MO,
for a purchase price, including transaction costs, of $79,141. The purchase
price consisted of $37,619 in cash and the assumption of $41,522 of non-recourse
debt that bears interest at a stated rate of 5.75% and matures in March 2014.
The Company recorded a debt premium of $687, computed using an estimated market
interest rate of 5.50%, since the debt assumed was at an above-market interest
rate compared to similar debt instruments at the date of acquisition.
80
The results of operations of the acquired properties have been included in
the consolidated financial statements since their respective dates of
acquisition. The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed as of the respective acquisition dates
during the year ended December 31, 2004:
Land $ 81,673
Buildings and improvements 872,855
Above-market leases 8,329
In-place leases 33,921
---------------
Total assets 996,778
Mortgage note payables assumed (304,646)
Premiums on mortgage note payables assumed (19,455)
Below-market leases (27,352)
Land purchase obligation (11,950)
---------------
Net assets acquired $633,375
===============
The following unaudited pro forma financial information is for the years
ended December 31, 2004 and 2003. It presents the results of the Company as if
each of the 2004 acquisitions had occurred on January 1, 2003. However, the
unaudited pro forma financial information does not represent what the
consolidated results of operations or financial condition actually would have
been if the acquisitions had occurred on January 1, 2003. The pro forma
financial information also does not project the consolidated results of
operations for any future period. The pro forma results for the years ended
December 31, 2004 and 2003 are as follows:
2004 2003
-------------- -------------
Total revenues $ 836,962 $ 809,825
Total expenses (470,910) (444,688)
-------------- -------------
Income from operations $ 366,052 $ 365,137
============== =============
Income before discontinued operations $ 121,094 $ 145,198
============== =============
Net income available to common shareholders $ 105,043 $ 131,563
============== =============
Basic per share data:
Income before discontinued operations, net of preferred dividends $ 1.67 $ 2.10
Net income available to common shareholders $ 1.71 $ 2.20
Diluted per share data:
Income before discontinued operations, net of preferred dividends $ 1.61 $ 2.01
Net income available to common shareholders $ 1.64 $ 2.11
2003 Acquisitions
-----------------
On April 30, 2003, the Company acquired Sunrise Mall and its associated
center, Sunrise Commons, which are located in Brownsville, TX. The total
purchase price, including transaction costs, of $80,686 consisted of $40,686 in
cash and the assumption of $40,000 of variable-rate debt that matured in May
2004.
On September 10, 2003, the Company acquired Cross Creek Mall in
Fayetteville, NC for a purchase price, including transaction costs, of $116,729,
which consisted of $52,484 in cash and the assumption of $64,245 of non-recourse
debt that bears interest at a stated rate of 7.4% and matures in April 2012. The
Company recorded a debt premium of $10,209, 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.
On October 1, 2003, the Company acquired River Ridge Mall in Lynchburg, VA
for a purchase price, including transaction costs, of $61,933, which consisted
of $38,622 in cash, a short-term note payable of $793 and the assumption of
$22,518 of non-recourse debt that bears interest at a stated rate of 8.05% and
81
matures in January 2007. The Company also recorded a debt premium of $2,724,
computed using an estimated market interest rate of 4.00%, since the debt
assumed was at an above-market interest rate compared to similar debt
instruments at the date of acquisition.
On October 1, 2003, the Company acquired Valley View Mall in Roanoke, VA
for a purchase price, including transaction costs, of $86,094, which consisted
of $35,351 in cash, a short-term note payable of $5,708 and the assumption of
$45,035 of non-recourse debt that bears interest at a weighted-average stated
rate of 8.61% and matures in September 2010. The Company also recorded a debt
premium of $8,813, computed using an estimated market interest rate of 5.10%,
since the debt assumed was at an above-market interest rate compared to similar
debt instruments at the date of acquisition.
On December 15, 2003, the Company acquired Southpark Mall in Colonial
Heights, VA for a purchase price, including transaction costs, of $78,031, which
consisted of $34,879 in cash, a short-term note payable of $5,116 and the
assumption of $38,036 of non-recourse debt that bears interest at a stated rate
of 7.00% and matures in May 2012. The Company also recorded a debt premium of
$4,544, computed using an estimated market interest rate of 5.10%, since the
debt assumed was at an above-market interest rate compared to similar debt
instruments at the date of acquisition.
On December 30, 2003, the Company acquired Harford Mall Business Trust, a
Maryland business trust that owns Harford Mall and its associated center,
Harford Annex, in Bel Air, MD for a cash purchase price, including transaction
costs, of $71,110.
The following summarizes the allocation of the purchase prices to the
assets acquired and liabilities assumed for the 2003 acquisitions:
Land $ 72,620
Buildings and improvements 434,318
Above-market leases 5,709
In-place leases 19,542
---------------
Total assets 532,189
Mortgage note payables assumed (209,834)
Short-term notes payable (11,617)
Premiums on mortgage note payables assumed (26,290)
Below-market leases (11,384)
---------------
Net assets acquired $ 273,064
===============
The following unaudited pro forma financial information is for the year
ended December 31, 2003. It presents the results of the Company as if each of
the 2003 acquisitions had occurred on January 1, 2003. However, the unaudited
pro forma financial information does not represent what the consolidated results
of operations or financial condition actually would have been if the
acquisitions had occurred on January 1, 2003. The pro forma financial
information also does not project the consolidated results of operations for any
future period. The pro forma results for the year ended December 31, 2003 are as
follows:
2003
--------------
Total revenues $ 743,241
Total expenses (412,949)
--------------
Income from operations $ 330,292
==============
Income before discontinued operations $ 139,778
==============
Net income available to common shareholders $ 125,568
==============
Basic per share data:
Income before discontinued operations, net of preferred dividends $ 2.02
Net income available to common shareholders $ 2.08
Diluted per share data:
Income before discontinued operations, net of preferred dividends $ 1.94
Net income available to common shareholders $ 2.01
82
NOTE 4. DISCONTINUED OPERATIONS
During 2005, the Company sold six community centers for an aggregate sales
price of $12,600. The Company previously recognized an aggregate loss on
impairment of real estate assets of $617 on these community centers in 2004.
Additionally, the Company determined that two community centers met the criteria
to be reflected as held for sale as of December 31, 2005 and recognized a loss
on impairment of $1,029.
During 2004, the Company sold three community centers for a total sales
price $7,250 and recognized a total gain of $845 on two of the community centers
that is recorded as gain on discontinued operations. The Company recognized a
loss of $114 in December 2004 on one of the community centers, which is included
in loss on impairment of real estate assets in the consolidated statement of
operations.
During 2003, the Company sold six community centers for a total sales price
$17,280 and recognized a net gain on discontinued operations of $4,042.
Total revenues of the centers described above that are included in
discontinued operations were $3,549, $2,734 and $4,524 in 2005, 2004 and 2003,
respectively. All periods presented have been restated to reflect the operations
of the centers described above as discontinued operations.
NOTE 5. JOINT VENTURES
Unconsolidated Affiliates
-------------------------
At December 31, 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 Square Plaza 50.0%
Governor's Square Company Governor's Square 47.5%
High Pointe Commons , LP High Pointe Commons 50.0%
Imperial Valley Mall L.P. Imperial Valley Mall 60.0%
Kentucky Oaks Mall Company Kentucky Oaks Mall 50.0%
Mall of South Carolina L.P. Coastal Grand-Myrtle Beach 50.0%
Mall of South Carolina Outparcel L.P Coastal Grand Crossing 50.0%
Mall Shopping Center Company Plaza del Sol 50.6%
Parkway Place L.P. Parkway Place 45.0%
Triangle Town Member LLC Triangle Town Center, Triangle Town 50.0%
Commons and Triangle Town Place
York Town Center, LP York Town Center 50.0%
83
Condensed combined financial statement information of the unconsolidated
affiliates is presented as follows:
December 31,
-----------------------------
2005 2004
-----------------------------
ASSETS:
Net investment in real estate assets $586,715 $1,013,475
Other assets 37,759 63,903
-----------------------------
Total assets $624,474 $1,077,378
=============================
LIABILITIES :
Mortgage notes payable $474,773 $ 603,664
Other liabilities 17,270 41,995
-----------------------------
Total liabilities 492,043 645,659
-----------------------------
OWNERS' EQUITY:
The Company 88,461 103,512
Other investors 43,970 328,207
-----------------------------
Total owners' equity 132,431 431,719
-----------------------------
Total liabilities and owners' equity $624,474 $1,077,378
=============================
Year Ended December 31,
----------------------------------------------
2005 2004 2003
----------------------------------------------
Revenues $118,823 $109,696 $ 49,855
Depreciation and amortization (30,273) (24,994) (9,338)
Other operating expenses (32,738) (27,479) (14,067)
----------------------------------------------
Income from operations 55,812 57,223 26,450
Interest income 246 138 -
Interest expense (35,083) (27,353) (13,981)
Gain on sales of real estate assets 6,717 4,555 892
Discontinued operations 55 1,945 207
----------------------------------------------
Net income $ 27,747 $ 36,508 $ 13,568
==============================================
All debt on these properties is non-recourse. See Note 17 for a description
of guarantees the Company has issued related to certain unconsolidated
affiliates.
In September 2004, Mall of South Carolina L.P. obtained a long-term,
non-recourse, fixed-rate mortgage loan totaling $118,000. The loan is comprised
of a $100,000 A-note to a financial institution that bears interest at 5.09%,
which matures in September 2014, and two 10-year B-notes of $9,000 each that
bear interest at 7.75% and mature in September 2014. The Company and its third
party partner in Mall of South Carolina L.P. each hold one of the B-notes. The
total net proceeds from these loans were used to retire $80,493 of outstanding
borrowings under the construction loan that partially financed the development
of Coastal Grand-Myrtle Beach.
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.
On November 16, 2005, the Company formed 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 assumed
management, leasing and any future development responsibilities of the
properties.
84
Jacobs' initial contribution consisted of the three shopping centers and
the Company made an initial cash contribution of $1,560. Concurrent with its
formation, the joint venture entered into a new ten-year, fixed rate
non-recourse loan of $200,000, secured by the collective centers. The proceeds
from the loan were used to retire an existing construction loan totaling
$121,828 and the balance was paid to Jacobs as a partial return of Jacobs'
equity. 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 are allocated 50/50 to Jacobs and the
Company. The Company receives 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.
Galileo America Joint Venture
-----------------------------
On September 24, 2003, the Company formed Galileo America LLC ("Galileo
America"), a joint venture with Galileo America, Inc., the U.S. affiliate of
Australia-based Galileo America Shopping Trust, to invest in community centers
throughout the United States. The arrangement provided for the Company to sell,
in three phases, its interests in 51 community centers for a total price of
$516,000 plus a 10% interest in Galileo America.
The first phase of the transaction closed on October 23, 2003, when the
Company sold its interests in 41 community centers to Galileo America for
$393,925, which consisted of $250,705 in cash, the retirement of $24,922 of debt
on one of the community centers, a note receivable of $4,813, Galileo America's
assumption of $93,037 in debt and $20,448 representing the Company's 10%
interest in Galileo America. The Company used the net proceeds to fund escrow
amounts used in like-kind exchange acquisitions and to reduce outstanding
borrowings under the Company's credit facilities. The Company recognized a gain
of $71,886 from the first phase and recorded its investment in Galileo America
at the carryover basis of the real estate assets contributed for its 10%
interest. The note receivable was paid subsequent to December 31, 2003.
The second phase of the Galileo America transaction closed on January 5,
2004, when the Company sold its interest in six community centers for $92,375,
which consisted of $62,687 in cash, the retirement of $25,953 of debt on one of
the community centers, the joint venture's assumption of $2,816 of debt and
closing costs of $919. The real estate assets and related mortgage notes payable
of the properties in the second phase were reflected as held for sale from
October 23, 2003, the date that it was determined these assets met the criteria
to be reflected as held for sale. There was no depreciation expense recorded on
these assets subsequent to October 23, 2003.
The Company sold a community center expansion to Galileo America during
September 2004 for $3,447 in cash. The Company recognized gain of $1,316 to the
extent of the third party partner's ownership interest and recorded an
investment of $147 in Galileo America at the carryover basis of the real estate
assets contributed for its 10% interest.
In October 2004, the Company sold its interests in one community center to
Galileo America for a purchase price of $17,900, which consisted of $2,900 in
cash, Galileo America's assumption of $10,500 of debt and a limited partnership
interest in Galileo America, Inc. The community center was originally scheduled
to be included in the third phase of the transaction that closed in January
2005. The Company recognized a gain of $2,840 on the sale of this property and
recorded an investment of $3,820 in Galileo America at the carryover basis of
the real estate assets contributed for its 10% interest in this property.
85
The third phase of the joint venture closed on January 5, 2005, when the
Company sold its interests in two power centers, one community center and one
community center expansion to 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 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 year ended December 31, 2005 related to
the properties included in the third phase.
The Company, as tenant, entered into separate master lease agreements with
Galileo America, as landlord, covering certain spaces in certain of the
properties sold to the joint venture. Under each master lease agreement, the
Company was obligated to pay Galileo America an agreed-upon minimum annual rent,
plus a pro rata share of common area maintenance expenses and real estate taxes,
for each designated space for a term of five years from the applicable
property's closing date. Two properties in the first phase and one in the second
phase were subject to master lease agreements. The Company had a liability of
$3,789 at December 31, 2004 for the amounts to be paid over the remaining terms
of the master lease obligations. During 2005, 2004 and 2003, the Company
recognized gain of $2,505, $7,206 and $0, respectively, as a result of being
relieved of its obligation under the master lease arrangements as spaces were
leased to third parties.
The Company also received $8,000 of additional contingent consideration
since, as the exclusive manager of the properties, it achieved certain leasing
objectives related to spaces that were vacant, or projected to soon be vacant,
at the time the first phase closed. The Company earned $4,167 in 2004 for
leasing objectives that were met during 2004, of which $3,750 was recognized as
gain on sales of real estate assets and $417, representing the portion
attributable to the Company's ownership interest, was recorded as a reduction of
the Company's investment in Galileo America. In 2003, the Company earned $3,833
for leasing objectives that were met as of December 31, 2003, of which $3,450
was recognized as gain on sales of real estate assets and $383, representing the
portion attributable to the Company's 10% ownership interest, was recorded as a
reduction of the Company's investment in Galileo America.
On August 10, 2005, the Company transferred all of 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, in accordance with SFAS No. 153, 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 recorded a loss on
impairment during 2005 related to these properties, which is discussed in Note
4.
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 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 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 any time after November 22, 2007, New Plan
86
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 2005.
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 2005 related to the
severance of affected personnel, including $736 related to the accelerated
vesting of stock-based compensation awards for certain affected personnel.
Consolidated Joint Ventures
---------------------------
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 must 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 receives 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.
The Company determined that the joint venture is a variable interest entity
in which it is the primary beneficiary in accordance with FASB Interpretation
No. 46(R), "Consolidation of Variable Interest Entities." At December 31, 2005,
this joint venture had total assets of $73,885 and a recourse term loan of
$42,020.
NOTE 6. MORTGAGE AND OTHER NOTES PAYABLE
Mortgage and other notes payable consisted of the following:
December 31, 2005 December 31, 2004
--------------------------------- -------------------------------
Weighted Weighted
Average Average
Amount Interest Rate(1) Amount Interest Rate(1)
------------- ------------------ ------------ ------------------
Fixed-rate debt:
Non-recourse loans on operating properties $ 3,281,939 6.02% $ 2,688,186 6.38%
------------- ------------
Variable-rate debt:
Recourse term loans on operating properties 292,000 5.33% 207,500 3.45%
Lines of credit 690,285 5.29% 461,400 3.37%
Construction loans 76,831 5.76% 14,593 3.94%
------------- ------------
Total variable-rate debt 1,059,116 5.33% 683,493 3.41%
------------- ------------
Total $ 4,341,055 5.85% $ 3,371,679 5.78%
============= ============
(1) Weighted average interest rate including the effect of debt premiums, but
excluding the amortization of deferred financing costs.
87
Non-recourse and recourse term loans include loans that are secured by
properties owned by the Company that have a net carrying value of $4,709,032 at
December 31, 2005.
Fixed-Rate Debt
---------------
At December 31, 2005, fixed-rate loans bear interest at stated rates
ranging from 4.52% to 10.125%. Outstanding borrowings under fixed-rate loans
include unamortized debt premiums of $42,187 that were recorded when the Company
assumed debt to acquire real estate assets that was at an above-market interest
rate compared to similar debt instruments at the date of acquisition. Fixed-rate
loans generally provide for monthly payments of principal and/or interest and
mature at various dates from March 2007 through April 2016, with a weighted
average maturity of 6.1 years.
Variable-Rate Debt
------------------
Recourse term loans bear interest at variable interest rates indexed to the
prime lending rate or LIBOR. At December 31, 2005, interest rates on recourse
loans varied from 5.29% to 5.375%. These loans mature at various dates from
March 2006 to June 2006, with a weighted average maturity of 0.5 years.
Unsecured Line of Credit
------------------------
In September 2005, the Company increased the availability under its
unsecured credit facility from $400,000 to $500,000. This credit facility bears
interest at 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 December 31, 2005, the outstanding borrowings of $278,000 under the
credit facility had a weighted average interest rate of 5.29%.
Secured Lines of Credit
-----------------------
The Company has four secured lines of credit that are used for
construction, acquisition, and working capital purposes. The following
summarizes certain information about the secured lines of credit as of December
31, 2005:
Total Total Maturity
Available Outstanding Date
----------------------------------------------------
$ 373,000 $ 358,150 February 2006
100,000 52,135 June 2007
20,000 1,000 March 2007
10,000 1,000 April 2007
----------------------------------
$ 503,000 $ 412,285
==================================
The secured lines of credit are secured by 21 of the Company's properties,
which had an aggregate net carrying value of $476,839 at December 31, 2005.
Borrowings under the secured lines of credit had a weighted average interest
rate of 5.29% at December 31, 2005.
Letters of Credit
-----------------
At December 31, 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 amount outstanding under these lines of credit was $22,143 at
December 31, 2005.
Covenants and Restrictions
--------------------------
The secured and unsecured line of credit agreements contain, among other
restrictions, certain financial covenants including the maintenance of certain
financial coverage ratios, minimum net worth requirements, and limitations on
cash flow distributions. Additionally, certain property-specific mortgage notes
88
payable require the maintenance of debt service coverage ratios on their
respective properties. The Company was in compliance with all covenants and
restrictions at December 31, 2005.
Twenty-three 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.
Debt Maturities
---------------
As of December 31, 2005, the scheduled principal payments on all mortgage
and other notes payable, including construction loans and lines of credit, are
as follows:
2006 $1,033,398
2007 231,223
2008 430,520
2009 387,013
2010 451,335
Thereafter 1,765,379
-------------
4,298,868
Net unamortized premiums 42,187
-------------
$4,341,055
=============
Of the $1,033,398 of scheduled principal payments in 2006, $978,720 is
related to loans that are scheduled to mature in 2006. In January 2006, the
Company extended the maturity of $358,150 of this debt to 2009. The Company has
extension options in place for $509,170 of these loans that will extend their
scheduled maturities to 2007. The Company intends to retire or refinance the
remaining loans of $111,400.
NOTE 7. LOSS ON EXTINGUISHMENT OF DEBT
The losses on extinguishment of debt resulted from prepayment penalties and
the write-off of unamortized deferred financing costs and unamortized debt
premiums when notes payable were retired before their scheduled maturity dates
as follows:
Year Ended December 31,
------------------------------------
2005 2004 2003
------------------------------------
Prepayment penalties $ 6,524 $ - $ -
Unamortized deferred financing costs 976 - 167
Unamortized debt premiums (1,329) - -
------------------------------------
$ 6,171 $ - $ 167
====================================
89
NOTE 8. SHAREHOLDERS' EQUITY
Common Stock Repurchase Plan
----------------------------
In November 2005, the Company's board of directors approved a plan to
repurchase up to $60,000 of the Company's common stock by December 31, 2006. The
Company had repurchased 1,371,034 shares of its common stock as of December 31,
2005 for a total of $54,998, or a weighted average cost of $40.11 per share. The
Company does not intend to repurchase any additional shares subsequent to
December 31, 2005. The Company had a payable of $6,706 at December 31, 2005,
related to repurchased common stock.
Preferred Stock
---------------
In June 1998, the Company issued 2,875,000 shares of 9.0% Series A
Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock") with a
liquidation preference of $25.00 per share in a public offering. In June 2002,
the Company purchased 200,000 shares of the Series A Preferred Stock for $5,093.
On November 28, 2003, the Company redeemed the remaining 2,675,000 outstanding
shares of the Series A Preferred Stock at its liquidation preference of $25.00
per share plus accrued and unpaid dividends. In connection with the redemption
of the Series A Preferred Stock, the Company recorded a charge of $2,181 to
write-off direct issuance costs that were recorded as a reduction of additional
paid-in capital when the Series A Preferred Stock was issued. The charge is
included in preferred dividends in the accompanying consolidated statement of
operations.
In June 2002, the Company completed an offering of 2,000,000 shares of
8.75% Series B Cumulative Redeemable Preferred Stock (the "Series B Preferred
Stock"), having a par value of $.01 per share, at its liquidation preference of
$50.00 per share. The net proceeds of $96,370 were used to reduce outstanding
balances under the Company's credit facilities and to retire term loans on
several properties. The dividends on the Series B Preferred Stock are cumulative
and accrue from the date of issue and are payable quarterly in arrears at a rate
of $4.375 per share per annum. The Series B Preferred Stock has no stated
maturity, is not subject to any sinking fund or mandatory redemption, and is not
convertible into any other securities of the Company. The Series B Preferred
Stock cannot be redeemed by the Company prior to June 14, 2007. After that date,
the Company may redeem shares, in whole or in part, at any time for a cash
redemption price of $50.00 per share plus accrued and unpaid dividends.
On August 22, 2003, the Company issued 4,600,000 depositary shares in a
public offering, each representing one-tenth of a share of 7.75% Series C
Cumulative Redeemable Preferred Stock (the "Series C Preferred Stock") with a
par value of $0.01 per share. The Series C Preferred Stock has a liquidation
preference of $250.00 per share ($25.00 per depositary share). The dividends on
the Series C Preferred Stock are cumulative, accrue from the date of issuance
and are payable quarterly in arrears at a rate of $19.375 per share ($1.9375 per
depositary share) per annum. The Series C Preferred Stock has no stated
maturity, is not subject to any sinking fund or mandatory redemption, and is not
convertible into any other securities of the Company. The Series C Preferred
Stock cannot be redeemed by the Company prior to August 22, 2008. After that
date, the Company may redeem shares, in whole or in part, at any time for a cash
redemption price of $250.00 per share ($25.00 per depositary share) plus accrued
and unpaid dividends. The net proceeds of $111,227 were used to partially fund
certain acquisitions discussed in Note 3 and to reduce outstanding borrowings on
the Company's credit facilities.
On December 13, 2004, the Company issued 7,000,000 depositary shares in a
public offering, each representing one-tenth of a share of 7.375% Series D
Cumulative Redeemable Preferred Stock (the "Series D Preferred Stock") with a
par value of $0.01 per share. The Series D Preferred Stock has a liquidation
preference of $250.00 per share ($25.00 per depositary share). The dividends on
the Series D Preferred Stock are cumulative, accrue from the date of issuance
and are payable quarterly in arrears at a rate of $18.4375 per share ($1.84375
per depositary share) per annum. The Series D Preferred Stock has no stated
maturity, is not subject to any sinking fund or mandatory redemption, and is not
convertible into any other securities of the Company. The Series D Preferred
90
Stock cannot be redeemed by the Company prior to December 13, 2009. After that
date, the Company may redeem shares, in whole or in part, at any time for a cash
redemption price of $250.00 per share ($25.00 per depositary share) plus accrued
and unpaid dividends. The net proceeds of $169,333 were used to reduce
outstanding borrowings on the Company's credit facilities.
Holders of each series of preferred stock will have limited voting rights
if dividends are not paid for six or more quarterly periods and in certain other
events.
NOTE 9. MINORITY INTERESTS
Minority interests represent (i) the aggregate partnership interest in the
Operating Partnership that is not owned by the Company and (ii) the aggregate
ownership interest in 18 of the Company's shopping center properties that is
held by third parties.
Minority Interest in Operating Partnership
------------------------------------------
The minority interest in the Operating Partnership is represented by common
units and special common units of limited partnership interest in the Operating
Partnership (the "Operating Partnership Units") that the Company does not own.
The assets and liabilities allocated to the Operating Partnership's
minority interests are based on their ownership percentage of the Operating
Partnership at December 31, 2005 and 2004. The ownership percentage is
determined by dividing the number of Operating Partnership Units held by the
minority interests at December 31, 2005 and 2004 by the total Operating
Partnership Units outstanding at December 31, 2005 and 2004, respectively. The
minority interest ownership percentage in assets and liabilities of the
Operating Partnership was 45.8% and 45.0% at December 31, 2005 and 2004,
respectively.
Income is allocated to the Operating Partnership's minority interests based
on their weighted average ownership during the year. The ownership percentage is
determined by dividing the weighted average number of Operating Partnership
Units held by the minority interests by the total weighted average number of
Operating Partnership Units outstanding during the year.
A change in the number of shares of common stock or Operating Partnership
Units changes the percentage ownership of all partners of the Operating
Partnership. An Operating Partnership Unit is considered to be equivalent to a
share of common stock since it generally is redeemable for cash or shares of the
Company's common stock. As a result, an allocation is made between shareholders'
equity and minority interest in the Operating Partnership in the accompanying
balance sheet to reflect the change in ownership of the Operating Partnership's
underlying equity when there is a change in the number of shares and/or
Operating Partnership Units outstanding. During 2005 and 2004, the Company
allocated $37,157 and $12,661, respectively, from minority interest to
shareholders' equity. In 2003, the Company allocated $11,759 from shareholders'
equity to minority interest.
The total minority interest in the Operating Partnership was $596,803 and
$554,629 at December 31, 2005 and 2004, respectively.
Minority Interest in Operating Partnership-Conversion Rights
------------------------------------------------------------
Under the terms of the Operating Partnership's limited partnership
agreement, each of the limited partners has the right to exchange all or a
portion of its partnership interests for shares of CBL's common stock or, at
CBL's election, their cash equivalent. When an exchange occurs, CBL assumes the
limited partner's ownership interests in the Operating Partnership. The number
of shares of common stock received by a limited partner of the Operating
Partnership upon exercise of its exchange rights will be equal, on a one-for-one
basis, to the number of Operating Partnership Units exchanged by the limited
91
partner. The amount of cash received by the limited partner, if CBL elects to
pay cash, will be based on the five-day trailing average of the trading price at
the time of exercise of the shares of common stock that would otherwise have
been received by the limited partner in the exchange. Neither the limited
partnership interests in the Operating Partnership nor the shares of common
stock of CBL are subject to any right of mandatory redemption.
As of January 31, 2004, holders of 26,318,804 Series J special common units
("J-SCUs") may exchange them for shares of common stock or cash. The J-SCUs
received a minimum distribution of $1.45125 per unit per year until the
distribution on the common units exceeded $1.45125 per unit per year during
2004. The J-SCUs now receive a distribution equal to that paid on the common
units.
In July 2004, the Company issued 1,560,940 S-SCUs in connection with the
acquisition of Monroeville Mall, which is discussed in Note 3. The S-SCUs
receive a minimum distribution of $2.53825 per unit per year for the first three
years, and a minimum distribution of $2.92875 per unit per year thereafter.
In June 2005, the Company issued 571,700 L-SCUs in connection with the
acquisition of Laurel Park Place, which is discussed in Note 3. The L-SCUs
receive a minimum distribution of $0.7575 per unit per quarter ($3.03 per unit
per year). Upon the earlier to occur of June 1, 2020, or when the distribution
on the common units exceeds $0.7575 per unit for four consecutive calendar
quarters, the L-SCUs will thereafter receive a distribution equal to the amount
paid on the common units.
In November 2005, the Company issued 1,144,924 K-SCUs in connection with
the acquisition of Oak Park Mall, Eastland Mall and Hickory Point Mall, which is
discussed in Note 3. The K-SCUs 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 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.
The Company issued 237,390 common units in connection with the acquisition
of Panama City Mall in 2002. These common units receive a minimum annual
dividend of $1.6875 per unit until May 2012. When the distribution on the common
units exceeds $1.6875 per unit, these common units will receive a distribution
equal to that paid on the common units. Additionally, if the annual distribution
on the common units should ever be less than $1.11 per unit, the $1.6875 per
unit dividend will be reduced by the amount the per unit distribution is less
than $1.11 per unit. The annual distribution on the common units exceeded
$1.6875 per unit during 2005.
During 2005, holders elected to exchange 48,618 special common units and
3,518 common units and the Company elected to exchange $2,172 of cash for these
units. During 2004, holders elected to exchange 62,392 special common units and
683,250 common units and the Company elected to exchange $5,949 of cash and
525,636 shares of common stock for these units. The Company purchased 920,166
common units from a former executive of the Company who retired in 1997 for
$21,013 during 2003.
Outstanding rights to convert minority interests in the Operating
Partnership to common stock were held by the following parties at December 31,
2005 and 2004:
December 31,
--------------------------------
2005 2004
--------------- ----------------
The Company 62,512,816 62,667,104
Jacobs 23,796,796 23,845,414
CBL's Predecessor 17,511,224 17,511,224
Third parties 11,617,592 9,904,486
--------------- ----------------
Total Operating Partnership Units 115,438,428 113,928,228
=============== ================
92
Minority Interest in Shopping Center Properties
-----------------------------------------------
The Company's consolidated financial statements include the assets,
liabilities and results of operations of 18 properties that the Company does not
wholly own. The minority interests in shopping center properties represents the
aggregate ownership interest of third parties in these properties. The total
minority interests in shopping center properties was $12,672 and $11,977 at
December 31, 2005 and 2004, respectively.
The assets and liabilities allocated to the minority interests in shopping
center properties are based on the third parties' ownership percentages in each
shopping center property at December 31, 2005 and 2004. Income is allocated to
the minority interests in shopping center properties based on the third parties'
weighted average ownership in each shopping center property during the year.
NOTE 10. MINIMUM RENTS
The Company receives rental income by leasing retail shopping center space
under operating leases. Future minimum rents are scheduled to be received under
noncancellable tenant leases at December 31, 2005, as follows:
2006 $501,560
2007 426,930
2008 371,773
2009 320,679
2010 264,937
Thereafter 806,409
Future minimum rents do not include percentage rents or tenant
reimbursements that may become due.
NOTE 11. MORTGAGE NOTES RECEIVABLE
Mortgage notes receivable are collateralized by first mortgages,
wrap-around mortgages on the underlying real estate and related improvements or
by assignment of 100% of the partnership interests that own the real estate
assets. Interest rates on notes receivable range from 3.63% to 9.50%, with a
weighted average interest rate of 6.68%, at December 31, 2005. Maturities of
notes receivable range from December 2006 to June 2019.
NOTE 12. SEGMENT INFORMATION
The Company measures performance and allocates resources according to
property type, which is determined based on differences such as nature of
tenants, capital requirements, economic risks and leasing terms. Rental income
and tenant reimbursements from tenant leases provide the majority of revenues
from all segments. The accounting policies of the reportable segments are the
same as those described in Note 2. Information on the Company's reportable
segments is presented as follows:
93
Associated Community
Year Ended December 31, 2005 Malls Centers Centers All Other(2) Total
----------------------------------------------------------------------------------------------------------------------
Revenues $ 827,679 $ 34,293 $ 9,421 $ 37,319 $ 908,712
Property operating expenses (1) (280,122) (8,833) (2,603) 21,603 (269,955)
Interest expense (183,120) (4,674) (2,872) (17,517) (208,183)
Other expense - - - (15,444) (15,444)
Gain on sales of real estate assets 18 - 3,802 49,763 53,583
-------------------------------------------------------------------
Segment profit and loss $ 364,455 $ 20,786 $ 7,748 $ 75,724 468,713
=======================================================
Depreciation and amortization expense (179,651)
General and administrative expense (39,197)
Interest income 6,831
Loss on extinguishment of debt (6,171)
Gain on sale of management contracts 21,619
Loss on impairment of real estate assets (1,334)
Equity in earnings of unconsolidated
affiliates 8,495
Minority interest in earnings (116,940)
------------
Income before discontinued operations $ 162,365
============
Total assets $ 5,619,923 $ 272,364 $151,970 $308,065 $6,352,322
Capital expenditures $ 1,182,349 $ 21,577 $ 77,026 $ 85,037 $1,365,989
Associated Community
Year Ended December 31, 2004 Malls Centers Centers All Other(2) Total
----------------------------------------------------------------------------------------------------------------------
Revenues $ 720,106 $ 30,000 $ 15,072 $ 16,255 $ 781,433
Property operating expenses (1) (250,512) (6,672) (4,860) 21,102 (240,942)
Interest expense (159,998) (4,804) (3,154) (9,263) (177,219)
Other expense - - - (16,373) (16,373)
Gain on sales of real estate assets 848 322 27,784 318 29,272
-------------------------------------------------------------------
Segment profit and loss $ 310,444 $ 18,846 $ 34,842 $ 12,039 376,171
=======================================================
Depreciation and amortization expense (142,012)
General and administrative expense (35,338)
Interest income 3,355
Loss on impairment of real estate assets (3,080)
Equity in earnings of unconsolidated
affiliates 10,308
Minority interest in earnings (90,551)
------------
Income before discontinued operations $ 118,853
============
Total assets $ 4,653,707 $ 273,166 $155,042 $122,585 $5,204,500
Capital expenditures $ 1,081,529 $ 56,109 $ 18,631 $ 20,541 $1,176,810
Associated Community
Year Ended December 31, 2003 Malls Centers Centers All Other(2) Total
----------------------------------------------------------------------------------------------------------------------
Revenues $ 609,489 $ 24,095 $ 49,202 $ 11,027 $ 693,813
Property operating expenses (1) (223,665) (5,747) (11,338) 17,374 (223,376)
Interest expense (139,900) (5,157) (6,746) (1,518) (153,321)
Other expense - - - (11,489) (11,489)
Gain(loss) on sales of real estate assets 2,207 - 75,559 (1) 77,765
-------------------------------------------------------------------
Segment profit and loss $ 248,131 $ 13,191 $106,677 $ 15,393 383,392
=======================================================
Depreciation and amortization expense (112,825)
General and administrative expense (30,395)
Interest income 2,485
Loss on extinguishment of debt (167)
Equity in earnings of unconsolidated
affiliates 4,941
Minority interest in earnings (109,290)
------------
Income before discontinued operations $ 138,141
============
Total assets $ 3,682,158 $ 199,356 $265,467 $117,329 $4,264,310
Capital expenditures $ 651,567 $ 28,901 $ 32,063 $ 31,274 $ 743,805
(1) Property operating expenses include property operating, real estate taxes
and maintenance and repairs.
(2) The All Other category includes mortgage notes receivable, the Company's
office building and the Management Company.
94
NOTE 13. OPERATING PARTNERSHIP
Condensed consolidated financial statement information for the Operating
Partnership is presented as follows:
December 31,
-------------------------------------
2005 2004
-------------------------------------
ASSETS:
Net investment in real estate assets $5,944,428 $4,894,780
Investment in unconsolidated affiliates 84,138 84,782
Other assets 323,353 224,476
-------------------------------------
Total assets $6,351,919 $5,204,038
=====================================
LIABILITIES:
Mortgage and other notes payable $4,341,055 $3,371,679
Other liabilities 279,315 185,839
-------------------------------------
Total liabilities 4,620,370 3,557,518
Minority interests 12,672 11,977
PARTNERS' CAPITAL 1,718,877 1,634,543
-------------------------------------
Total liabilities and partners' capital $6,351,919 $5,204,038
=====================================
Year Ended December 31,
---------------------------------------------------------
2005 2004 2003
---------------------------------------------------------
Total revenues $908,712 $781,433 $693,810
Depreciation and amortization (179,651) (142,012) (112,825)
Other operating expenses (323,493) (294,342) (263,774)
---------------------------------------------------------
Income from operations 405,568 345,079 317,211
Interest income 6,828 3,355 2,485
Interest expense (208,180) (177,191) (153,314)
Loss on extinguishment of debt (6,171) -- (167)
Gain on sales of real estate assets 53,583 29,272 77,765
Gain on sale of management contracts 21,619 -- --
Equity in earnings of unconsolidated
affiliates 8,495 10,308 4,941
Minority interest in shopping center
properties (4,879) (5,365) (2,758)
---------------------------------------------------------
Income before discontinued operations 276,863 205,458 246,163
Operating income of discontinued operations 192 1,413 1,956
Gain (loss) on discontinued operations (82) 845 4,042
---------------------------------------------------------
Net income $276,973 $207,716 $252,161
=========================================================
NOTE 14. SUPPLEMENTAL AND NONCASH INFORMATION
The Company paid cash for interest, net of amounts capitalized, in the
amount of $207,861, $174,496 and $151,012 during 2005, 2004 and 2003,
respectively.
The Company's noncash investing and financing activities were as follows
for 2005, 2004 and 2003:
2005 2004 2003
--------------- ---------------- ----------------
Debt assumed to acquire property interests $385,754 $304,646 $209,834
Premiums related to debt assumed to acquire property interests 10,552 19,455 26,290
Issuance of minority interest to acquire property interests 72,850 46,212 --
Purchase obligation related to acquired property 14,000 11,950 --
Conversion of Operating Partnership units into common stock 10,304 5,630 --
Payable related to repurchased common stock 6,706 -- --
Note receivable from sale of real estate assets 2,627 -- 4,813
Debt consolidated from application of FIN 46(R) -- 38,147 --
Short-term notes payable issued to acquire property interests -- -- 11,617
95
NOTE 15. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to manage its exposure to
changes in interest rates. The Company does not use derivative financial
instruments for speculative purposes. The Company's 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 upon their credit ratings and other factors.
The Company's objective in using derivatives is to manage its exposure to
changes in interest rates. To accomplish this objective, the Company primarily
uses interest rate swap and cap agreements as part of its cash flow hedging
strategy.
Interest rate swap agreements designated as cash flow hedges involve the
receipt of variable-rate amounts in exchange for fixed-rate payments over the
life of the agreements without the exchange of the underlying principal amount.
The change in net unrealized gains on cash flow hedges in 2003 reflects a
reclassification of net unrealized gains from accumulated other comprehensive
loss to interest expense in the amount of $2,397 related to an interest rate
swap agreement that was in place during 2003.
There were no other derivative financial instruments outstanding during
2005, 2004 and 2003.
NOTE 16. RELATED PARTY TRANSACTIONS
CBL's Predecessor and certain officers of the Company have a significant
minority interest in the construction company that the Company engaged to build
substantially all of the Company's development properties. The Company paid
approximately $96,246, $81,153 and $163,617 to the construction company in 2005,
2004 and 2003, respectively, for construction and development activities. The
Company had accounts payable to the construction company of $8,097 and $7,774 at
December 31, 2005 and 2004, respectively.
The Management Company provides management, development and leasing
services to the Company's unconsolidated affiliates and other affiliated
partnerships. Revenues recognized for these services amounted to $14,290, $5,970
and $3,030 in 2005, 2004 and 2003, respectively.
NOTE 17. 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. Additionally, management believes that, based on
environmental studies completed to date, any exposure to environmental cleanup
will not materially affect the financial position and results of operations of
the Company.
The Company has guaranteed 50% of the debt of Parkway Place L.P., an
unconsolidated affiliate in which the Company owns a 45% interest. The total
amount outstanding at December 31, 2005 and 2004, was $53,200 and $53,323,
respectively, of which the Company had guaranteed $26,600 and $26,662,
respectively. The guaranty will expire when the related debt matures in June
2008. The Company did not receive a fee for this guaranty.
Under the terms of the partnership agreement of Mall of South Carolina
L.P., an unconsolidated affiliate in which the Company owns a 50% interest, the
Company had guaranteed 100% of the construction debt incurred to develop Coastal
Grand - Myrtle Beach in Myrtle Beach, SC. The Company received a fee of $1,572
for this guaranty when it was issued during 2003. The Company recognized
one-half of this fee as revenue pro rata over the term of the guaranty until its
expiration in May 2006, which represents the portion of the fee attributable to
the third-party partner's ownership interest. As discussed in Note 5, Mall of
South Carolina L.P. refinanced the construction loan with new mortgage loans in
96
September 2004. As a result, the Company was release from the guaranty and
recognized one-half of the unamortized balance of the guaranty fee, or $328, as
revenue when the construction loan was retired. The remaining $328 attributable
to the Company's ownership interest was recorded as a reduction to the Company's
investment in the partnership. The Company recognized total revenue of $568 and
$218 related to this guaranty during 2004 and 2003, respectively.
The Company had guaranteed 100% of the debt of Imperial Valley Mall L.P.,
an unconsolidated affiliate in which the Company owns a 60% interest, as of
December 31, 2004. As discussed in Note 5, Imperial Valley Mall L.P. refinanced
the construction loan with a new mortgage loan in September 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. The total amount outstanding on these bonds was
$24,100 and $11,789 at December 31, 2005 and 2004, respectively.
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, receivables, accounts
payable and accrued liabilities are reasonable estimates of their fair values
because of the short maturity of these financial instruments. Based on the
interest rates for similar financial instruments, the carrying value of mortgage
notes receivable is a reasonable estimate of fair value. The fair value of
mortgage and other notes payable was $4,336,474 and $3,667,151 at December 31,
2005 and 2004, respectively. The fair value was calculated by discounting future
cash flows for the notes payable using estimated rates at which similar loans
would be made currently.
NOTE 19. STOCK INCENTIVE PLAN
The Company maintains the CBL & Associates Properties, Inc. Amended and
Restated Stock Incentive Plan, as amended, which permits the Company to issue
stock options and common stock to selected officers, employees and directors of
the Company. The shares available under the plan were increased from 8,000,000
to 10,400,000 during 2002. The compensation committee of the board of directors
(the "Committee") administers the plan.
Stock Options
-------------
Stock options issued under the plan allow for the purchase of common stock
at the fair market value of the stock on the date of grant. Stock options
granted to officers and employees vest and become exercisable in installments on
each of the first five anniversaries of the date of grant and expire 10 years
after the date of grant. Stock options granted to independent directors are
fully vested upon grant. However, the independent directors may not sell, pledge
or otherwise transfer their stock options during their board term or for one
year thereafter.
97
The Company's stock option activity for the years ended December 31, 2005,
2004 and 2003 is summarized as follows:
2005 2004 2003
--------------------------- -------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------------------- ------------- ------------ ----------------------------
Outstanding, beginning of year 3,033,542 $13.39 4,368,216 $12.84 5,066,834 $12.76
Exercised (812,302) 11.99 (1,324,374) 11.53 (646,518) 12.00
Canceled (12,800) 16.88 (10,300) 15.76 (52,100) 15.46
--------------- -------------- ---------------
Outstanding, end of year 2,208,440 13.89 3,033,542 13.39 4,368,216 12.84
=============== ============== ===============
Options exercisable at end of year 1,781,440 $13.15 2,150,242 $12.35 2,923,316 $11.60
=============== ============== ===============
The following is a summary of the stock options outstanding at December 31,
2005:
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Price Exercise Price
Options Contractual of Options Options of Options
Exercise Price Range Outstanding Life in Years Outstanding Exercisable Exercisable
------------------------ -------------- ----------------- ----------------- --------------- -----------------
$10.2500 - $12.8125 1,199,956 2.6 $11.78 1,199,956 $11.78
$13.8375 - $19.9000 1,008,484 5.9 16.40 581,484 15.99
-------------- ----------------- ----------------- --------------- -----------------
Totals 2,208,440 4.1 $13.89 1,781,440 $13.15
============== ================= ================= =============== =================
Stock Awards
------------
Under the plan, common stock may be awarded either alone, in addition to,
or in tandem with other stock awards granted under the plan. The Committee has
the authority to determine eligible persons to whom common stock will be
awarded, the number of shares to be awarded and the duration of the vesting
period, as defined. The Committee may also provide for the issuance of common
stock under the plan on a deferred basis pursuant to deferred compensation
arrangements, as described in Note 20.
The Company had issued awards of stock totaling 1,091,776 shares under the
plan as of December 31, 2005. Compensation expense related to these awards is
determined based on the market value of the Company's common stock on the grant
date and is amortized over the vesting period on a straight-line basis when the
award is related to future services. Awards related to past services are
expensed when granted, regardless of the vesting period, if any.
The Company granted awards for 208,200, 93,600 and 86,450 shares of the
Company's common stock to employees in May 2005, 2004 and 2003, respectively.
The terms of the awards allow for a recipient to vest and receive shares of
common stock in equal installments on each of the first five anniversaries of
the date of grant. Under the terms of the awards, the Company pays the recipient
additional compensation, in an amount equal to the dividends paid on the
Company's common stock, on the unvested portion of the award.
The Company recorded deferred compensation of $8,162, $2,206 and $1,870
when the awards were granted in May 2005, 2004 and 2003, respectively, based on
the market value of the Company's common stock on the grant dates, which was
$39.24, $23.57 and $21.53 per share, respectively. The deferred compensation is
amortized on a straight-line basis as compensation expense over the five-year
vesting period.
During 2005, 2004 and 2003, the Company issued an additional 37,299, 63,314
and 87,212 shares of common stock, respectively, to employees and nonemployee
directors with a weighted-average grant date fair value of $37.99, $30.56 and
$21.51, respectively.
98
NOTE 20. EMPLOYEE BENEFIT PLANS
401(k) Plan
-----------
The Management Company maintains a 401(k) profit sharing plan, which is
qualified under Section 401(a) and Section 401(k) of the Code to cover employees
of the Management Company. All employees who have attained the age of 21 and
have completed at least 90 days of service are eligible to participate in the
plan. The plan provides for employer matching contributions on behalf of each
participant equal to 50% of the portion of such participant's contribution that
does not exceed 2.5% of such participant's compensation for the plan year.
Additionally, the Management Company has the discretion to make additional
profit-sharing-type contributions not related to participant elective
contributions. Total contributions by the Management Company were $727, $657 and
$518 in 2005, 2004 and 2003, respectively.
Employee Stock Purchase Plan
----------------------------
The Company maintains an employee stock purchase plan that allows eligible
employees to acquire shares of the Company's common stock in the open market
without incurring brokerage or transaction fees. Under the plan, eligible
employees make payroll deductions that are used to purchase shares of the
Company's common stock. The shares are purchased by the fifth business day of
the month following the month when the deductions were withheld. The shares are
purchased at the prevailing market price of the stock at the time of purchase.
Deferred Compensation Arrangements
----------------------------------
The Company has entered into agreements with certain of its officers that
allow the officers to defer receipt of selected salary increases and/or bonus
compensation for periods ranging from 5 to 10 years.
For certain officers, the deferred compensation arrangements provide that
when the salary increase or bonus compensation is earned and deferred, shares of
the Company's common stock issuable under the Amended and Restated Stock
Incentive Plan are deemed set aside for the amount deferred. The number of
shares deemed set aside is determined by dividing the amount of compensation
deferred by the fair value of the Company's common stock on the deferral date,
as defined in the arrangements. The shares set aside are deemed to receive
dividends equivalent to those paid on the Company's common stock, which are then
deemed to be reinvested in the Company's common stock in accordance with the
Company's dividend reinvestment plan. When an arrangement terminates, the
Company will issue shares of the Company's common stock to the officer
equivalent to the number of shares deemed to have accumulated under the
officer's arrangement.
In October 2005, the Company issued 174,403 shares of common stock to one
officer as a result of the termination of that officer's deferred compensation
agreement. The Company had accrued all compensation expense related to the
agreement as it was earned during the term of the agreement.
At December 31, 2005 and 2004, respectively, there were 63,882 and 214,196
shares that were deemed set aside in accordance with these arrangements.
For other officers, the deferred compensation arrangements provide that
their bonus compensation is deferred in the form of a note payable to the
officer. Interest accumulates on these notes at 7.0%. When an arrangement
terminates, the note payable plus accrued interest is paid to the officer in
cash. At December 31, 2005 and 2004, respectively, the Company had notes
payable, including accrued interest, of $107 and $52 related to these
arrangements.
99
NOTE 21. DIVIDENDS
On October 5, 2005, the Company declared a special one-time cash dividend
of $0.09 per share of common stock as a result of the taxable gains generated
from the sale of the Company's management contracts with Galileo America as
discussed in Note 5. On October 27, 2005, the Company declared a cash dividend
of $0.4575 per share of common stock for the quarter ended December 31, 2005.
Both dividends were paid on January 16, 2006, to shareholders of record as of
December 30, 2005. The total dividend of $34,228 is included in accounts payable
and accrued liabilities at December 31, 2005.
On October 27, 2005, the Operating Partnership declared a distribution of
$29,014 to the Operating Partnership's limited partners. The distribution was
paid on January 16, 2006. This distribution represented a distribution of
$0.5475 per unit for each common unit and $0.6346 to $.7125 per unit for certain
special common units in the Operating Partnership. The total distribution is
included in accounts payable and accrued liabilities at December 31, 2005.
On November 4, 2004, the Company declared a cash dividend of $0.40625 per
share of common stock for the quarter ended December 31, 2004. The dividend was
paid on January 14, 2005, to shareholders of record as of December 31, 2004. The
total dividend of $25,459 is included in accounts payable and accrued
liabilities at December 31, 2004.
On November 4, 2004, the Operating Partnership declared a distribution of
$21,185 to the Operating Partnership's limited partners. The distribution was
paid on January 14, 2005. This distribution represented a distribution of
$0.40625 per unit for each common unit and $0.40625 to $0.6480 per unit for the
special common units in the Operating Partnership. The total distribution is
included in accounts payable and accrued liabilities at December 31, 2004.
The allocations of dividends declared and paid for income tax purposes are
as follows:
Year Ended December 31,
----------------------------------------------------
2005 2004 2003
--------------- ------------------ ----------------
Dividends declared:
Common stock $ 1.76625 $ 1.49375 $ 1.345
Series A preferred stock $ -- $ -- $ 2.05
Series B preferred stock $ 4.37500 $ 4.37505 $ 4.3752
Series C preferred stock $ 19.3750 $ 19.3750 $ 6.99653
Series D preferred stock $19.359375 $ -- $ --
Allocations: (1)
Ordinary income 100.00% 87.41% 98.83%
Capital gains 15% rate 0.00% 11.27% 0.00%
Capital gains 20% rate 0.00% 0.00% 0.00%
Capital gains 25% rate 0.00% 1.32% 1.17%(2)
Return of capital 0.00% 0.00% 0.00%
--------------- ------------------ ----------------
Total 100.0% 100.00% 100.00%
=============== ================== ================
(1) The allocations for income tax purposes are the same for the common stock
and each series of preferred stock for each period presented.
(2) All of the 2003 capital gains represent pre-May 6, 2003 capital gains.
NOTE 22. SUBSEQUENT EVENTS
Subsequent to December 31, 2005, holders of 1,480,067 common units of
limited partnership interest in the Operating Partnership and holders of 27,582
J-SCUs exercised their conversion rights, which are described in Note 9. The
Company has elected to issue 1,480,067 shares of common stock in exchange for
the common units and to pay cash of $1,112 in exchange for the J-SCUs.
100
NOTE 23. QUARTERLY INFORMATION (UNAUDITED)
The following quarterly information differs from previously reported
results since the results of operations of long-lived assets disposed of
subsequent to each quarter end in 2004 have been reclassified to discontinued
operations for all periods presented. Additionally, certain prior period amounts
have been reclassified to present marketing fund revenues and expenses on a
gross basis in accordance with Emerging Issues Task Force Issue No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an Agent. This
reclassification did not change previously reported amounts of net income
available to common shareholders. As a result, total revenues increased from the
previously reported amounts for the first, second and third quarters of the year
ended December 31, 2005 by $3,973, $4,189 and $4,938, respectively. Total
revenues increased from the previously reported amounts for the first, second,
third and fourth quarters of the year ended December 31, 2004 by $5,129, $5,557,
$4,757 and $8,744, respectively. The increase in total revenues was offset by a
corresponding increase in property operation expenses; therefore, there were no
changes to previously reported amounts of any other line items presented below.
First Second Third Fourth
Year Ended December 31, 2005 Quarter Quarter Quarter Quarter Total (1)
---------- ---------- ---------- ---------- ----------
Total revenues $ 214,878 $ 203,185 $ 228,038 $ 262,611 $ 908,712
Income from operations 97,299 87,204 99,829 118,799 403,131
Income before discontinued operations 32,758 28,535 67,635 33,437 162,365
Discontinued operations 255 (109) 100 (136) 110
Net income available to common
shareholders 25,372 20,783 60,093 25,659 131,907
Basic per share data:
Income before discontinued
operations, net of preferred dividends $ 0.40 $ 0.33 $ 0.95 $ 0.41 $ 2.10
Net income available to common
shareholders $ 0.41 $ 0.33 $ 0.95 $ 0.41 $ 2.10
Diluted per share data:
Income before discontinued
operations, net of preferred
dividends $ 0.39 $ 0.32 $ 0.92 $ 0.40 $ 2.03
Net income available to common
shareholders $ 0.39 $ 0.32 $ 0.92 $ 0.40 $ 2.03
First Second Third Fourth
Year Ended December 31, 2004 Quarter Quarter Quarter Quarter Total (1)
---------- ---------- ---------- ---------- ----------
Total revenues $ 177,280 $ 181,059 $ 198,394 $ 224,700 $ 781,433
Income from operations 77,427 79,103 83,457 103,701 343,688
Income before discontinued operations 34,290 24,989 23,581 35,993 118,853
Discontinued operations 317 1,134 598 209 2,258
Net income available to common
shareholders 30,189 21,708 19,764 31,141 102,802
Basic per share data:
Income before discontinued
operations, net of preferred dividends $ 0.49 $ 0.34 $ 0.31 $ 0.50 $ 1.63
Net income available to common
shareholders $ 0.50 $ 0.36 $ 0.32 $ 0.50 $ 1.67
Diluted per share data:
Income before discontinued
operations, net of preferred dividends $ 0.47 $ 0.32 $ 0.30 $ 0.48 $ 1.57
Net income available to common
shareholders $ 0.48 $ 0.34 $ 0.31 $ 0.48 $ 1.61
(1) The sum of quarterly earnings per share may differ from annual earnings per
share due to rounding.
101
CBL & Associates Properties, Inc.
Schedule II Valuation and Qualifying Accounts (in thousands)
Year Ended December 31,
-----------------------------------------------------
2005 2004 2003
-----------------------------------------------------
Allowance for doubtful accounts:
Balance, beginning of year $ 3,237 $ 3,237 $ 2,861
Provision for credit losses 1,296 2,754 2,083
Bad debts charged against allowance (1,094) (2,754) (1,707)
-----------------------------------------------------
Balance, end of year $ 3,439 $ 3,237 $ 3,237
=====================================================
102
Schedule III
CBL & ASSOCIATES PROPERTIES, INC.
REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION
At December 31, 2005
(In thousands)
Gross Amounts at Which
Carried at Close of Period
Initial Cost(A) --------------------------
------------------
(D)
Buildings Costs Buildings Accumu- Date of
(B) and Capitalized Sales of and lated Const-
Encumbr- Improv- Subsequent to Outparcel Improve- Depre- ruction/
Description /Location ances Land ments Acquisition Land Land ments Total(C) ciation Acquisition
--------------------- -------- -------- ---------- -------------- ---------- ------- --------- -------- -------- ------------
MALLS:
Arbor Place $76,525 $7,862 $95,330 $18,675 $ 0 $ 7,862 114,005 $121,867 $(21,117) 1998-1999
Douglasville, GA
Asheville Mall 67,780 7,139 58,747 30,551 (805) 6,334 89,298 95,632 (16,444) 1998
Asheville, NC
Bonita Lakes Mall 25,789 4,924 31,933 5,768 (985) 4,924 36,716 41,640 (9,796) 1997
Meridian, MS
Brookfield Square 104,876 8,646 78,703 10,982 0 8,646 89,685 98,331 (10,867) 2001
Brookfield, WI
Burnsville Center 68,272 12,804 71,355 25,619 0 12,804 96,974 109,778 (19,159) 1998
Burnsville, MN
Cary Towne Center 86,114 23,688 74,432 11,498 0 23,688 85,930 109,618 (11,010) 2001
Cary, NC
Chapel Hill Mall 64,000 6,578 68,043 1,590 0 6,578 69,633 76,211 (3,207) 2004
Akron, OH
Cherryvale Mall 93,774 11,892 63,973 25,750 (1,667) 11,608 88,340 99,948 (9,696) 2001
Rockford, IL
Citadel Mall 29,939 11,443 44,008 9,896 0 11,896 53,451 65,347 (6,356) 2001
Charleston, SC
Cross Creek Mall 70,446 18,717 101,983 7,562 0 19,155 109,107 128,262 (7,969) 2003
Fayetteville, NC
College Square 0 2,954 17,787 11,123 (27) 2,927 28,910 31,837 (10,452) 1987-1988
Morristown, TN
Columbia Place 32,471 9,645 52,348 2,896 (423) 9,222 55,244 64,466 (6,803) 2002
Columbia, SC
Coolsprings Galleria 128,574 13,527 86,755 29,201 0 13,527 115,956 129,483 (40,736) 1989-1991
Nashville, TN
103
Gross Amounts at Which
Carried at Close of Period
Initial Cost(A) --------------------------
------------------
(D)
Buildings Costs Buildings Accumu- Date of
(B) and Capitalized Sales of and lated Const-
Encumbr- Improv- Subsequent to Outparcel Improve- Depre- ruction/
Description /Location ances Land ments Acquisition Land Land ments Total(C) ciation Acquisition
--------------------- -------- -------- ---------- -------------- ---------- ------- --------- -------- -------- ------------
Eastland Mall 59,400 5,746 75,893 0 0 5,746 75,893 81,639 (229) 2005
Bloomington, IL
East Towne Mall 79,807 4,496 63,867 35,626 0 4,496 99,493 103,989 (10,557) 2002
Madison, WI
Eastgate Mall 56,335 13,046 44,949 22,142 0 13,046 67,091 80,137 (7,797) 2001
Cincinnati, OH
Fashion Square 58,591 15,218 64,971 9,807 0 15,218 74,778 89,996 (9,809) 2001
Saginaw, MI
Fayette Mall 93,028 20,707 84,267 35,295 0 20,707 119,562 140,269 (11,501) 2001
Lexington, KY
Frontier Mall (E) 0 2,681 15,858 11,372 0 2,681 27,230 29,911 (11,080) 1984-1985
Cheyenne, WY
Foothills Mall 0 4,536 14,901 9,086 0 4,536 23,987 28,523 (9,383) 1996
Maryville, TN
Georgia Square (E) 0 2,982 31,071 12,985 (23) 2,959 44,056 47,015 (20,025) 1982
Athens, GA
Greenbrier Mall 92,650 3,181 107,355 2,233 0 2,555 110,214 112,769 (5,338) 2004
Chesapeake, VA
Gulf Coast Town
Center 42,020 18,816 40,471 0 0 18,816 40,471 59,287 (210) 2005
Ft. Meyers, FL
Hamilton Place 61,640 3,202 42,619 18,338 (441) 2,761 60,957 63,718 (23,434) 1986-1987
Chattanooga, TN
Hanes Mall 105,990 17,176 133,376 24,035 (948) 16,808 156,831 173,639 (19,592) 2001
Winston-Salem, NC
Harford Mall (E) 0 8,699 45,704 627 0 8,699 46,331 55,030 (3,815) 2003
Bel Air, MD
104
Gross Amounts at Which
Carried at Close of Period
Initial Cost(A) --------------------------
------------------
(D)
Buildings Costs Buildings Accumu- Date of
(B) and Capitalized Sales of and lated Const-
Encumbr- Improv- Subsequent to Outparcel Improve- Depre- ruction/
Description /Location ances Land ments Acquisition Land Land ments Total(C) ciation Acquisition
--------------------- -------- -------- ---------- -------------- ---------- ------- --------- -------- -------- ------------
Hickory Hollow Mall 86,136 13,813 111,431 16,901 0 13,813 128,332 142,145 (23,693) 1998
Nashville, TN
Hickory Point 33,116 10,732 31,728 0 0 10,732 31,728 42,460 (124) 2005
Forsyth, IL
Honey Creek Mall 34,339 3,108 83,358 1,048 0 3,108 84,406 87,514 (4,386) 2004
Terre Haute, IN
JCPenney (E) 0 0 2,650 0 0 0 2,650 2,650 (1,413) 1983
Maryville, TN
Janesville Mall 12,816 8,074 26,009 2,878 0 8,074 28,887 36,961 (6,419) 1998
Janesville, WI
Jefferson Mall 42,629 13,125 40,234 11,499 0 13,125 51,733 64,858 (6,218) 2001
Louisville, KY
The Lakes Mall (E) 0 3,328 42,366 9,672 0 3,328 52,038 55,366 (9,520) 2000-2001
Muskegon, MI
Lakeshore Mall (E) 0 1,443 28,819 4,070 (169) 1,274 32,889 34,163 (10,792) 1991-1992
Sebring, FL
Laurel Park 60,104 13,291 92,579 0 13,291 92,579 105,870 (2,490) 2005
Livonia, MI
Layton Hills Mall 102,850 20,464 99,846 0 0 20,464 99,846 120,310 (291) 2005
Layton, UT
Madison Square (E) 0 17,596 39,186 4,196 0 17,596 43,382 60,978 (5,603) 1984
Huntsville, AL
Mall del Norte 113,400 21,734 142,062 3,939 0 21,734 146,001 167,735 (5,070) 2004
Laredo, TX
Mall of Acadiana 0 22,511 145,769 0 0 22,511 145,769 168,280 (3,366) 2005
Lafayette, LA
105
Gross Amounts at Which
Carried at Close of Period
Initial Cost(A) --------------------------
------------------
(D)
Buildings Costs Buildings Accumu- Date of
(B) and Capitalized Sales of and lated Const-
Encumbr- Improv- Subsequent to Outparcel Improve- Depre- ruction/
Description /Location ances Land ments Acquisition Land Land ments Total(C) ciation Acquisition
--------------------- -------- -------- ---------- -------------- ---------- ------- --------- -------- -------- ------------
Meridian Mall 91,090 529 103,678 55,560 0 2,232 157,535 159,767 (27,798) 1998
Lansing, MI
Midland Mall 30,000 10,321 29,429 6,080 0 10,321 35,509 45,830 (4,979) 2001
Midland, MI
Monroeville Mall 133,053 21,217 177,214 2,519 0 21,263 179,687 200,950 (7,288) 2004
Pittsburgh, PA
Northpark Mall 41,294 9,977 65,481 4,294 0 10,962 68,790 79,752 (2,766) 2004
Joplin, MO
Northwoods Mall 61,033 14,867 49,647 15,465 (777) 14,090 65,112 79,202 (7,303) 2001
Charleston, SC
Oak Hollow Mall 43,073 5,237 54,775 4,438 0 5,237 59,213 64,450 (17,886) 1994-1995
High Point, NC
Oak Park Mall 276,174 23,119 318,759 0 23,119 318,759 341,878 (886) 2005
Overland Park, KS
Old Hickory Mall 33,803 15,527 29,413 3,343 0 15,527 32,756 48,283 (4,243) 2001
Jackson, TN
Panama City Mall 39,290 9,017 37,454 11,088 0 12,168 45,391 57,559 (4,258) 2002
Panama City, FL
Parkdale Mall 54,274 20,723 47,390 30,172 (307) 20,416 77,562 97,978 (8,432) 2001
Beaumont, TX
Park Plaza Mall 46,607 6,297 81,638 3,560 0 6,304 85,191 91,495 (3,299) 2004
Little Rock, AR
Pemberton Square(E) 0 1,191 14,305 580 (947) 244 14,885 15,129 (6,601) 1986
Vicksburg, MS
Post Oak Mall (E) 0 3,936 48,948 (1,471) (327) 3,608 47,478 51,086 (14,323) 1984-1985
College Station,
TX
106
Gross Amounts at Which
Carried at Close of Period
Initial Cost(A) --------------------------
------------------
(D)
Buildings Costs Buildings Accumu- Date of
(B) and Capitalized Sales of and lated Const-
Encumbr- Improv- Subsequent to Outparcel Improve- Depre- ruction/
Description /Location ances Land ments Acquisition Land Land ments Total(C) ciation Acquisition
--------------------- -------- -------- ---------- -------------- ---------- ------- --------- -------- -------- ------------
Randolph Mall 14,740 4,547 13,927 7,036 0 4,547 20,963 25,510 (2,513) 2001
Asheboro, NC
Regency Mall 33,427 3,384 36,839 12,444 0 4,188 48,479 52,667 (6,367) 2001
Racine, WI
Richland Mall (E) 0 9,874 35,238 4,035 0 9,887 39,260 49,147 (3,893) 2002
Waco, TX
Rivergate Mall 69,614 17,896 86,767 16,817 0 17,896 103,584 121,480 (20,483) 1998
Nashville, TN
River Ridge Mall 0 4,824 59,052 715 0 4,825 59,766 64,591 (5,101) 2003
Lynchburg, VA
Southaven Towne
Center 27,849 8,255 29,380 0 0 8,255 29,380 37,635 (237) 2005
Southaven, MS
Southpark Mall 40,192 9,501 73,262 2,734 0 9,503 75,994 85,497 (5,198) 2003
Colonial Heights,
VA
Stroud Mall 31,252 14,711 23,936 9,522 0 14,711 33,458 48,169 (6,013) 1998
Stroudsburg, PA
St. Clair Square 65,596 11,027 75,620 24,584 0 11,027 100,204 111,231 (20,023) 1996
Fairview Heights,
IL
Sunrise Mall (E) 0 11,156 59,047 3,386 0 11,156 62,433 73,589 (5,913) 2003
Brownsville, TX
Towne Mall (E) 0 3,101 17,033 830 0 3,101 17,863 20,964 (2,523) 2001
Franklin, OH
Turtle Creek Mall 0 2,345 26,418 7,083 0 3,535 32,311 35,846 (11,695) 1993-1995
Hattiesburg, MS
Twin Peaks (E) 0 1,874 22,022 20,178 (46) 1,828 42,200 44,028 (17,165) 1984
Longmont, CO
107
Gross Amounts at Which
Carried at Close of Period
Initial Cost(A) --------------------------
------------------
(D)
Buildings Costs Buildings Accumu- Date of
(B) and Capitalized Sales of and lated Const-
Encumbr- Improv- Subsequent to Outparcel Improve- Depre- ruction/
Description /Location ances Land ments Acquisition Land Land ments Total(C) ciation Acquisition
--------------------- -------- -------- ---------- -------------- ---------- ------- --------- -------- -------- ------------
Valley View 50,112 15,985 77,771 2,916 0 15,987 80,685 96,672 (8,430) 2003
Roanoke, VA
Volusia Mall 56,806 2,526 120,242 545 0 2,526 120,787 123,313 (5,965) 2004
Daytona, FL
Walnut Square (E) 0 50 15,138 6,654 0 50 21,792 21,842 (10,911) 1984-1985
Dalton, GA
Wausau Center 12,927 5,231 24,705 7,973 (5,231) 0 32,678 32,678 (4,208) 2001
Wausau, WI
West Towne Mall 112,728 9,545 83,084 29,709 0 9,545 112,793 122,338 (12,433) 2002
Madison, WI
WestGate Mall 52,953 2,149 23,257 41,727 (432) 1,742 64,959 66,701 (17,862) 1995
Spartanburg, SC
Westmoreland Mall 79,996 4,621 84,215 11,822 0 4,621 96,037 100,658 (8,016) 2002
Greensburg, PA
York Galleria 49,965 5,757 63,316 3,384 0 5,757 66,700 72,457 (11,441) 1995
York, PA
ASSOCIATED CENTERS
Annex at Monroeville 0 716 29,496 22 0 717 29,517 30,234 (1,305) 2004
Monroeville, PA
Bonita Lakes Crossin 8,081 794 4,786 8,037 0 794 12,823 13,617 (2,372) 1997
Meridian, MS
Chapel Hill Suburban 2,500 925 2,520 80 0 925 2,600 3,525 (198) 2004
Akron, OH
Coolsprings
Crossing (E) 0 2,803 14,985 4,428 0 3,554 18,662 22,216 (6,221) 1991-1993
Nashville, TN
108
Gross Amounts at Which
Carried at Close of Period
Initial Cost(A) --------------------------
------------------
(D)
Buildings Costs Buildings Accumu- Date of
(B) and Capitalized Sales of and lated Const-
Encumbr- Improv- Subsequent to Outparcel Improve- Depre- ruction/
Description /Location ances Land ments Acquisition Land Land ments Total(C) ciation Acquisition
--------------------- -------- -------- ---------- -------------- ---------- ------- --------- -------- -------- ------------
Courtyard at
Hickory Hollow 4,010 3,314 2,771 420 0 3,314 3,191 6,505 (559) 1998
Nashville, TN
Eastgate Crossing 9,980 707 2,424 854 0 707 3,278 3,985 (345) 2001
Cincinnati, OH
Foothills Plaza (E) 0 132 2,132 558 0 148 2,674 2,822 (1,398) 1984-1988
Maryville, TN
Foothills Plaza
Expansion 0 137 1,960 240 0 141 2,196 2,337 (919) 1984-1988
Maryville, TN
Frontier Square (E) 0 346 684 236 (86) 260 920 1,180 (391) 1985
Cheyenne, WY
General Cinema (E) 0 100 1,082 177 0 100 1,259 1,359 (798) 1984
Athens, GA
Gunbarrel Pointe (E) 0 4,170 10,874 214 0 4,170 11,088 15,258 (1,475) 2000
Chattanooga, TN
Hamilton Corner 2,023 960 3,670 6,355 (226) 734 10,025 10,759 (1,842) 1986-1987
Chattanooga, TN
Hamilton Crossing 0 4,014 5,906 701 (1,370) 2,644 6,607 9,251 (2,492) 1987
Chattanooga, TN
Harford Annex (E) 0 2,854 9,718 7 0 2,854 9,725 12,579 (486) 2003
Bel Air, MD
The Landing at
Arbor Place 8,638 4,993 14,330 467 0 4,993 14,797 19,790 (3,196) 1998-1999
Douglasville, GA
109
Gross Amounts at Which
Carried at Close of Period
Initial Cost(A) --------------------------
------------------
(D)
Buildings Costs Buildings Accumu- Date of
(B) and Capitalized Sales of and lated Const-
Encumbr- Improv- Subsequent to Outparcel Improve- Depre- ruction/
Description /Location ances Land ments Acquisition Land Land ments Total(C) ciation Acquisition
--------------------- -------- -------- ---------- -------------- ---------- ------- --------- -------- -------- ------------
Madison Plaza (E) 0 473 2,888 1,014 0 473 3,902 4,375 (1,624) 1984
Huntsville, AL
Parkdale Crossing 8,570 2,994 7,408 1,919 (355) 2,639 9,327 11,966 (707) 2002
Beaumont, TX
The Shoppes At
Hamilton Place 0 4,894 11,700 26 0 4,894 11,726 16,620 (781) 2003
Chattanooga, TN
Sunrise Commons (E) 0 1,013 7,525 (153) 0 1,013 7,372 8,385 (492) 2003
Brownsville, TX
The Shoppes at
Panama City 0 1,010 8,140 78 0 1,010 8,218 9,228 (349) 2004
Panama City, FL
The Terrace 0 4,166 9,929 14 0 4,166 9,943 14,109 (2,224) 1997
Chattanooga, TN
Village at
Monroeville 0 932 0 17,731 0 934 17,729 18,663 (562) 2004
Monroeville, PA
Village at Rivergate 3,288 2,641 2,808 2,596 0 2,641 5,404 8,045 (790) 1998
Nashville, TN
West Towne Crossing 0 1,151 2,955 0 0 1,151 2,955 4,106 (326) 1998
Madison, WI
WestGate Crossing 9,483 1,082 3,422 5,721 0 1,082 9,143 10,225 (2,616) 1997
Spartanburg, SC
Westmoreland South 0 2,898 21,167 6,052 0 2,898 27,219 30,117 (1,726) 2002
Greensburg, PA
COMMUNITY CENTERS
Chicopee Marketplace 0 4,341 14,491 0 0 4,341 14,491 18,832 (116) 2005
Chicopee, MA
110
Gross Amounts at Which
Carried at Close of Period
Initial Cost(A) --------------------------
------------------
(D)
Buildings Costs Buildings Accumu- Date of
(B) and Capitalized Sales of and lated Const-
Encumbr- Improv- Subsequent to Outparcel Improve- Depre- ruction/
Description /Location ances Land ments Acquisition Land Land ments Total(C) ciation Acquisition
--------------------- -------- -------- ---------- -------------- ---------- ------- --------- -------- -------- ------------
CBL Center 14,369 140 24,675 842 - 140 25,517 25,657 (5,057) 2001
Chattanooga, TN
Cobblestone Village 0 2,122 6,972 0 0 2,122 6,972 9,094 (15) 2005
Royal Palm Beach,
FL
Fashion Square 0 4,169 69 2,876 0 4,169 2,945 7,114 (34) 2004
Orange Park, FL
Massard Crossing 5,792 2,879 5,176 37 0 2,879 5,213 8,092 (537) 2004
Ft. Smith, AR
Pemberton Plaza 1,979 1,284 1,379 0 0 1,284 1,379 2,663 (136) 2004
Vicksburg, MS
Willowbrook Plaza 29,636 15,079 27,376 377 0 15,079 27,753 42,832 (2,823) 2004
Houston, TX
OTHER
Other - Land 11,162 591 833 690 - 592 1,522 2,114 (775)
Developments in
Progress Consisting
of Construction
and Development
Properties (F) 690,285 - - - - - - 133,509
------------ -------- ---------- ------------ --------- -------- --------- ------------
TOTALS $4,341,055 $780,665 $4,871,387 $839,198 $(15,592) $776,989 $5,698,669 $6,609,167 $(727,907)
============ ======== ========== ============ ========= ======== ========= ============ ============
HELD FOR SALE - - - - - - $ 63,168 $ 63,168
------------ -------- ---------- ------------ --------- -------- --------- ------------
TOTALS $4,341,055 $780,665 $4,871,387 $839,198 $(15,592) $776,989 $5,698,669 $6,672,335 $(727,907)
============ ======== ========== ============ ========= ======== ========= ============ ============
(A) Initial cost represents the total cost capitalized including carrying cost
at the end of the first fiscal year in which the property opened or was
acquired.
(B) Encumbrances represent the mortgage notes payable balance at December 31,
2005.
(C) The aggregate cost of land and buildings and improvements for federal
income tax purposes is approximately $5.3 billion.
111
(D) Depreciation for all properties is computed over the useful life which is
generally 40 years for buildings, 10-20 years for certain improvements and
7 to 10 years for equipment and fixtures.
(E) Property is pledged as collateral on the secured lines of credit used for
developments and acquisitions.
(F) Includes non-property mortgages and credit line mortgages.
112
CBL & ASSOCIATES PROPERTIES, INC.
REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION
The changes in real estate assets and accumulated depreciation for the years
ending December 31, 2005, 2004, and 2003 are set forth below (in thousands):
Year Ended December 31,
-----------------------------------------------------
2005 2004 2001
-----------------------------------------------------
REAL ESTATE ASSETS:
Balance at beginning of period $5,470,244 $4,379,834 $4,046,325
Additions during the period:
Additions and improvements 376,319 222,233 227,025
Acquisitions of real estate assets 916,769 954,528 506,865
Consolidation of real estate assets
as a result of FIN 46(R) - 52,860 -
Deductions during the period:
Cost of sales and retirements (87,869) (121,598) (389,693)
Accumulated depreciation on assets
held for sale (A) (1,539) (5,093) (8,632)
Accumulated depreciation on
impaired assets (B) - (5,840) -
Loss on impairment of real estate
assets (C) (1,029) (2,966) -
Abandoned projects (560) (3,714) (2,056)
-----------------------------------------------------
Balance at end of period $6,672,335 $5,470,244 $4,379,834
=====================================================
ACCUMULATED DEPRECIATION:
Balance at beginning of period $575,464 $467,614 $434,840
Depreciation expense 169,240 134,146 111,473
Consolidation of real estate assets as a
result of FIN 46(R) - 1,988 -
Accumulated depreciation on assets held
for sale (A) (1,539) (5,093) (8,632)
Accumulated depreciation on impaired
assets (B) - (5,840) -
Real estate assets sold or retired (15,258) (17,351) (70,067)
-----------------------------------------------------
Balance at end of period $727,907 $575,464 $467,614
=====================================================
(A) Reflects the reclassification of accumulated depreciation against the cost
of the assets to reflect assets held for sale at net carrying value.
(B) Reflects the write-off of accumulated depreciation against the cost of the
assets to establish a new cost basis for assets that were determined to be
impaired.
(C) Represents loss on impairment recorded to reduce the carrying values of
impaired assets to their estimated fair values.
113
SCHEDULE IV
CBL & ASSOCIATES PROPERTIES, INC.
MORTGAGE NOTES RECEIVABLE ON REAL ESTATE
AT DECEMBER 31, 2005
(In thousands)
Principal
Amount Of
Mortgage
Carrying Subject To
Final Monthly Balloon Amount Of Delinquent
Name Of Interest Maturity Payment Payment At Face Amount Mortgage Principal
Center/Location Rate Date Amount(1) Maturity Prior Liens Of Mortgage (2) Or Interest
--------------- --------- -------- ---------- --------- ----------- ----------- ---------- -----------
FIRST MORTGAGES:
Coastal Grand-Myrtle 7.75% Oct-2014 $ 58(3) $ 9,000 None $9,000 $ 9,000 $ -
Beach
Myrtle Beach, SC
Gaston Square 7.50% Jun-2019 None
Gastonia, NC 16 - 1,870 1,560 -
Park Place 3.63% Apr-2007 2,602 None
Chattanooga, TN 19 3,118 2,789 -
Signal Hills Crossing 7.50% Jun-2019 14 - None 1,415 1,378 -
Statesville, NC
Village Square 4.50% Mar-2007 10(3) 2,627 None 2,627 2,627 -
Houghton Lake, MI
and
Village at Wexford
Wexford, MI
Aug-2006-
OTHER 9.50% Jan-2047 36 204 6,387 763 -
---------- --------- ----------- ----------- ---------- -----------
$ 153 $14,433 $24,417 $ 18,117 $ -
========== ========= =========== =========== ========== ===========
(1) Equal monthly installments comprised of principal and interest unless
otherwise noted.
(2) The aggregate carrying value for federal income tax purposes was $18,117 at
December 31, 2005.
(3) Payment represents interest only.
The changes in mortgage notes receivable for the years ending December 31, 2005,
2004, and 2003 were as follows (in thousands):
Year Ended December 31,
-------------------------------------------------------
2005 2004 2003
-------------------------------------------------------
Beginning balance $ 27,804 $ 36,169 $ 23,074
Additions 3,486 9,225 14,934
Payments (13,173) (17,590) (1,839)
--------------- --------------- -----------------
Ending balance $ 18,117 $ 27,804 $ 36,169
=============== =============== =================
114
EXHIBIT INDEX
Exhibit
Number Description
-------- -----------
3.1 Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the
Company, dated May 10, 2005 (s)
3.2 Amended and Restated Certificate of Incorporation of the Company, as amended through May 10,
2005 (s)
3.3 Amended and Restated Bylaws of the Company, dated October 27, 1993(a)
4.1 See Amended and Restated Certificate of Incorporation of the Company, as amended, relating to
the Common Stock, Exhibits 3.1, 3.2 and 3.3 above
4.2 Certificate of Designations, dated June 25, 1998, relating to the 9.0% Series A Cumulative
Redeemable Preferred Stock (g)
4.3 Certificate of Designation, dated April 30, 1999, relating to the Series 1999 Junior
Participating Preferred Stock (g)
4.4 Terms of Series J Special Common Units of the Operating Partnership, pursuant to Article 4.4
of the Second Amended and Restated Partnership Agreement of the Operating Partnership (g)
4.5 Certificate of Designations, dated June 11, 2002, relating to the 8.75% Series B Cumulative
Redeemable Preferred Stock (h)
4.6 Acknowledgement Regarding Issuance of Partnership Interests and Assumption of Partnership
Agreement (j)
4.7 Certificate of Designations, dated August 13, 2003, relating to the 7.75% Series C Cumulative
Redeemable Preferred Stock (i)
4.8 Certificate of Correction of the Certificate of Designations relating to the 7.75% Series C
Cumulative Redeemable Preferred Stock (m)
4.9 Certificate of Designations, dated December 10, 2004, relating to the 7.375% Series D
Cumulative Redeemable Preferred Stock (m)
4.10 Terms of the Series S Special Common Units of the Operating Partnership, pursuant to the
Third Amendment to the Second Amended and Restated Partnership Agreement of the Operating
Partnership (o)
4.11 Terms of the Series L Special Common Units of the Operating Partnership, pursuant to the
Fourth Amendment to the Second Amended and Restated Partnership Agreement of the Operating
Partnership, see Exhibit 10.1.1
115
Exhibit
Number Description
-------- -----------
4.12 Terms of the Series K Special Common Units of the Operating Partnership, pursuant to the
First Amendment to the Third Amended and Restated Partnership Agreement of the Operating
Partnership, see Exhibit 10.1.3
10.1.1 Fourth Amendment to the Second Amended and Restated Partnership Agreement of the Operating
Partnership, dated as of June 1, 2005 (s)
10.1.2 Third Amended and Restated Agreement of Limited Partnership of the Operating Partnership,
dated June 15, 2005 (r)
10.1.3 First Amendment to Third Amended and Restated Agreement of Limited Partnership of the
Operating Partnership, dated as of November 16, 2005 (v)
10.2.1 Rights Agreement by and between the Company and BankBoston, N.A., dated as of April 30, 1999
(d)
10.2.2 Amendment No. 1 to Rights Agreement by and between the Company and SunTrust Bank (successor
to BankBoston), dated January 31, 2001 (g)
10.3 Property Management Agreement between the Operating Partnership and the Management Company (a)
10.4 Property Management Agreement relating to Retained Properties (a)
10.5.1 CBL & Associates Properties, Inc. Amended and Restated Stock Incentive Plan (k)+
10.5.2 Form of Non-Qualified Stock Option Agreement for all participants+ (j)
10.5.3 Form of Stock Restriction Agreement for restricted stock awards+ (j)
10.5.4 Deferred Compensation Arrangement, dated January 1, 1997, for Eric P. Snyder+ (j)
10.5.5 Form of Stock Restriction agreement for restricted stock awards with annual installment
vesting+ (k)
10.5.6 Amendment No. 1 to CBL & Associates Properties, Inc. Amended and Restated Stock Incentive
Plan+ (o)
10.5.7 Amendment No. 2 to CBL & Associates Properties, Inc. Amended and Restated Stock Incentive
Plan+ (o)
10.5.8 Form of Senior Executive Deferred Compensation Arrangements, dated as of January 1, 2004,
between the Company and Charles B. Lebovitz, Stephen D. Lebovitz, John N. Foy and Ben
Landress+]
10.5.9 Form of Stock Restriction Agreement for restricted stock awards in 2004 and subsequent years+
(q)
116
Exhibit
Number Description
-------- -----------
10.5.10 Letter amending Deferred Compensation Arrangement for Eric P. Snyder, dated October 24, 2005+
(t)
10.6 Form of Indemnification Agreements between the Company and the Management Company and their
officers and directors (a)
10.7.1 Employment Agreement for Charles B. Lebovitz (a)+
10.7.2 Employment Agreement for John N. Foy (a)+
10.7.3 Employment Agreement for Stephen D. Lebovitz (a)+
10.7.4 Summary Description of CBL & Associates Properties, Inc. Director Compensation Arrangements+
(o)
10.7.5 Summary Description of CBL & Associates Properties, Inc. Annual Base Salary and Bonus
Arrangements Approved for Named Executive Officers in October 2004+ (o)
10.7.6 Summary Description of May 9, 2005 Compensation Committee Action Confirming 2005 Executive
Base Salary Levels+ (s)
10.7.7 Summary Description of May 9, 2005 Compensation Committee Action Approving 2005 Executive
Bonus Opportunities+ (s)
10.7.8 Summary Description of October 26, 2005 Compensation Committee Action Approving 2006
Executive Base Salary Levels+]
10.7.9 Summary Description of October 26, 2005 Compensation Committee Action Approving Adjustments
to 2005 Executive Bonus Opportunities+]
10.7.10 Summary Description of May 9, 2005 Compensation Committee Action Approving 2006 Executive
Bonus Opportunities+]
10.8 Subscription Agreement relating to purchase of the Common Stock and Preferred Stock of the
Management Company (a)
10.9.1 Option Agreement relating to certain Retained Properties (a)
10.9.2 Option Agreement relating to Outparcels (a)
10.10.1 Property Partnership Agreement relating to Hamilton Place (a)
10.10.2 Property Partnership Agreement relating to CoolSprings Galleria (a)
10.11.1 Acquisition Option Agreement relating to Hamilton Place (a)
10.11.2 Acquisition Option Agreement relating to the Hamilton Place Centers (a)
117
Exhibit
Number Description
-------- -----------
10.12.1 Unsecured Credit Agreement by and among the Operating Partnership and Wells Fargo Bank, N.A.,
et al., dated as of August 27, 2004 (l)
10.12.2 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 (u)
10.12.3 Second Amendment to Unsecured Credit Agreement by and among the Operating Partnership and
Wells Fargo Bank, N.A., et al., dated as of February 14, 2006]
10.13 Loan agreement between Rivergate Mall Limited Partnership, The Village at Rivergate Limited
Partnership, Hickory Hollow Mall Limited Partnership, and The Courtyard at Hickory Hollow
Limited Partnership and Midland Loan Services, Inc., dated July 1, 1998 (b)
10.14.1 Master Contribution Agreement, dated as of September 25, 2000, by and among the Company, the
Operating Partnership and the Jacobs entities (e)
10.14.2 Amendment to Master Contribution Agreement, dated as of September 25, 2000, by and among the
Company, the Operating Partnership and the Jacobs entities (f)
10.15.1 Share Ownership Agreement by and among the Company and its related parties and the Jacobs
entities, dated as of January 31, 2001 (f)
10.15.2 Voting and Standstill Agreement dated as of September 25, 2000 (x)
10.15.3 Amendment, effective as of January 1, 2006, to Voting and Standstill Agreement dated as of
September 25, 2000
10.16.1 Registration Rights Agreement by and between the Company and the Holders of SCU's listed on
Schedule 1 thereto, dated as of January 31, 2001 (f)
10.16.2 Registration Rights Agreement by and between the Company and Frankel Midland Limited
Partnership, dated as of January 31, 2001 (f)
10.16.3 Registration Rights Agreement by and between the Company and Hess Abroms Properties of
Huntsville, dated as of January 31, 2001 (f)
10.16.4 Registration Rights Agreement by and between the Company and the Holders of Series S
Special Common Units of the Operating Partnership listed on Schedule A thereto, dated
July 28, 2004 (o)
10.16.5 Form of Registration Rights Agreements between the Company and Certain Holders of Series
K Special Common Units of the Operating Partnership, dated as of November 16, 2005 (v)
10.17.1 Sixth Amended and Restated Credit Agreement by and among the Operating Partnership and Wells
Fargo Bank, National Association, et al., dated February 28, 2003 (o)
118
Exhibit
Number Description
-------- -----------
10.17.2 First Amendment to Sixth Amended and Restated Credit Agreement between the Operating
Partnership and Wells Fargo Bank, National Association, et al., dated May 3, 2004 (o)
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 (u)
10.17.4 Third Amendment to Sixth Amended and Restated Credit Agreement between the Operating
Partnership and Wells Fargo Bank, National Association, et al., dated February 14, 2006
10.18 Revolving Credit Loan Agreement between the Operating Partnership and SouthTrust Bank, dated
September 24, 2003 (o)
10.19.1 Third Amended and Restated Loan Agreement by and between the Operating Partnership and
SunTrust Bank, dated as of September 24, 2003 (o)
10.19.2 First Amendment to Third Amended and Restated Loan Agreement by and between the Operating
Partnership and SunTrust Bank, dated April 1, 2004 (o)
10.19.3 Second Amendment to Third Amended and Restated Loan Agreement by and between the Operating
Partnership and SunTrust Bank, dated July 11, 2005 to be effective as of April 1, 2005
10.20.1 Amended and Restated Loan Agreement between the Operating Partnership, The Lakes Mall, LLC,
Lakeshore Sebring Limited Partnership and First Tennessee Bank National Association, dated
December 30, 2004 (o)
10.20.2 Amended and Restated Loan Agreement between the Operating Partnership, The Lakes Mall, LLC,
Lakeshore Sebring Limited Partnership and First Tennessee Bank National Association, dated
July 29, 2004 (o)
10.20.3 Amended and Restated Loan Agreement between the Operating Partnership, The Lakes Mall, LLC,
Lakeshore/Sebring Limited Partnership and First Tennessee Bank National Association, dated
March 9, 2005 (p)
10.20.4 Amended and Restated Loan Agreement between the Operating Partnership, The Lakes Mall, LLC,
Lakeshore/Sebring Limited Partnership and First Tennessee Bank National Association, dated
December 16, 2005
10.21 Amended and Restated Limited Liability Company Agreement of JG Gulf Coast Town Center LLC
by and between JG Gulf Coast Member LLC, an Ohio limited liability company and CBL/Gulf
Coast, LLC, a Florida limited liability company, dated April 27, 2005 (s)
10.23.1 Contribution Agreement and Joint Escrow Instructions between the Company and the owners of
Oak Park Mall named therein, dated as of October 17, 2005 (v)
119
Exhibit
Number Description
-------- -----------
10.23.2 First Amendment to Contribution Agreement and Joint Escrow Instructions between
the Company and the owners of Oak Park Mall named therein, dated as of November
8, 2005 (v)
10.23.3 Contribution Agreement and Joint Escrow Instructions between the Company and
the owners of Eastland Mall named therein, dated as of October 17, 2005 (v)
10.23.4 First Amendment to Contribution Agreement and Joint Escrow Instructions between
the Company and the owners of Eastland Mall named therein, dated as of November
8, 2005 (v)
10.23.5 Purchase and Sale Agreement and Joint Escrow Instructions between the Company
and the owners of Hickory Point Mall named therein, dated as of October 17, 2005 (v)
10.23.6 Purchase and Sale Agreement and Joint Escrow Instructions between the Company
and the owner of Eastland Medical Building, dated as of October 17, 2005 (v)
10.23.7 Letter Agreement, dated as of October 17, 2005, between the Company and the other
parties to the acquisition agreements listed above for Oak Park Mall, Eastland Mall,
Hickory Point Mall and Eastland Medical Building (v)
10.24.1 Master Transaction Agreement by and among REJ Realty LLC, JG Realty Investors Corp., JG
Manager LLC, JG North Raleigh L.L.C., JG Triangle Peripheral South LLC, and the Operating
Partnership, effective October 24, 2005
10.24.2 Amended and Restated Limited Liability Company Agreement of Triangle Town Member, LLC by and
among CBL Triangle Town Member, LLC and REJ Realty LLC, JG Realty Investors Corp. and JG
Manager LLC, effective as of November 16, 2005
12.1 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Dividends
14 CBL & Associates Properties, Inc. Code of Business Conduct and Ethics, as amended by the
First Amendment thereto dated February 8, 2006 (w)
21 Subsidiaries of the Company
23 Consent of Deloitte & Touche LLP
24 Power of Attorney
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
120
Exhibit
Number Description
-------- -----------
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) Incorporated by reference to Post-Effective Amendment No. 1 to the
Company's Registration Statement on Form S-11 (No. 33-67372), as filed
with the Commission on January 27, 1994.*
(b) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998.*
(c) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999.*
(d) Incorporated by reference to the Company's Current Report on Form 8-K,
filed on May 4, 1999.*
(e) Incorporated by reference from the Company's Current Report on Form 8-K,
filed on October 27, 2000.*
(f) Incorporated by reference from the Company's Current Report on Form 8-K,
filed on February 6, 2001.*
(g) Incorporated by reference from the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2001.*
(h) Incorporated by reference from the Company's Current Report on Form 8-K,
dated June 10, 2002, filed on June 17, 2002.*
(i) Incorporated by reference from the Company's Registration Statement on
Form 8-A, filed on August 21, 2003.*
(j) Incorporated by reference from the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2002.*
(k) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2003.*
(l) Incorporated by reference from the Company's Current Report on Form 8-K,
filed on October 21, 2004.*
(m) Incorporated by reference from the Company's Registration Statement on
Form 8-A, filed on December 10, 2004.*
121
(n) Incorporated by reference from the Company's Current Report on Form 8-K,
filed December 14, 2004.*
(o) Incorporated by reference from the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2004.*
(p) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2005.*
(q) Incorporated by reference from the Company's Current Report on Form 8-K,
filed on May 13, 2005.*
(r) Incorporated by reference from the Company's Current Report on Form 8-K,
filed on June 21, 2005.*
(s) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2005.*
(t) Incorporated by reference from the Company's Current Report on Form 8-K,
filed on October 28, 2005.*
(u) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2005.*
(v) Incorporated by reference from the Company's Current Report on Form 8-K,
filed on November 22, 2005.*
(w) Incorporated by reference from the Company's Current Report on Form 8-K,
filed on February 14, 2006.*
(x) Incorporated by reference from the Company's Proxy Statement dated
December 19, 2000 for the Special Meeting of Shareholders
held January 19, 2001.*
+ A management contract or compensatory plan or arrangement required to be
filed pursuant to Item 15(b) of this report.
* Commission File No. 1-12494
122