-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GchC/abgj3AinZHLOUnCk+D0XhmXgyOR6VEP5/zX2otrwBizSE7PA3x1h0+8V1wr 8NHez2oiQNw3C6Voq0skBw== 0000910612-08-000077.txt : 20080509 0000910612-08-000077.hdr.sgml : 20080509 20080508195909 ACCESSION NUMBER: 0000910612-08-000077 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20080331 FILED AS OF DATE: 20080509 DATE AS OF CHANGE: 20080508 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CBL & ASSOCIATES PROPERTIES INC CENTRAL INDEX KEY: 0000910612 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 621545718 STATE OF INCORPORATION: DE FISCAL YEAR END: 1207 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12494 FILM NUMBER: 08815676 BUSINESS ADDRESS: STREET 1: 2030 HAMILTON PLACE BVLD, SUITE 500 STREET 2: CBL CENTER CITY: CHATTANOOGA STATE: TN ZIP: 37421 BUSINESS PHONE: 4238550001 MAIL ADDRESS: STREET 1: 2030 HAMILTON PLACE BVLD, SUITE 500 STREET 2: CBL CENTER CITY: CHATTANOOGA STATE: TN ZIP: 37421 10-Q 1 form10qfinalct.htm FORM 10-Q PERIOD ENDING MARCH 31, 2008

 


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008

Or

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ____________ TO _______________

COMMISSION FILE NO. 001-12494


CBL & ASSOCIATES PROPERTIES, INC.

(Exact Name of registrant as specified in its charter)


DELAWARE                                                                                                               62-1545718

(State or other jurisdiction of incorporation or organization)                                      (I.R.S. Employer Identification Number)

2030 Hamilton Place Blvd., Suite 500, Chattanooga, TN 37421-6000

(Address of principal executive office, including zip code)

423.855.0001

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x

Accelerated filer o

 

 

Non-accelerated filer o(Do not check if smaller reporting company)

Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

As of May 5, 2008, there were 66,320,709 shares of common stock, par value $0.01 per share, outstanding.

 


 

1

 

 

 

 

CBL & Associates Properties, Inc.

 

Table of Contents

 

 

PART I

FINANCIAL INFORMATION

3

 

Item 1.

Financial Statements

3

 

 

Condensed Consolidated Balance Sheets

3

 

 

Condensed Consolidated Statements of Operations

4

 

 

Condensed Consolidated Statements of Cash Flows

5

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

36

 

Item 4.

Controls and Procedures

37

 

PART II

OTHER INFORMATION

37

 

Item 1.

Legal Proceedings

37

 

Item 1A.

Risk Factors

37

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

47

 

Item 3.

Defaults Upon Senior Securities

47

 

Item 4.

Submission of Matters to a Vote of Security Holders

48

 

Item 5.

Other Information

48

 

Item 6.

Exhibits

48

 

SIGNATURE

49

 

 

2

 

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1:

Financial Statements

 

CBL & Associates Properties, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share data)

(Unaudited)

 

 

 

March 31,
2008

 

 

 

December 31,
2007

 

ASSETS

 

 

 

 

 

 

 

 

 

Real estate assets:

 

 

 

 

 

 

 

 

 

Land

 

$

868,233

 

 

 

$

917,578

 

Buildings and improvements

 

 

7,207,622

 

 

 

 

7,263,907

 

 

 

 

8,075,855

 

 

 

 

8,181,485

 

Less accumulated depreciation

 

 

(1,157,209

)

 

 

 

(1,102,767

)

 

 

 

6,918,646

 

 

 

 

7,078,718

 

Held for sale

 

 

161,298

 

 

 

 

 

Developments in progress

 

 

308,467

 

 

 

 

323,560

 

Net investment in real estate assets

 

 

7,388,411

 

 

 

 

7,402,278

 

Cash and cash equivalents

 

 

65,742

 

 

 

 

65,826

 

Cash held in escrow

 

 

2,640

 

 

 

 

 

Receivables:

 

 

 

 

 

 

 

 

 

Tenant, net of allowance for doubtful accounts of $1,209 in

    2008 and $1,126 in 2007

 

 

68,506

 

 

 

 

72,570

 

Other

 

 

11,233

 

 

 

 

10,257

 

Mortgage and other notes receivable

 

 

40,849

 

 

 

 

135,137

 

Investments in unconsolidated affiliates

 

 

195,397

 

 

 

 

142,550

 

Intangible lease assets and other assets

 

 

256,170

 

 

 

 

276,429

 

 

 

$

8,028,948

 

 

 

$

8,105,047

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Mortgage and other notes payable

 

$

5,889,620

 

 

 

$

5,869,318

 

Accounts payable and accrued liabilities

 

 

363,043

 

 

 

 

394,884

 

Total liabilities

 

 

6,252,663

 

 

 

 

6,264,202

 

Commitments and contingencies (Notes 3,5 and 11)

 

 

 

 

 

 

 

 

 

Minority interests

 

 

888,510

 

 

 

 

920,297

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

Preferred stock, $.01 par value, 15,000,000 shares authorized:

 

 

 

 

 

 

 

 

 

7.75% Series C cumulative redeemable preferred stock,

       460,000 shares outstanding in 2008 and 2007

 

 

5

 

 

 

 

5

 

7.375% Series D cumulative redeemable preferred stock,

       700,000 shares outstanding in 2008 and 2007

 

 

7

 

 

 

 

7

 

Common stock, $.01 par value, 180,000,000 shares authorized,

66,306,558 and 66,179,747 shares issued and outstanding
    in 2008 and 2007, respectively

 

 

663

 

 

 

 

662

 

Additional paid-in capital

 

 

999,468

 

 

 

 

990,048

 

Accumulated other comprehensive loss

 

 

(12,329

)

 

 

 

(20

)

Accumulated deficit

 

 

(100,039

)

 

 

 

(70,154

)

Total shareholders’ equity

 

 

887,775

 

 

 

 

920,548

 

 

 

$

8,028,948

 

 

 

$

8,105,047

 

 

The accompanying notes are an integral part of these balance sheets.

 

3

 

 

 

CBL & Associates Properties, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

 

2008

 

 

2007

 

REVENUES:

 

 

 

 

 

 

 

Minimum rents

 

$

172,032

 

$

154,249

 

Percentage rents

 

 

4,990

 

 

6,482

 

Other rents

 

 

5,011

 

 

4,415

 

Tenant reimbursements

 

 

86,279

 

 

77,671

 

Management, development and leasing fees

 

 

2,938

 

 

1,221

 

Other

 

 

7,029

 

 

4,980

 

Total revenues

 

 

278,279

 

 

249,018

 

EXPENSES:

 

 

 

 

 

 

 

Property operating

 

 

48,024

 

 

43,065

 

Depreciation and amortization

 

 

73,616

 

 

56,608

 

Real estate taxes

 

 

23,855

 

 

20,646

 

Maintenance and repairs

 

 

17,718

 

 

15,291

 

General and administrative

 

 

12,531

 

 

10,197

 

Other

 

 

6,999

 

 

3,639

 

Total expenses

 

 

182,743

 

 

149,446

 

Income from operations

 

 

95,536

 

 

99,572

 

Interest and other income

 

 

2,727

 

 

2,745

 

Interest expense

 

 

(80,224

)

 

(66,127

)

Loss on extinguishment of debt

 

 

 

 

(227

)

Gain on sales of real estate assets

 

 

3,076

 

 

3,530

 

Equity in earnings of unconsolidated affiliates

 

 

979

 

 

598

 

Income tax provision

 

 

(357

)

 

(803

)

Minority interest in earnings:

 

 

 

 

 

 

 

Operating partnership

 

 

(4,742

)

 

(13,563

)

Shopping center properties

 

 

(6,049

)

 

(730

)

Income from continuing operations

 

 

10,946

 

 

24,995

 

Operating income of discontinued operations

 

 

680

 

 

103

 

Loss on discontinued operations

 

 

 

 

(55

)

Net income

 

 

11,626

 

 

25,043

 

Preferred dividends

 

 

(5,455

)

 

(7,642

)

Net income available to common shareholders

 

$

6,171

 

$

17,401

 

 

 

 

 

 

 

 

 

Basic per share data:

 

 

 

 

 

 

 

Income from continuing operations, net of preferred dividends

 

$

0.08

 

$

0.27

 

Discontinued operations

 

 

0.01

 

 

 

Net income available to common shareholders

 

$

0.09

 

$

0.27

 

Weighted average common shares outstanding

 

 

65,897

 

 

65,109

 

Diluted per share data:

 

 

 

 

 

 

 

Income from continuing operations, net of preferred dividends

 

$

0.08

 

$

0.26

 

Discontinued operations

 

 

0.01

 

 

 

Net income available to common shareholders

 

$

0.09

 

$

0.26

 

Weighted average common and potential dilutive common shares outstanding

 

 

66,109

 

 

65,886

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.5450

 

$

0.5050

 

 

The accompanying notes are an integral part of these statements.

 

4

 

 

 

 

CBL & Associates Properties, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

Three Months Ended March 31,

 

 

 

 

2008

 

 

2007

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income

 

$

11,626

 

 

$25,043

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation

 

 

44,472

 

 

37,302

 

Amortization

 

 

33,504

 

 

21,348

 

Net amortization of debt premiums and discounts

 

 

(1,975

)

 

(1,902

)

Net amortization of above and below market leases

 

 

(2,597

)

 

(2,930

)

Gain on sales of real estate assets

 

 

(3,076

)

 

(3,530

)

Loss on discontinued operations

 

 

 

 

55

 

Write-off of development projects

 

 

1,713

 

 

48

 

Share-based compensation expense

 

 

1,588

 

 

2,126

 

Income tax benefit from share-based compensation

 

 

1,501

 

 

1,139

 

Loss on extinguishment of debt

 

 

 

 

227

 

Equity in earnings of unconsolidated affiliates

 

 

(979

)

 

(598

)

Distributions of earnings from unconsolidated affiliates

 

 

4,163

 

 

891

 

Minority interest in earnings

 

 

10,791

 

 

14,293

 

Changes in:

 

 

 

 

 

 

 

Tenant and other receivables

 

 

3,013

 

 

7,442

 

Other assets

 

 

(5,357

)

 

(5,188

)

Accounts payable and accrued liabilities

 

 

(5,434

)

 

2,548

 

Net cash provided by operating activities

 

 

92,953

 

 

98,314

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Additions to real estate assets

 

 

(126,998

)

 

(118,061

)

Acquisitions of real estate assets and intangible lease assets

 

 

 

 

(7,545

)

Cash placed in escrow

 

 

(2,640

)

 

 

Purchases of available-for-sale securities

 

 

 

 

(18,652

)

Proceeds from sales of real estate assets

 

 

6,187

 

 

11,581

 

Additions to mortgage notes receivable

 

 

(9,597

)

 

(2,085

)

Payments received on mortgage notes receivable

 

 

103,885

 

 

73

 

Additional investments in and advances to unconsolidated affiliates

 

 

(33,447

)

 

(18,097

)

Distributions in excess of equity in earnings of unconsolidated affiliates

 

 

13,370

 

 

1,205

 

Purchase of minority interests in shopping center properties

 

 

 

 

(8,007

)

Purchase of minority interests in the Operating Partnership

 

 

 

 

(8,509

)

Changes in other assets

 

 

674

 

 

4,707

 

Net cash used in investing activities

 

 

(48,566

)

 

(163,390

)

 

5

 

 

 

CBL & Associates Properties, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

(Continued)

 

 

 

Three Months Ended March 31,

 

 

 

 

2008

 

 

2007

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from mortgage and other notes payable

 

 

217,381

 

 

572,994

 

Principal payments on mortgage and other notes payable

 

 

(185,412

)

 

(421,185

)

Additions to deferred financing costs

 

 

(489

)

 

(1,307

)

Prepayment fees to extinguish debt

 

 

 

 

(227

)

Proceeds from issuance of common stock

 

 

86

 

 

81

 

Proceeds from exercises of stock options

 

 

250

 

 

2,139

 

Income tax benefit from share-based compensation

 

 

(1,501

)

 

(1,139

)

Contributions from minority partners

 

 

203

 

 

 

Distributions to minority interests

 

 

(33,465

)

 

(27,489

)

Dividends paid to holders of preferred stock

 

 

(5,455

)

 

(7,642

)

Dividends paid to common shareholders

 

 

(36,069

)

 

(33,038

)

Net cash provided by (used in) financing activities

 

 

(44,471

)

 

83,187

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

(84

)

 

18,111

 

CASH AND CASH EQUIVALENTS, beginning of period

 

 

65,826

 

 

28,700

 

CASH AND CASH EQUIVALENTS, end of period

 

$

65,742

 

$

46,811

 

SUPPLEMENTAL INFORMATION:

 

 

 

 

 

 

 

Cash paid for interest, net of amounts capitalized

 

$

83,499

 

$

68,087

 

 

The accompanying notes are an integral part of these statements.         

 

6

 

 

 

CBL & Associates Properties, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands, except share data)

 

Note 1 – Organization and Basis of Presentation

 

CBL & Associates Properties, Inc. (“CBL”), a Delaware corporation, is a self-managed, self-administered, fully integrated real estate investment trust (“REIT”) that is engaged in the ownership, development, acquisition, leasing, management and operation of regional shopping malls, open-air centers and community 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”).   At March 31, 2008, the Operating Partnership owned controlling interests in 75 regional malls/open-air centers, 28 associated centers (each adjacent to a regional mall), 13 community centers and 14 office buildings, including 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 nine regional malls/open-air centers, four associated centers, three community centers and six office buildings. Because one or more of the other partners have substantive participating rights, 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 six mall expansions, two associated/lifestyle centers (one of which is owned in a joint venture), one mixed-use center and five community/open-air centers (four of which are owned in joint ventures) under construction at March 31, 2008. 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 March 31, 2008, CBL Holdings I, Inc., the sole general partner of the Operating Partnership, owned a 1.6% general partner interest in the Operating Partnership and CBL Holdings II, Inc. owned a 55.1% limited partner interest for a combined interest held by CBL of 56.7%.

 

The minority interest in the Operating Partnership is held primarily by CBL & Associates, Inc. and its affiliates (collectively “CBL’s Predecessor”) and by affiliates of The Richard E. Jacobs Group, Inc. (“Jacobs”). CBL’s Predecessor contributed their interests in certain real estate properties and joint ventures to the Operating Partnership in exchange for a limited partner interest when the Operating Partnership was formed in November 1993. Jacobs contributed their interests in certain real estate properties and joint ventures to the Operating Partnership in exchange for limited partner interests when the Operating Partnership acquired the majority of Jacobs’ interests in 23 properties in January 2001 and the balance of such interests in February 2002. At March 31, 2008, CBL’s Predecessor owned a 14.9% limited partner interest, Jacobs owned a 19.6% limited partner interest and third parties owned an 8.8% limited partner interest in the Operating Partnership. CBL’s Predecessor also owned 7.2 million shares of CBL’s common stock at March 31, 2008, for a total combined effective interest of 21.0% in the Operating Partnership.

 

The Operating Partnership conducts CBL’s property management and development activities through CBL & Associates Management, Inc. (the “Management Company”) to comply with certain requirements of the Internal Revenue Code of 1986, as amended (the “Code”). The Operating Partnership owns 100% of both of the Management Company’s preferred stock and common stock.

 

CBL, the Operating Partnership and the Management Company are collectively referred to herein as “the Company”.

 

The accompanying condensed consolidated financial statements are unaudited; however, they have been prepared in accordance with accounting principles generally accepted in the United States of America

 

7

 

 

(“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair presentation of the financial statements for these interim periods have been included. Material intercompany transactions have been eliminated. The results for the interim period ended March 31, 2008, are not necessarily indicative of the results to be obtained for the full fiscal year.

 

Certain historical amounts have been reclassified to conform to the current year presentation. The financial results of certain properties are reported as discontinued operations in the condensed consolidated financial statements. Except where noted, the information presented in the Notes to Unaudited Condensed Consolidated Financial Statements excludes discontinued operations. See Note 6 for further discussion.

 

These condensed consolidated financial statements should be read in conjunction with CBL’s audited consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2007.

 

Note 2 – Recent Accounting Pronouncements

 

In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 161, Disclosures about Derivative Instruments and Hedging Activities. SFAS No. 161 improves financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance and cash flows. SFAS No. 161 requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format and provides more information about an entity’s liquidity by requiring disclosure of derivative features that are credit risk-related. It also requires cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption is not expected to have an impact on the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51, which requires that a noncontrolling interest in a consolidated subsidiary be displayed in the consolidated statement of financial position as a separate component of equity. After control is obtained, a change in ownership interests that does not result in a loss of control should be accounted for as an equity transaction. A change in ownership of a consolidated subsidiary that results in a loss of control and deconsolidation is a significant event that triggers gain or loss recognition, with the establishment of a new fair value basis in any remaining ownership interests. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The Company is currently evaluating the impact of adopting SFAS No. 160 on its financial position and results of operations.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, which changes certain aspects of current business combination accounting. SFAS No. 141(R) requires, among other things, that entities generally recognize 100 percent of the fair values of assets acquired, liabilities assumed and non-controlling interests in acquisitions of less than a 100 percent controlling interest when the acquisition constitutes a change in control of the acquired entity. Shares issued as consideration for a business combination are to be measured at fair value on the acquisition date and contingent consideration arrangements are to be recognized at their fair values on the date of acquisition, with subsequent changes in fair value generally reflected in earnings. Pre-acquisition gain and loss contingencies generally are to be recognized at their fair values on the acquisition date and any acquisition-related transaction costs are to be expensed as incurred. SFAS No. 141(R) is effective for business combination transactions for which the acquisition date is in a fiscal year

 

8

 

beginning on or after December 15, 2008. The adoption of SFAS No. 141(R) is not expected to have a material impact on the Company’s consolidated financial statements.

Note 3 – Fair Value Measurements

 

In September 2006, FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB issued FASB Staff Position 157-2 which delays the effective date of SFAS No. 157 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in an entity’s financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008. The Company adopted the provisions of SFAS No. 157 for financial assets and financial liabilities on January 1, 2008.

 

In accordance with SFAS No. 157, the Company has categorized its financial assets and financial liabilities that are recorded at fair value into a hierarchy based on whether the inputs to valuation techniques are observable or unobservable. The fair value hierarchy, as defined by SFAS No. 157, contains three levels of inputs that may be used to measure fair value as follows:

 

Level 1 – Inputs represent quoted prices in active markets for identical assets and liabilities as of the measurement date.

 

Level 2 – Inputs, other than those included in Level 1, represent observable measurements for similar instruments in active markets, or identical or similar instruments in markets that are not active, and observable measurements or market data for instruments with substantially the full term of the asset or liability.

 

Level 3 – Inputs represent unobservable measurements, supported by little, if any, market activity, and require considerable assumptions that are significant to the fair value of the asset or liability. Market valuations must often be determined using discounted cash flow methodologies, pricing models or similar techniques based on the Company’s assumptions and best judgment.

 

              The following table sets forth information regarding the Company’s financial instruments that are measured at fair value in the Condensed Consolidated Balance Sheet as of March 31, 2008:

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

Fair Value
At
March 31,
2008

 

 

 

Quoted Prices in

Active Markets

For Identical

Assets
(Level 1)

 

 

 

Significant
Other Observable
Inputs
(Level 2)

 

 

 

Significant

Unobservable

Inputs
(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

$

17,882

 

 

 

$

17,882

 

 

 

$

 

 

 

$

 

Privately held debt and equity securities

 

 

4,875

 

 

 

 

 

 

 

 

 

 

 

 

4,875

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

9,023

 

 

 

$

 

 

 

$

9,023

 

 

 

$

 

 

Other assets in the condensed consolidated balance sheets include marketable securities consisting of corporate equity securities that are classified as available for sale. Unrealized gains and losses on available-for-sale securities that are deemed to be temporary in nature are recorded as a component of accumulated other comprehensive loss in shareholders’ equity. During the quarter ended March 31, 2008, the Company did not recognize any realized gains and losses or write-downs related to sales or disposals of marketable securities or

 

9

 

 

other-than-temporary impairments. The fair value of the Company’s available-for-sale securities is based on quoted market prices and, thus, is classified under Level 1.

 

The Company uses interest rate swaps to mitigate the effect of interest rate movements on its variable-rate debt. The interest rate swaps are accounted for in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and related amendments. The Company currently has two interest rate swap agreements included in Accounts Payable and Accrued Liabilities that qualify as hedging instruments and are designated as cash flow hedges. The swaps have met the effectiveness test criteria since inception and changes in the fair values of the swaps are, thus, reported in other comprehensive income (loss) and will be reclassified into earnings in the same period or periods during which the hedged item affects earnings. The Company has engaged a third party firm to calculate the valuations for its interest rate swaps. The fair values of the Company’s interest rate swaps, classified under Level 2, are determined using a proprietary model which is based on prevailing market data for contracts with matching durations, current and anticipated London Interbank Offered Rate (“LIBOR”) rate information, consideration of the Company’s credit standing, credit risk of the counterparties and reasonable estimates about relevant future market conditions.

 

The Company holds a convertible note receivable from, and a warrant to acquire shares of Jinsheng Group, in which the Company also holds a cost-method investment. See Note 4 for additional information. The convertible note receivable is non-interest bearing and is secured by shares of the private entity. Since the convertible note receivable is non-interest bearing and there is no active market for the entity’s debt, the Company performed an analysis on the note considering credit risk and discounting factors to determine the fair value. The warrant was valued using estimated share price and volatility variables in a Black Scholes model. Due to the significant estimates and assumptions used in the valuation of the note and warrant, the Company has classified these under Level 3. During the three months ended March 31, 2008, there was no change in the fair value of the note and warrant.

 

SFAS No. 157 requires separate disclosure of assets and liabilities measured at fair value on a recurring basis from those measured at fair value on a nonrecurring basis. As of March 31, 2008, no assets or liabilities were measured at fair value on a nonrecurring basis.

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company adopted SFAS No. 159 on January 1, 2008, and has elected not to apply the fair value option.

 

Note 4 – Joint Ventures

 

Equity Method Investments

 

At March 31, 2008, the Company had investments in the following 19 entities, which are accounted for using the equity method of accounting:

 

 

10

 

 

Joint Venture

 

Property Name

 

Company's

Interest

 

Governor’s Square IB

 

Governor’s Plaza

 

50.0

%

Governor’s Square Company

 

Governor’s Square

 

47.5

%

High Pointe Commons, LP

 

High Pointe Commons

 

50.0

%

Imperial Valley Mall L.P.

 

Imperial Valley Mall

 

60.0

%

Imperial Valley Peripheral L.P.

 

Imperial Valley Mall (vacant land)

 

60.0

%

Kentucky Oaks Mall Company

 

Kentucky Oaks Mall

 

50.0

%

Mall of South Carolina L.P.

 

Coastal Grand—Myrtle Beach

 

50.0

%

Mall of South Carolina Outparcel L.P.

 

Coastal Grand—Myrtle Beach (vacant land)

 

50.0

%

Mall Shopping Center Company

 

Plaza del Sol

 

50.6

%

Parkway Place L.P.

 

Parkway Place

 

45.0

%

Triangle Town Member LLC

 

Triangle Town Center, Triangle Town Commons and Triangle Town Place

 

50.0

%

York Town Center, LP

 

York Town Center

 

50.0

%

JG Gulf Coast Town Center

 

Gulf Coast Town Center

 

50.0

%

CBL Brazil

 

Plaza Macae

 

60.0

%

CBL—TRS Joint Venture, LLC

 

Friendly Center, The Shops at Friendly Center, Renaissance Center and a portfolio of six office buildings

 

50.0

%

West Melbourne I, LLC

 

Hammock Landing Phase I

 

50.0

%

West Melbourne II, LLC

 

Hammock Landing Phase II

 

50.0

%

Port Orange I, LLC

 

The Pavilion at Port Orange Phase I

 

50.0

%

Port Orange II, LLC

 

The Pavilion at Port Orange Phase II

 

50.0

%

 

Condensed combined financial statement information for the unconsolidated affiliates is as follows:

 

 

 

Total for the Three
Months Ended March 31,

 

 

 

Company's Share for the Three

Months Ended March 31,

 

 

 

2008

 

 

 

2007

 

 

 

2008

 

 

 

2007

 

Revenues

 

$

38,286

 

 

 

$

23,562

 

 

 

$

19,799

 

 

 

$

11,898

 

Depreciation and amortization expense

 

 

(13,000

)

 

 

 

(6,896

)

 

 

 

(6,677

)

 

 

 

(3,504

)

Interest expense

 

 

(13,006

)

 

 

 

(8,317

)

 

 

 

(6,626

)

 

 

 

(4,192

)

Other operating expenses

 

 

(11,343

)

 

 

 

(7,656

)

 

 

 

(5,946

)

 

 

 

(3,873

)

Gain on sales of real estate assets

 

 

472

 

 

 

 

538

 

 

 

 

429

 

 

 

 

269

 

Net income

 

$

1,409

 

 

 

$

1,231

 

 

 

$

979

 

 

 

$

598

 

 

                  Effective January 30, 2008, the Company entered into two 50/50 joint ventures, West Melbourne I, LLC and West Melbourne II, LLC, with certain affiliates of Benchmark Development (“Benchmark”) to develop Hammock Landing, an open-air shopping center in West Melbourne, Florida that will be developed in two phases. The Company obtained its 50% interests in the joint ventures by contributing cash of $9,685. The Company will develop and manage Hammock Landing. The joint venture’s net cash flows and income (loss) will be allocated 50/50 to Benchmark and the Company. The Company records its investments in these joint ventures using the equity method of accounting.

 

Effective January 30, 2008, the Company entered into two 50/50 joint ventures, Port Orange I, LLC and Port Orange II, LLC, with Benchmark to develop the Pavilion at Port Orange (the “Pavilion”), an open-air shopping center in Port Orange, Florida that will be developed in two phases. The Company obtained its 50% interests in the joint ventures by contributing cash of $13,812. The Company will develop and manage the Pavilion. The joint ventures’ net cash flows and income (loss) will be allocated 50/50 to Benchmark and the Company. The Company records its investments in these joint ventures using the equity method of accounting.

 

11

 

 

 

During the first quarter of 2008, CBL-TRS Joint Venture, a joint venture that the Company accounts for using the equity method of accounting, completed its acquisition of properties from the Starmount Company when it acquired the Renaissance Center, located in Durham, NC, for $89,639 and an anchor parcel at Friendly Center, located in Greensboro, NC, for $5,000. The aggregate purchase price consisted of $58,121 in cash and the assumption of $36,518 of non-recourse debt that bears interest at a fixed interest rate of 5.61% and matures in July 2016.

 

Cost Method Investments

 

In February 2007, the Company acquired a 6.2% minority interest in subsidiaries of Jinsheng Group (“Jinsheng”), an established mall operating and real estate development company located in Nanjing, China, for $10,125. As of March 31, 2008, Jinsheng owns controlling interests in four home decoration shopping centers,  two general retail shopping centers and four development sites.

 

Jinsheng also issued to the Company a secured convertible promissory note in exchange for cash of $4,875. The note is secured by 16,565,534 Series 2 Ordinary Shares of Jinsheng. The secured note is non-interest bearing and matures upon the earlier to occur of (i) January 22, 2012, (ii) the closing of the sale, transfer or other disposition of substantially all of Jinsheng’s assets, (iii) the closing of a merger or consolidation of Jinsheng or (iv) an event of default, as defined in the secured note. In lieu of the Company’s right to demand payment on the maturity date, at any time commencing upon the earlier to occur of January 22, 2010 or the occurrence of a Final Trigger Event, as defined in the secured note, the Company may, at its sole option, convert the outstanding amount of the secured note into 16,565,534 Series A-2 Preferred Shares of Jinsheng (which equates to a 2.275% ownership interest).

 

Jinsheng also granted the Company a warrant to acquire 5,461,165 Series A-3 Preferred Shares for $1,875. The warrant expires upon the earlier of January 22, 2010 or the date that Jinsheng distributes, as a dividend, shares of Jinsheng’s successor should Jinsheng complete an initial public offering.

 

The Company accounts for its minority interest in Jinsheng using the cost method because the Company does not exercise significant influence over Jinsheng and there is no readily determinable market value of Jinsheng’s shares since they are not publicly traded. The Company recorded the secured note at its estimated fair value of $4,513, which reflects a discount of $362 due to the fact that it is non-interest bearing. The discount is amortized to interest income over the term of the secured note using the effective interest method. The minority interest and the secured note are reflected as investment in unconsolidated affiliates in the accompanying condensed consolidated balance sheets. The Company recorded the warrant at its estimated fair value of $362, which is included in other assets in the accompanying condensed consolidated balance sheets. There have been no significant changes to the fair values of the secured note and warrant.

 

During the first quarter of 2008, the Company became aware that a lender to Jinsheng had declared an event of default under its loan, claiming that the loan proceeds had been improperly advanced to a related party entity owned by Jinsheng's founder. As a result, the lender sought to exercise its rights to register ownership of the shares of Jinsheng that were pledged as collateral for the loan. Jinsheng's founder partially repaid the loan in April 2008 and obtained a release of a portion of the collateral. However, because he failed to pay the balance of the loan by its maturity date of April 30, 2008, the lender is once again seeking to exercise its rights with respect to the remaining collateral. Due to the uncertainty surrounding the final disposition of the pledged Jinsheng shares, the Company has determined that its investment may be potentially impaired. The Company and its fellow investor in Jinsheng are currently working with both the lender and Jinsheng’s founder to negotiate a restructuring plan that would allow for the repayment of the loan and the settlement of the related party receivable. Based on information to date, the Company believes that implementation of a satisfactory restructuring plan will be achieved and has determined that any potential impairment would not be other than temporary.

 

12

 

Variable Interest Entities

 

In October 2006, the Company entered into a loan agreement with a third party under which the Company would loan the third party up to $18,000 to fund land acquisition costs and certain predevelopment expenses for the purpose of developing a shopping center. The Company determined that its loan to the third party represented a variable interest in a variable interest entity and that the Company was the primary beneficiary. As a result, the Company consolidated this entity.

 

During the first quarter of 2008, the Company agreed to receive title to the underlying land in exchange for the full payment of the $18,000 loan. The transaction had no impact on the Company’s condensed consolidated financial statements.

 

Note 5 – Mortgage and Other Notes Payable

 

Mortgage and other notes payable consisted of the following at March 31, 2008 and December 31, 2007, respectively:

 

 

March 31, 2008

 

 

 

December 31, 2007

 

 

 

Amount

 

 

 

Weighted

Average

Interest

Rate(1)

 

 

 

Amount

 

 

 

Weighted

Average

Interest

Rate(1)

 

Fixed-rate debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-recourse loans on operating properties

 

$

4,273,477

 

 

 

5.93

%

 

 

$

4,293,515

 

 

 

5.93

%

Line of credit (2)

 

 

400,000

 

 

 

4.55

%

 

 

 

250,000

 

 

 

4.61

%

Total fixed-rate debt

 

 

4,673,477

 

 

 

5.81

%

 

 

 

4,543,515

 

 

 

5.85

%

Variable-rate debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recourse term loans on operating properties

 

 

118,175

 

 

 

4.00

%

 

 

 

81,767

 

 

 

6.15

%

Lines of credit

 

 

1,014,602

 

 

 

3.68

%

 

 

 

1,165,032

 

 

 

6.28

%

Construction loans

 

 

83,366

 

 

 

3.97

%

 

 

 

79,004

 

 

 

6.20

%

Total variable-rate debt

 

 

1,216,143

 

 

 

3.73

%

 

 

 

1,325,803

 

 

 

6.13

%

Total

 

$

5,889,620

 

 

 

5.38

%

 

 

$

5,869,318

 

 

 

5.92

%

 

 

(1)

Weighted-average interest rate including the effect of debt premiums (discounts), but excluding amortization of deferred financing costs.

 

(2)

The Company has entered into interest rate swaps on notional amounts totaling $400,000 related to its largest secured credit facility to effectively fix the interest rate on that portion of the line of credit. Therefore, this amount is currently reflected in fixed-rate debt.

 

Unsecured Line of Credit

 

The Company has an unsecured credit facility with total availability of $560,000 that bears interest at LIBOR plus a margin of 0.75% to 1.20% based on the Company’s leverage, as defined in the agreement to the facility. Additionally, the Company pays an annual fee of 0.1% of the amount of total availability under the unsecured credit facility. The credit facility matures in August 2008 and has three one-year extension options, which are at the Company’s election. At March 31, 2008, the outstanding borrowings of $525,232 under the unsecured credit facility had a weighted average interest rate of 3.56%.

 

The Company has an unsecured credit facility that was obtained for the exclusive purpose of acquiring certain properties from the Starmount Company or its affiliates. The Company completed its acquisition of these properties in February 2008 and, as a result, no further draws can be made against the facility. The unsecured credit facility bears interest at LIBOR plus a margin of 0.95% to 1.40% based on the Company’s leverage ratio, as defined in the agreement to the facility. Net proceeds from a sale, or the Company’s share of excess proceeds from any refinancings, of any of the properties originally purchased with borrowings from this unsecured credit facility must be used to pay down any remaining outstanding balance. The agreement to the facility contains default provisions customary for transactions of this nature and also contains cross-default provisions for defaults of the Company’s $560,000 unsecured credit facility and $525,000 secured facility.

 

13

 

 

The facility matures in November 2010 and has two one-year extension options, which are at the Company’s election. At March 31, 2008, the outstanding borrowings of $264,870 under this facility had a weighted average interest rate of 3.83%.

 

Secured Lines of Credit

 

The Company has four secured lines of credit that are used for construction, acquisition and working capital purposes, as well as issuances of letters of credit. Each of these lines is secured by mortgages on certain of the Company’s operating properties. Borrowings under the secured lines of credit bear interest at LIBOR plus a margin ranging from 0.80% to 0.90% and had a weighted average interest rate of 3.78% at March 31, 2008. The Company also pays a fee based on the amount of unused availability under its largest secured credit facility at a rate of 0.125% of unused availability. The following summarizes certain information about the secured lines of credit as of March 31, 2008:

 

Total

Available

 

Total

Outstanding

 

Maturity Date

 

$

525,000

 

$

525,000

 

February 2009

 

 

100,000

 

 

62,300

 

June 2009

 

 

20,000

 

 

20,000

 

March 2010

 

 

17,200

 

 

17,200

 

April 2010

 

$

662,200

 

$

624,500

 

 

 


Interest Rate Swaps

 

On January 2, 2008, the Company entered into a $150,000 pay fixed/receive variable interest rate swap agreement to hedge the interest rate risk exposure on an amount of borrowings on the Company’s largest secured credit facility equal to the swap notional amount. This interest rate swap hedges the risk of changes in cash flows on the Company’s designated forecasted interest payments attributable to changes in 1-month LIBOR, the designated benchmark interest rate being hedged, thereby reducing exposure to variability in cash flows relating to interest payments on the variable-rate debt. The interest rate swap effectively fixes the interest payments on the portion of debt principal corresponding to the swap notional amount at 4.453%. The swap was valued at $(3,197) as of March 31, 2008 and matures on December 30, 2009.

 

On December 31, 2007, the Company entered into a $250,000 pay fixed/receive variable interest rate swap agreement to hedge the interest rate risk exposure on an amount of borrowings on the Company’s largest secured credit facility equal to the swap notional amount. The interest rate swap effectively fixes the interest payments on the portion of debt principal corresponding to the swap notional amount at 4.605%. The swap was valued at $(5,826) as of March 31, 2008 and matures on December 30, 2009.

 

The above swaps have met the effectiveness test criteria since inception and changes in the fair values of the swaps are, thus, reported in other comprehensive income (loss) and will be reclassified into earnings in the same period or periods during which the hedged item affects earnings.  The swaps' total fair value of $(9,023) as of March 31, 2008 is included in Accounts Payable and Accrued Liabilities in the accompanying condensed consolidated balance sheet.

 

Letters of Credit

 

At March 31, 2008, the Company had additional secured and unsecured lines of credit with a total commitment of $37,940 that can only be used for issuing letters of credit. The letters of credit outstanding under these lines of credit totaled $15,867 at March 31, 2008.

 

 

14

 

 

Covenants and Restrictions

 

Thirty-nine malls/open-air centers, nine associated centers, three community centers and the corporate office building are owned by special purpose entities that are included in the Company’s consolidated financial statements. The sole business purpose of the special purpose entities is to own and operate these properties, each of which is encumbered by a commercial-mortgage-backed-securities loan. The real estate and other assets owned by these special purpose entities are restricted under the loan agreements in that they are not available to settle other debts of the Company. However, so long as the loans are not under an event of default, as defined in the loan agreements, the cash flows from these properties, after payments of debt service, operating expenses and reserves, are available for distribution to the Company.

 

Maturities

 

The weighted average remaining term of the Company’s total consolidated debt was 4.1 years at March 31, 2008 and 4.4 years at December 31, 2007. The weighted average remaining term of the Company's consolidated fixed-rate debt was 4.7 years and 5.1 years at March 31, 2008 and December 31, 2007, respectively. The Company has eleven loans and two lines of credit totaling $1,602,011 that are scheduled to mature before March 31, 2009. Of the total amount scheduled to mature within the next twelve months, the two lines of credit account for $1,050,232. The lines of credit are the Company’s largest secured and unsecured facilities, as discussed above. The secured facility has a one-year extension option and the unsecured facility has three one-year extension options. Of the eleven loans scheduled to mature within the next twelve months, three loans totaling $76,234 have extension options. The Company expects to extend, retire or refinance the loans.

 

Note 6 – Discontinued Operations

 

As of March 31, 2008, the Company determined that 19 of the community center and office properties originally acquired during the fourth quarter of 2007 from the Starmount Company met the criteria to be classified as held-for-sale. Individual sales of the properties are expected to close throughout the next twelve months. In conjunction with their classification as held-for-sale, the results of operations from the properties have been reclassified to discontinued operations for the three months ended March 31, 2008.

 

During August 2007, the Company sold Twin Peaks Mall in Longmont, CO. During December 2007, the Company sold The Shops at Pineda Ridge in Melbourne, FL. The results of operations of these properties are included in discontinued operations for the three months ended March 31, 2007.

 

Total revenues for the properties included in discontinued operations in the accompanying condensed consolidated financial statements of operations were $4,555 and $1,538 for the three month periods ended March 31, 2008 and 2007, respectively.

 

Note 7 – Segment Information

 

The Company measures performance and allocates resources according to property type, which is determined based on certain criteria such as type of tenants, capital requirements, economic risks, leasing terms, and short and long-term returns on capital. Rental income and tenant reimbursements from tenant leases provide the majority of revenues from all segments. Information on the Company’s reportable segments is presented as follows:

 

15

 

 

 

 

Three Months Ended March 31, 2008

 

 

Malls

 

 

Associated

Centers

 

 

Community

Centers

 

 

All Other

(2)

 

 

Total

 

Revenues

 

 

$

253,652

 

 

$

10,950

 

 

$

3,338

 

 

 

10,339

 

 

$

278,279

 

Property operating expenses (1)

 

 

 

(92,256

)

 

 

(2,645

)

 

 

(1,206

)

 

 

6,510

 

 

 

(89,597

)

Interest expense

 

 

 

(63,069

)

 

 

(2,306

)

 

 

(1,135

)

 

 

(13,714

)

 

 

(80,224

)

Other expense

 

 

 

 

 

 

 

 

 

 

 

 

(6,999

)

 

 

(6,999

)

Gain on sales of real estate assets

 

 

 

1,398

 

 

 

 

 

 

2

 

 

 

1,676

 

 

 

3,076

 

Segment profit (loss)

 

 

$

99,725

 

 

$

5,999

 

 

$

999

 

 

$

(2,188

)

 

 

104,535

 

Depreciation and amortization expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(73,616

)

General and administrative expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,531

)

Interest and other income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,727

 

Equity in earnings of unconsolidated affiliates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

979

 

Income tax provision

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(357

)

Minority interest in earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,791

)

Income from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

10,946

 

Total Assets

 

 

$

6,880,765

 

 

$

348,057

 

 

$

219,173

 

 

$

580,953

 

 

$

8,028,948

 

Capital expenditures (3)

 

 

$

52,481

 

 

$

267

 

 

$

22,433

 

 

$

101,183

 

 

$

176,364

 

 

 

 

 

Three Months Ended March 31, 2007

 

 

Malls

 

 

Associated

Centers

 

 

Community

Centers

 

 

All Other

(2)

 

 

Total

 

Revenues

 

 

$

230,618

 

 

$

10,557

 

 

$

1,978

 

 

 

5,865

 

 

$

249,018

 

Property operating expenses (1)

 

 

 

(82,505

)

 

 

(2,606

)

 

 

(785

)

 

 

6,894

 

 

 

(79,002

)

Interest expense

 

 

 

(54,107

)

 

 

(1,856

)

 

 

(993

)

 

 

(9,171

)

 

 

(66,127

)

Other expense

 

 

 

 

 

 

 

 

 

 

 

 

(3,639

)

 

 

(3,639

)

Gain on sales of real estate assets

 

 

 

(93

)

 

 

(10

)

 

 

(9

)

 

 

3,642

 

 

 

3,530

 

Segment profit (loss)

 

 

$

93,913

 

 

$

6,085

 

 

$

191

 

 

$

3,591

 

 

 

103,780

 

Depreciation and amortization expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(56,608

)

General and administrative expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,197

)

Loss on extinguishment of debt

(227

)

Interest and other income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,745

 

Equity in earnings of unconsolidated affiliates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

598

 

Income tax provision

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(803

)

Minority interest in earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14,293

)

Income from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

24,995

 

Total Assets

 

 

$

5,844,095

 

 

$

318,566

 

 

$

60,046

 

 

$

396,641

 

 

$

6,619,348

 

Capital expenditures (3)

 

 

$

62,531

 

 

$

9,992

 

 

$

7,985

 

 

$

33,979

 

 

$

114,487

 

 

(1)

Property operating expenses include property operating expenses, real estate taxes and maintenance and repairs.

(2)

The All Other category includes mortgage notes receivable, Office Buildings, the Management Company and the Company’s subsidiary that provides security and maintenance services.

(3)

Amounts include acquisitions of real estate assets and investments in unconsolidated affiliates. Developments in progress are included in the All Other category.

 

Note 8 – Postretirement Benefits

 

Effective March 1, 2008, the Company adopted an unfunded plan to provide medical insurance coverage for up to two years to any retirees with thirty or more years of service and no eligibility for any other group health plan coverage or Medicare. The Company accounts for the plan pursuant to SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. The Company elected to account for the obligation using the transition methodology. During the first quarter of 2008, the Company incurred a total charge of $190 due to the adoption of the plan. Election of the transition methodology resulted in an unrecognized transition cost of $434.

 

 

16

 

                On March 3, 2008, the Company’s Senior Vice President and Director of Corporate Leasing announced his retirement effective March 31, 2008. In conjunction with his retirement, the Company agreed to the payment of certain compensation and to the acceleration of the vesting of any outstanding restricted stock awards, among other items. The Company incurred a total charge of $1,216 during the first quarter of 2008 related to the officer’s retirement benefits, consisting of $1,000 of base compensation, $75 of pro rata bonus compensation, $31 of health benefits and $110 of restricted stock accelerated vesting.

 

Note 9 – Earnings Per Share

 

Basic earnings per share (“EPS”) is computed by dividing net income available to common shareholders by the weighted-average number of unrestricted common shares outstanding for the period. Diluted EPS assumes the issuance of common stock for all potential dilutive common shares outstanding. The limited partners’ rights to convert their minority interest in the Operating Partnership into shares of common stock are not dilutive. The following summarizes the impact of potential dilutive common shares on the denominator used to compute earnings per share:

 

 

Three Months Ended March 31,

 

 

 

2008

 

 

 

2007

 

Weighted average shares outstanding

 

66,195

 

 

 

65,562

 

Effect of nonvested stock awards

 

(298

)

 

 

(453

)

Denominator – basic earnings per share

 

65,897

 

 

 

65,109

 

Dilutive effect of:

 

 

 

 

 

 

 

Stock options

 

134

 

 

 

583

 

Nonvested stock awards

 

48

 

 

 

157

 

Deemed shares related to deferred compensation arrangements

 

30

 

 

 

37

 

Denominator – diluted earnings per share

 

66,109

 

 

 

65,886

 

 

Note 10 – Comprehensive Income (Loss)

 

The computation of comprehensive income (loss) for the three months ended March 31, 2008 and 2007 is as follows:

 

 

Total for the Three Months

Ended March 31,

 

 

 

2008

 

 

 

2007

 

Net Income

 

$

11,626

 

 

 

$

25,043

 

Change in unrealized loss on interest rate hedge agreements

 

 

(9,023

)

 

 

 

 

Change in unrealized loss on available-for-sale securities

 

 

(3,486

)

 

 

 

531

 

Change in foreign currency translation adjustments

 

 

200

 

 

 

 

 

Total other comprehensive income (loss)

 

 

(12,309

)

 

 

 

531

 

Comprehensive income (loss)

 

$

(683

)

 

 

$

25,574

 

 

Note 11 – Contingencies

 

The Company is currently involved in certain litigation that arises in the ordinary course of business. It is management’s opinion that the pending litigation will not materially affect the financial position or results of operations of the Company.

 

The Company has guaranteed 50% of the debt of Parkway Place L.P., an unconsolidated affiliate in which the Company owns a 45% interest, which owns Parkway Place in Huntsville, AL. The total amount outstanding at March 31, 2008, was $53,200 of which the Company has guaranteed $26,600. The guaranty will expire when the related debt matures in June 2008. The Company has not recorded an obligation for this guaranty because it has determined that the fair value of the guaranty is not material.

 

17

 

 

 

The Company has guaranteed the performance of York Town Center, LP (“YTC”), an unconsolidated affiliate in which the Company owns a 50% interest, under the terms of an agreement with a third party that will own property adjacent to the shopping center property YTC is currently developing. Under the terms of that agreement, YTC is obligated to cause performance of the third party’s obligations as landlord under its lease with its sole tenant, including, but not limited to, provisions such as co-tenancy and exclusivity requirements. Should YTC fail to cause performance, then the tenant under the third party landlord’s lease may pursue certain remedies ranging from rights to terminate its lease to receiving reductions in rent. The Company has guaranteed YTC’s performance under this agreement up to a maximum of $22,000, which decreases by $800 annually until the guaranteed amount is reduced to $10,000. The maximum guaranteed obligation was $21,200 as of March 31, 2008. The Company has entered into an agreement with its joint venture partner under which the joint venture partner has agreed to reimburse the Company 50% of any amounts the Company is obligated to fund under the guaranty. The Company has not recorded an obligation for this guaranty because it has determined that the fair value of the guaranty is not material.

 

The Company owns a parcel of land that it is ground leasing to a third party developer for the purpose of developing a shopping center. The Company has guaranteed 27% of the third party’s construction loan and bond line of credit (the “loans”) of which the maximum guaranteed amount is $31,554. The total amount outstanding at March 31, 2008 on the loans was $23,986 of which the Company has guaranteed $6,476. The Company has recorded an obligation of $315 in the accompanying condensed consolidated balance sheets as of March 31, 2008 and December 31, 2007 to reflect the estimated fair value of the guaranty.

 

The Company has issued various bonds that it would have to satisfy in the event of non-performance. At March 31, 2008, the total amount outstanding on these bonds was $48,560.

 

Note 12 – Share-Based Compensation

 

The share-based compensation cost that was charged against income was $1,300 and $1,263 for the three months ended March 31, 2008 and 2007. The share-based compensation cost capitalized as part of real estate assets was $277 and $187 for the three months ended March 31, 2008 and 2007.

 

The Company’s stock option activity for the three months ended March 31, 2008 is summarized as follows:

 

 

Shares

 

Weighted
Average
Exercise Price

 

Outstanding at January 1, 2008

 

652,030

 

$

15.71

 

Exercised

 

(19,215

)

 

13.00

 

Outstanding at March 31, 2008

 

632,815

 

 

15.80

 

Vested at March 31, 2008

 

632,815

 

 

15.80

 

Exercisable at March 31, 2008

 

632,815

 

 

15.80

 

 

A summary of the status of the Company’s stock awards as of March 31, 2008, and changes during the three months ended March 31, 2008, is presented below:

 

 

Shares

 

Weighted
Average Grant
Date Fair Value

 

Nonvested at January 1, 2008

 

298,330

 

$

36.73

 

Granted

 

106,813

 

 

24.36

 

Vested

 

(14,013

)

 

24.29

 

Nonvested at March 31, 2008

 

391,130

 

 

33.62

 

 

 

18

 

                As of March 31, 2008, there was $9,166 of total unrecognized compensation cost related to nonvested stock options and stock awards granted under the plan, which is expected to be recognized over a weighted average period of 3.0 years.

 

Note 13 – Noncash Investing and Financing Activities

 

The Company’s noncash investing and financing activities were as follows for the three months ended March 31, 2008 and 2007:

 

 

Three Months Ended
March 31,

 

 

 

2008

 

2007

 

Accrued dividends and distributions

 

$

64,372

 

$

59,336

 

Additions to real estate assets accrued but not yet paid

 

 

22,738

 

 

27,113

 

Reclassification of developments in progress to mortgage notes receivable

 

 

 

 

6,528

 

Note receivable received on sale of land

 

 

 

 

3,735

 

Minority interest issued in acquisition of real estate assets

 

 

 

 

330

 

Payable for marketable securities acquired

 

 

 

 

5,672

 

 

Note 14 – Income Taxes

 

The Company has elected taxable REIT subsidiary status for some of its subsidiaries. This enables the Company to receive income and provide services that would otherwise be impermissible for REITs. For these entities, deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the temporary differences reverse. A valuation allowance for deferred tax assets is provided if the Company believes all or some portion of the deferred tax asset may not be realized. An increase or decrease in the valuation allowance resulting from changes in circumstances that may affect the realizability of the related deferred tax asset is included in income.

 

The Company recorded an income tax provision of $357 and $803 for the three months ended March 31, 2008 and 2007, respectively. The income tax provision in 2008 consisted of a current income tax provision of $1,501 and a deferred income tax benefit of $1,144. The income tax provision in 2007 consisted of a current income tax provision of $1,139 and a deferred income tax benefit of $336.

 

The Company had a net deferred tax asset of $5,476 at March 31, 2008 and $4,332 at December 31, 2007. The net deferred tax asset at March 31, 2008 and December 31, 2007 primarily consisted of operating expense accruals and differences between book and tax depreciation.

 

The Company reports any income tax penalties attributable to its properties as property operating expenses and any corporate-related income tax penalties as general and administrative expenses in its statement of operations. In addition, any interest incurred on tax assessments is reported as interest expense. The Company reported nominal interest and penalty amounts for the three months ended March 31, 2008 and 2007, respectively.

 

Note 15 – Subsequent Events

 

In April 2008, the Company entered into a new, unsecured term facility for up to $228,000. The facility has an initial term of three years with two one-year extensions at the Company’s option. The facility bears interest at LIBOR plus a margin of 1.50% to 1.80% based on the Company’s leverage, as defined in the agreement to the facility. The facility was used to pay down outstanding balances on the Company's lines of credit.

19

 

 

 

In April 2008, the Company completed the sale of five community centers located in Greensboro, NC to three separate buyers for an aggregate of approximately $24,325. The Company expects to record a $1,477 gain attributable to the sales in the second quarter of 2008. The proceeds were used to retire a portion of the outstanding balance on the unsecured line of credit that was originally used to purchase the properties. These centers are included in the held-for-sale portfolio as of March 31, 2008, and their results are included in discontinued operations for the three months ended March 31, 2008.

 

ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the consolidated financial statements and accompanying notes that are included in this Form 10-Q. In this discussion, the terms “we”, “us”, “our” and the “Company” refer to CBL & Associates Properties, Inc. and its subsidiaries.

 

Certain statements made in this section or elsewhere in this report may be deemed “forward looking statements” within the meaning of the federal securities laws. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that these expectations will be attained, and it is possible that actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks and uncertainties. In addition to the risk factors described in Part II, Item 1A. of this report, such risks and uncertainties include, without limitation, general industry, economic and business conditions, interest rate fluctuations, costs of capital and capital requirements, availability of real estate properties, inability to consummate acquisition opportunities, competition from other companies and retail formats, changes in retail rental rates in the Company’s markets, shifts in customer demands, tenant bankruptcies or store closings, changes in vacancy rates at our properties, changes in operating expenses, changes in applicable laws, rules and regulations, the ability to obtain suitable equity and/or debt financing and the continued availability of financing in the amounts and on the terms necessary to support our future business. We disclaim any obligation to update or revise any forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking information.

 

EXECUTIVE OVERVIEW

 

We are a self-managed, self-administered, fully integrated real estate investment trust (“REIT”) that is engaged in the ownership, development, acquisition, leasing, management and operation of regional malls and 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.

 

As of March 31, 2008, we owned controlling interests in 75 regional malls/open-air centers, 28 associated centers (each adjacent to a regional shopping mall), 13 community centers and 14 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 March 31, 2008, we owned non-controlling interests in nine regional malls/open-air centers, four associated centers, three community centers and six office buildings. Because one or more of the other partners have substantive participating rights, we do not control these partnerships and joint ventures and, accordingly, account for these investments using the equity method. At March 31, 2008, we had six mall expansions, two associated/lifestyle centers (one of which is owned in a joint venture), five community/open-air centers (four of which are owned in joint ventures) and one mixed-use center under construction.

 

The majority of our revenues is derived from leases with retail tenants and generally includes base minimum rents, percentage rents based on tenants’ sales volumes and reimbursements from tenants for expenditures, including property operating expenses, real estate taxes and maintenance and repairs, as well as certain capital expenditures. We also generate revenues from sales of outparcel land at the properties and from sales of operating real estate assets when it is

 

20

 

 

determined that we can realize the maximum value of the assets. Proceeds from such sales are generally used to pay off related construction loans or reduce borrowings on our credit facilities.

 

Despite the challenging economy, we recorded encouraging results this quarter including increases in occupancy, strong leasing spreads and positive growth in Funds From Operations ("FFO"). FFO is a key performance measure for real estate companies. Please see the more detailed discussion of this measure on page 34. We are continuing to maximize the productivity of our core portfolio through leasing and management and through opportunistic expansions and redevelopments. We are generating growth with a pipeline of solid new development projects that are well-positioned for long-term success.

 

As a result of the tight credit markets, we are seeing an increase in the number of projects from smaller private developers that are unable to secure funding. Not only is this providing us with new opportunities, but it is also encouraging retailers to sign onto projects with us due to our proven history of established development. In April 2008, we successfully closed on a new, unsecured term facility of $228.0 million and we have several new developments, redevelopments and expansions in process.

 

Certain retailers have announced store closures or bankruptcies in 2008 and it is possible that there may be more. However, we believe that store closures and bankruptcies provide an opportunity to enhance the overall credit quality of our retailers and provide us with an opportunity to increase the productivity in our malls, both in terms of rents and sales. Based on the announcements made to date, the impact on our portfolio is not expected to be significant.

 

Our current quarter results are beginning to reflect the benefits from the expansions and enhancements that we made to our existing portfolio in 2007, as well as the properties that we acquired in the latter part of that year. Our new development projects that are scheduled to open in 2008 should serve to maintain the positive momentum.

 

RESULTS OF OPERATIONS

 

Comparison of the Three Months Ended March 31, 2008 to the Three Months Ended March 31, 2007

 

We have acquired or opened five malls/open-air centers, one associated center, 13 community centers and 19 office buildings since January 1, 2007 (collectively referred to as the “New Properties”). These transactions impact the comparison of the results of operations for the three months ended March 31, 2008 to the results of operations for the comparable period ended March 31, 2007. Properties that were in operation as of January 1, 2007 and March 31, 2008 are referred to as the “Comparable Properties.” We do not consider a property to be one of the Comparable Properties until it has been owned or open for one complete calendar year. Any reference to the New Properties in this section excludes those properties that are accounted for using the equity method of accounting or that are included in Discontinued Operations. The New Properties are as follows:

 

21

 

             

 

 

Property

 

Location

 

Date Acquired/
Opened

 

Acquisitions:

 

 

 

 

 

Chesterfield Mall

 

St. Louis, MO

 

Oct-07

 

Mid Rivers Mall

 

St. Peters, MO

 

Oct-07

 

South County Center

 

St. Louis, MO

 

Oct-07

 

West County Center

 

St. Louis, MO

 

Oct-07

 

Friendly Center and The Shops at Friendly (50/50 joint venture) (1)

 

Greensboro, NC

 

Nov-07

 

Brassfield Square (2)

 

Greensboro, NC

 

Nov-07

 

Caldwell Court (2)

 

Greensboro, NC

 

Nov-07

 

Garden Square (2)

 

Greensboro, NC

 

Nov-07

 

Hunt Village (2)

 

Greensboro, NC

 

Nov-07

 

New Garden Center (2)

 

Greensboro, NC