UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2023
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 NO. 1-12494 (CBL & ASSOCIATES PROPERTIES, INC.)
CBL & ASSOCIATES PROPERTIES, INC.
(Exact Name of registrant as specified in its charter)
Delaware (CBL & ASSOCIATES PROPERTIES, INC.)
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)
Securities registered under Section 12(b) of the Act:
Title of each Class
Trading
Symbol(s)
Name of each exchange on
which registered
Common Stock, $0.001 par value, with associated Stock Purchase Rights
CBL
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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
☒
No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐
No ☒
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes ☒
No ☐
As of August 2, 2023, 32,054,421 shares of common stock were outstanding, excluding 34 treasury shares.
CBL & Associates Properties, Inc.
Table of Contents
PART I
FINANCIAL INFORMATION
1
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2023 and 2022
2
Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2023 and 2022
3
Condensed Consolidated Statements of Equity for the Three and Six Months Ended June 30, 2023 and 2022
4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022
5
Notes to Unaudited Condensed Consolidated Financial Statements
6
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
22
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
37
Item 4.
Controls and Procedures
PART II
OTHER INFORMATION
38
Legal Proceedings
Item1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
39
SIGNATURES
40
PART I – FINANCIAL INFORMATION
ITEM 1: Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
June 30,
December 31,
ASSETS (1)
2023
2022
Real estate assets:
Land
$
589,557
596,715
Buildings and improvements
1,200,096
1,198,597
1,789,653
1,795,312
Accumulated depreciation
(183,529
)
(136,901
1,606,124
1,658,411
Developments in progress
6,431
5,576
Net investment in real estate assets
1,612,555
1,663,987
Cash and cash equivalents
24,919
44,718
Restricted cash
88,674
97,231
Available-for-sale securities - at fair value (amortized cost of $255,412 and $293,476 as of June 30, 2023 and December 31, 2022, respectively)
254,872
292,422
Receivables:
Tenant
34,764
40,620
Other
3,318
3,876
Investments in unconsolidated affiliates
74,138
77,295
In-place leases, net
197,245
247,497
Above market leases, net
143,453
171,265
Intangible lease assets and other assets
41,474
39,332
2,475,412
2,678,243
LIABILITIES AND EQUITY
Mortgage and other indebtedness, net
1,942,049
2,000,186
Below market leases, net
94,180
110,616
Accounts payable and accrued liabilities
114,082
200,312
Total liabilities (1)
2,150,311
2,311,114
Shareholders' equity:
Common stock, $.001 par value, 200,000,000 shares authorized, 32,054,421 and 31,780,075 issued and outstanding as of June 30, 2023 and December 31, 2022, respectively (in each case, excluding 34 treasury shares)
32
Additional paid-in capital
715,163
710,497
Accumulated other comprehensive income (loss)
339
(1,054
Accumulated deficit
(381,509
(338,934
Total shareholders' equity
334,025
370,541
Noncontrolling interests
(8,924
(3,412
Total equity
325,101
367,129
The accompanying notes are an integral part of these condensed consolidated statements.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
Three Months Ended June 30,
Six Months Ended June 30,
REVENUES:
Rental revenues
124,842
131,832
255,166
267,164
Management, development and leasing fees
1,822
1,786
4,256
3,555
3,203
3,400
6,804
6,401
Total revenues
129,867
137,018
266,226
277,120
EXPENSES:
Property operating
(21,507
(21,312
(46,121
(44,656
Depreciation and amortization
(49,742
(64,476
(103,011
(133,419
Real estate taxes
(14,481
(14,254
(29,269
(28,689
Maintenance and repairs
(9,991
(10,230
(21,515
(20,796
General and administrative
(16,156
(18,450
(35,385
(36,524
Loss on impairment
—
(252
Litigation settlement
74
65
118
146
(834
(198
Total expenses
(111,803
(129,743
(235,381
(265,024
OTHER INCOME (EXPENSES):
Interest and other income
2,967
910
5,632
1,064
Interest expense
(44,173
(55,117
(87,697
(145,776
Gain on deconsolidation
28,151
36,250
(Loss) gain on sales of real estate assets
(114
1,482
19
Reorganization items, net
613
(958
Income tax (provision) benefit
(219
472
(118
(329
Equity in earnings (losses) of unconsolidated affiliates
812
2,039
(444
10,606
Total other expenses
(40,727
(51,080
(52,994
(99,124
Net loss
(22,663
(43,805
(22,149
(87,028
Net loss attributable to noncontrolling interests in:
Operating Partnership
44
59
Other consolidated subsidiaries
1,875
2,373
3,620
4,859
Net loss attributable to the Company
(20,788
(41,388
(18,529
(82,110
Dividends allocable to unvested restricted stock
(281
(210
(561
Net loss attributable to common shareholders
(21,069
(41,598
(19,090
(82,320
Basic and diluted per share data attributable to common shareholders:
Basic earnings per share
(0.67
(1.34
(0.61
(2.83
Diluted earnings per share
Weighted-average basic shares
31,313
30,973
31,309
29,091
Weighted-average diluted shares
Condensed Consolidated Statements of Comprehensive Loss
Other comprehensive income (loss):
Unrealized gain on interest rate swap
880
Unrealized (loss) gain on available-for-sale securities
(17
(33
513
9
Total other comprehensive income (loss)
863
1,393
Comprehensive loss
(21,800
(43,838
(20,756
(87,019
Comprehensive loss attributable to noncontrolling interests in:
Comprehensive loss attributable to the Company
(19,925
(41,421
(17,136
(82,101
Comprehensive loss attributable to common shareholders
(20,206
(41,631
(17,697
(82,311
Condensed Consolidated Statements of Equity
Equity
Shareholders' Equity
CommonStock
AdditionalPaid-inCapital
AccumulatedOtherComprehensiveIncome (Loss)
Accumulated Deficit
TotalShareholders'Equity
NoncontrollingInterests
TotalEquity
Balance, December 31, 2021
21
547,726
(3
(151,545
396,199
4,901
401,100
(40,722
(2,501
(43,223
Other comprehensive income
42
Share-based compensation expense
2,743
Conversion of exchangeable notes into 10,982,795 shares of common stock
11
152,527
152,538
Contributions from noncontrolling interests
143
Balance, March 31, 2022
702,996
(192,267
510,800
2,543
513,343
(2,417
Other comprehensive loss
Dividends declared - common stock
(7,954
2,818
Adjustment for noncontrolling interests
70
(70
Distributions to noncontrolling interests
(2,744
Balance, June 30, 2022
705,884
(241,609
464,313
(2,688
461,625
AccumulatedDeficit
Balance, December 31, 2022
Net income (loss)
2,259
(1,745
514
530
(12,024
Issuance of 152,905 shares of restricted common stock
Issuance of 133,221 shares of common stock associated with performance stock units, net of shares withheld for tax
(1,793
Amortization of deferred compensation
1,843
Compensation expense related to performance stock units
1,409
Balance, March 31, 2023
711,956
(524
(348,699
362,765
(5,160
357,605
(1,875
(12,022
(1,889
1,797
1,410
Balance, June 30, 2023
Condensed Consolidated Statements of Cash Flows
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net loss to net cash provided by operating activities:
103,011
133,419
Net amortization of deferred financing costs, discounts on available-for-sale securities and debt discounts
15,330
98,923
Net amortization of intangible lease assets and liabilities
10,715
11,078
Gain on sales of real estate assets
(1,482
(19
Gain on insurance proceeds
(49
(803
(28,151
(36,250
Write-off of development projects
17
834
6,459
5,561
252
Equity in losses (earnings) of unconsolidated affiliates
444
(10,606
Distributions of earnings from unconsolidated affiliates
6,550
12,583
Change in estimate of uncollectable revenues
1,451
(2,699
Change in deferred tax accounts
(839
(1,334
Changes in:
Tenant and other receivables
5,091
937
Other assets
158
(513
(12,320
(36,246
Net cash provided by operating activities
84,236
88,089
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate assets
(17,464
(14,660
Proceeds from sales of real estate assets
5,279
1,569
Purchases of available-for-sale securities
(99,933
(299,993
Redemptions of available-for-sale securities
142,793
299,934
Proceeds from insurance
743
Payments received on notes receivable
35
33
Additional investments in and advances to unconsolidated affiliates
(8,242
(1,061
Distributions in excess of equity in earnings of unconsolidated affiliates
4,430
17,059
Changes in other assets
(1,226
(934
Net cash provided by investing activities
25,672
2,690
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage and other indebtedness
425,000
Principal payments on mortgage and other indebtedness
(39,903
(475,322
Additions to deferred financing costs
(593
(15,196
Shares of common stock withheld for tax associated with performance stock units
(1,892
Dividends paid to common shareholders
(94,083
Net cash used in financing activities
(138,264
(68,119
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
(28,356
22,660
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period
141,949
236,198
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period
113,593
258,858
Reconciliation from condensed consolidated statements of cash flows to condensed consolidated balance sheets:
177,065
Restricted cash:
47,650
47,155
Mortgage escrows
41,024
34,638
SUPPLEMENTAL INFORMATION
Cash paid for interest, net of amounts capitalized
66,561
64,626
Cash paid for reorganization items
5,648
(Dollars in thousands, except per share data)
Note 1 – Organization and Basis of Presentation
CBL & Associates Properties, Inc. (“CBL”), a Delaware corporation, is a self-managed, self-administered, fully-integrated real estate investment trust (“REIT”) that is engaged in the ownership, development, acquisition, leasing, management and operation of regional shopping malls, outlet centers, lifestyle centers, open-air centers, office buildings and other properties, including single-tenant and multi-tenant parcels. Its properties are located in 22 states, but are primarily in the southeastern and midwestern United States.
CBL conducts substantially all its business through CBL & Associates Limited Partnership (the “Operating Partnership”), which is a variable interest entity ("VIE"). 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 VIE.
As of June 30, 2023, the Operating Partnership owned interests in the following properties:
Malls (1)
Outlet Centers (1)
Lifestyle Centers (1)
Open-Air Centers (2)
Other (2)(3)
Total
Consolidated Properties
41
71
Unconsolidated Properties (4)
8
20
47
29
91
CBL is the 100% owner of two qualified REIT subsidiaries, CBL Holdings I, Inc. and CBL Holdings II, Inc. As of June 30, 2023, CBL Holdings I, Inc., the sole general partner of the Operating Partnership, owned a 1.00% general partner interest in the Operating Partnership and CBL Holdings II, Inc. owned a 98.97% limited partner interest for a combined interest held by CBL of 99.97%. As of June 30, 2023, third parties owned a 0.03% limited partner interest in the Operating Partnership.
As used herein, the term "Company" includes CBL & Associates Properties, Inc. and its subsidiaries, including CBL & Associates Limited Partnership and its subsidiaries, unless the context indicates otherwise. The term "Operating Partnership" refers to CBL & Associates Limited Partnership and its subsidiaries.
The Operating Partnership conducts the Company's property management and development activities through its wholly owned subsidiary, CBL & Associates Management, Inc. (the “Management Company"), to comply with certain requirements of the Internal Revenue Code.
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 (“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, they do not include all 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. All intercompany transactions have been eliminated. The results for the interim period ended June 30, 2023 are not necessarily indicative of the results to be obtained for the full fiscal year.
Reclassifications
The Company reclassified restricted cash of $97,231 from intangible lease assets and other assets into an individual line item on the condensed consolidated balance sheets at December 31, 2022 to conform with the current period presentation.
Note 2 – Summary of Significant Accounting Policies
Accounting Guidance Adopted
In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04, "Reference Rate Reform," which provides temporary optional expedients and exceptions to the US GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. Additional optional expedients, exceptions and clarifications were created in ASU 2021-01. The guidance is effective upon issuance and generally can be applied to any contract modifications or existing and new hedging relationships through December 31, 2024. The Company elected the expedients in conjunction with transitioning certain debt instruments to alternative benchmark indexes. During the six months ended June 30, 2023, there was no impact on our condensed consolidated financial statements at adoption through the use of the expedient.
Accounts Receivable
Receivables include amounts billed and currently due from tenants pursuant to lease agreements and receivables attributable to straight-line rents associated with those lease agreements. Individual leases where the collection of rents is in dispute are assessed for collectability based on management’s best estimate of collection considering the anticipated outcome of the dispute. Individual leases that are not in dispute are assessed for collectability and upon the determination that the collection of rents over the remaining lease term is not probable, accounts receivable are reduced as an adjustment to rental revenues. Revenue from leases where collection is deemed to be less than probable is recorded on a cash basis until collectability is determined to be probable. Further, management assesses whether operating lease receivables, at a portfolio level, are appropriately valued based upon an analysis of balances outstanding, historical collection levels and current economic trends. An allowance for the uncollectable portion of the portfolio is recorded as an adjustment to rental revenues.
Management’s collection assessment took into consideration the type of retailer, billing disputes, lease negotiation status and executed deferral or abatement agreements, as well as recent rent collection experience and tenant bankruptcies based on the best information available to management at the time of evaluation.
Note 3 – Revenues
Revenues
The following table presents the Company's revenues disaggregated by revenue source for the three and six months ended June 30, 2023 and 2022:
Revenues from contracts with customers (Accounting Standards Codification ("ASC") 606):
Operating expense reimbursements
1,929
4,091
4,118
Management, development and leasing fees (1)
Marketing revenues (2)
575
759
1,220
744
4,272
4,474
9,567
8,417
Other revenues
753
712
1,493
1,539
Total revenues (3)
See Note 9 for information on the Company's segments.
Revenues from Contracts with Customers
Outstanding Performance Obligations
The Company has outstanding performance obligations related to certain noncancellable contracts with customers for which it will receive fixed operating expense reimbursements for providing certain maintenance and other services as described above. As of June 30, 2023, the Company expects to recognize these amounts as revenue over the following periods:
7
Performance obligation
Less than 5years
5-20years
Over 20years
Fixed operating expense reimbursements
19,935
43,837
40,098
103,870
The Company evaluates its performance obligations each period and makes adjustments to reflect any known additions or cancellations. Performance obligations related to variable consideration, which is based on sales, are constrained.
Note 4 – Leases
The components of rental revenues for the three and six months ended June 30, 2023 and 2022 are as follows:
Fixed lease payments
104,391
96,733
203,372
192,381
Variable lease payments
20,451
35,099
51,794
74,783
Total rental revenues
The undiscounted future fixed lease payments to be received under the Company's operating leases as of June 30, 2023, are as follows:
Years Ending December 31,
Operating Leases
2023 (1)
197,813
2024
331,796
2025
260,067
2026
200,163
2027
146,936
2028
99,404
Thereafter
235,181
Total undiscounted lease payments
1,471,360
Note 5 – Fair Value Measurements
The Company has categorized its financial assets and financial liabilities that are recorded at fair value into a hierarchy in accordance with ASC 820, Fair Value Measurements and Disclosure, ("ASC 820") based on whether the inputs to valuation techniques are observable or unobservable. The fair value hierarchy 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 asset or liability's fair value within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Under ASC 820, fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability in an orderly transaction at the measurement date and under current market conditions. Valuation techniques used maximize the use of observable inputs and minimize the use of unobservable inputs and consider assumptions such as inherent risk, transfer restrictions and risk of nonperformance.
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-term nature of these financial instruments. The estimated fair value of mortgage and other indebtedness was $1,848,797 and $1,833,992 as of June 30, 2023 and December 31, 2022, respectively. The fair value of mortgage and other indebtedness was calculated using Level 2 inputs by discounting future cash flows for mortgage and other indebtedness using estimated market rates at which similar loans would be made currently.
Fair Value Measurements on a Recurring Basis
The following table sets forth information regarding the Company's interest rate swap that was designated as a cash flow hedge of interest rate risk for the six months ended June 30, 2023. See Note 8 for additional information.
Fair Value Measurements at Reporting Date Using
Asset
Fair Value at June 30, 2023
Quoted Prices inActive Markets for IdenticalAssets (Level 1)
SignificantOtherObservableInputs (Level 2)
SignificantUnobservableInputs (Level 3)
Interest rate swap
During the three and six months ended June 30, 2023, the Company has continued to reinvest the cash from maturing U.S. Treasury securities into new U.S. Treasury securities. The Company designated the U.S. Treasury securities as available-for-sale (“AFS”). The table below sets forth information regarding the Company’s AFS securities that were measured at fair value for the six months ended June 30, 2023. Subsequent to June 30, 2023, the Company redeemed and purchased additional U.S. Treasury securities. See Note 14 for additional information.
AFS Security (1)
AmortizedCost
Allowancefor creditlosses (2)
Total unrealized loss
Fair value as of June 30, 2023 (3)
U.S. Treasury securities
255,412
(540
The following table sets forth information regarding the Company’s AFS securities that were measured at fair value for the year ended December 31, 2022:
AFS Security
Allowancefor creditlosses (1)
Fair value as of December 31, 2022 (2)
293,476
Fair Value Measurements on a Nonrecurring Basis
The Company measures the fair value of certain long-lived assets on a nonrecurring basis, through quarterly impairment testing or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company’s evaluation of the recoverability of long-lived assets involves the comparison of undiscounted future cash flows expected to be generated by each property over the Company’s expected remaining holding period to the respective carrying amount. The determination of whether the carrying value is recoverable also requires management to make estimates related to probability weighted scenarios impacting undiscounted cash flow models. The Company considers both quantitative and qualitative factors in its impairment analysis of long-lived assets. Significant quantitative factors include historical and forecasted information for each property such as net operating income, occupancy statistics and sales levels. Significant qualitative factors used include market conditions, age and condition of the property and tenant mix. The quantitative and qualitative factors impact the selection of the terminal capitalization rate which is used in both an undiscounted and discounted cash flow model and the discount rate used in a discounted cash flow model. Due to the significant unobservable estimates and assumptions used in the valuation of long-lived assets that experience impairment, the Company classifies such long-lived assets under Level 3 in the fair value hierarchy. Level 3 inputs primarily consist of sales and market data, independent valuations and discounted cash flow models.
Long-lived Assets Measured at Fair Value in 2023
During the six months ended June 30, 2023, the Company adjusted the negative equity in Alamance Crossing East to zero upon deconsolidation, which represents the estimated fair value of the Company's investment in that property. See Note 7 for additional information.
Long-lived Assets Measured at Fair Value in 2022
During the six months ended June 30, 2022, the Company adjusted the negative equity in Greenbrier Mall to zero upon deconsolidation, which represented the estimated fair value of the Company's investment in that property.
During the three and six months ended June 30, 2022, the Company sold an outparcel at the Pavilion at Port Orange. Gross proceeds amounted to $1,660 and the transaction resulted in a loss on sale of $252.
Note 6 – Dispositions
Dispositions
Based on its analysis, the Company determined that the dispositions described below do not meet the criteria for classification as discontinued operations and are not considered to be significant disposals based on its quantitative and qualitative evaluation. Thus, the results of operations of the properties described below, as well as any related gains or losses, are included in net income (loss) for all periods presented, as applicable.
2023 Dispositions
During the six months ended June 30, 2023, the Company deconsolidated Alamance Crossing East, which resulted in $28,151 of gain on deconsolidation. Alamance Crossing East was included in Malls for purposes of segment reporting. See Note 7 for additional information.
During the three months ended June 30, 2023, the Company realized a loss of $114, primarily related to the sale of one parcel. During the six months ended June 30, 2023, the Company realized a gain of $1,482, primarily related to the sale of five land parcels. Gross proceeds from sales of real estate assets were $5,674 for the six months ended June 30, 2023.
2022 Dispositions
During the six months ended June 30, 2022, the Company deconsolidated Greenbrier Mall. See Note 5 for additional information. Other than the deconsolidation of Greenbrier Mall, the Company had no significant dispositions during the three and six months ended June 30, 2022.
Note 7 – Unconsolidated Affiliates and Noncontrolling Interests
Unconsolidated Affiliates
Although the Company had majority ownership of certain joint ventures during 2023 and 2022, it evaluated the investments and concluded that the other partners or owners in these joint ventures had substantive participating rights, such as approvals of:
As a result of the joint control over these joint ventures, the Company accounts for these investments using the equity method of accounting.
At June 30, 2023, the Company had investments in 25 entities, which are accounted for using the equity method of accounting. The Company's ownership interest in these unconsolidated affiliates ranges from 33% to 100%. Of these entities, 17 are owned in 50/50 joint ventures.
10
2023 Activity - Unconsolidated Affiliates
Alamance Crossing CMBS, LLC
In February 2023, the Company deconsolidated Alamance Crossing East as a result of the Company losing control when the property was placed in receivership. As of June 30, 2023, the loan secured by Alamance Crossing East had an outstanding balance of $41,122. For the six months ended June 30, 2023, the Company recognized gain on deconsolidation of $28,151.
CBL-TRS Med OFC Holding, LLC
In June 2023, the Company and its joint venture partner in Friendly Center and The Shops at Friendly entered into a new 50/50 joint venture, CBL-TRS Med OFC Holding, LLC, for the purpose of entering into a joint venture, CBL DMC I, LLC, with a third party to develop a medical office building on a parcel of land adjacent to those centers. CBL-TRS Med OFC Holding, LLC contributed the parcel of land valued at $2,600 to CBL DMC I, LLC in exchange for a 50% interest in CBL DMC I, LLC. The unconsolidated affiliate is a VIE.
CBL-TRS Joint Venture, LLC
In April 2023, the Company and its joint venture partner entered into a new $148,000 loan secured by Friendly Center and The Shops at Friendly Center. Proceeds from the new loan were used to pay off two previous loans totaling $145,591. The new loan bears a fixed interest rate of 6.44% and matures in May 2028.
Louisville Outlet Shoppes, LLC
In April 2023, the $7,247 loan secured by The Outlet Shoppes of the Bluegrass - Phase II, an unconsolidated affiliate, was paid off.
West County Mall CMBS, LLC
In March 2023, the loan secured by West County Mall was extended through December 2024, with one two-year conditional extension available upon meeting certain requirements.
Condensed Combined Financial Statements - Unconsolidated Affiliates
Condensed combined financial statement information of the unconsolidated affiliates is as follows:
June 30, 2023
December 31, 2022
ASSETS:
Investment in real estate assets
1,989,551
1,971,348
(859,514
(829,574
1,130,037
1,141,774
13,826
10,914
1,143,863
1,152,688
191,648
170,756
Total assets
1,335,511
1,323,444
LIABILITIES:
1,345,090
1,333,152
Other liabilities
42,266
33,419
Total liabilities
1,387,356
1,366,571
OWNERS' EQUITY (DEFICIT):
The Company
12,347
3,123
Other investors
(64,192
(46,250
Total owners' deficit
(51,845
(43,127
Total liabilities and owners’ deficit
62,943
65,551
123,476
129,288
Net income (1)
11,092
12,384
20,273
33,062
Variable Interest Entities
The Operating Partnership and certain of its subsidiaries are deemed to have the characteristics of a VIE primarily because the limited partners of these entities do not collectively possess substantive kick-out or participating rights.
The Company consolidates the Operating Partnership, which is a VIE, for which the Company is the primary beneficiary. The Company, through the Operating Partnership, consolidates all VIEs for which it is the primary beneficiary. Generally, a VIE is a legal entity in which the equity investors do not have the characteristics of a controlling financial interest or the equity investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. A limited partnership is considered a VIE when the majority of the limited partners unrelated to the general partner possess neither the right to remove the general partner without cause, nor certain rights to participate in the decisions that most significantly affect the financial results of the partnership. In determining whether the Company is the primary beneficiary of a VIE, the Company considers qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics of the Company's investment; the obligation or likelihood for the Company or other investors to provide financial support; and the similarity with and significance to the Company's business activities and the business activities of the other investors.
Consolidated VIEs
As of June 30, 2023, the Company had investments in 10 consolidated VIEs with ownership interests ranging from 50% to 92%.
Unconsolidated VIEs
The table below lists the Company's unconsolidated VIEs as of June 30, 2023:
Unconsolidated VIEs:
Investment inReal EstateJointVenturesandPartnerships
MaximumRisk of Loss
Alamance Crossing CMBS, LLC (1)
Ambassador Infrastructure, LLC (2)
5,749
Atlanta Outlet JV, LLC (2)
4,355
BI Development, LLC
105
BI Development II, LLC
CBL-T/C, LLC
CBL-TRS Med OFC Holding, LLC (3)
1,300
El Paso Outlet Center Holding, LLC
Fremaux Town Center JV, LLC
Mall of South Carolina L.P.
Vision - CBL Hamilton Place, LLC
2,210
Vision - CBL Mayfaire TC Hotel, LLC
1,800
5,415
15,519
Note 8 – Mortgage and Other Indebtedness, Net
CBL has no indebtedness. Either the Operating Partnership or one of its consolidated subsidiaries that it has a direct or indirect ownership interest in are the borrowers on all the Company's debt.
CBL is a limited guarantor of the secured term loan for losses suffered solely by reason of fraud or willful misrepresentation by the Operating Partnership or its affiliates.
12
The Company’s mortgage and other indebtedness, net, consisted of the following:
Amount
Weighted-AverageInterestRate (1)
Fixed-rate debt:
Open-air centers and outparcels loan (2)
180,000
6.95
%
Non-recourse loans on operating properties
783,501
5.29
843,634
4.90
Total fixed-rate debt
963,501
5.60
1,023,634
5.26
Variable-rate debt:
Secured term loan (3)
813,038
7.92
829,452
6.87
9.26
8.22
55,440
8.30
56,490
7.26
Total variable-rate debt
1,048,478
8.17
1,065,942
7.12
Total fixed-rate and variable-rate debt
2,011,979
6.94
2,089,576
6.21
Unamortized deferred financing costs
(15,407
(17,101
Debt discounts (4)
(54,523
(72,289
Total mortgage and other indebtedness, net
Non-recourse loans on operating properties, the open-air centers and outparcels loan and the secured term loan include loans that are secured by properties owned by the Company that have a carrying value of $1,530,211 at June 30, 2023.
2023 Loan Activity
In February 2023, the Company exercised its first option to extend the loan secured by Fayette Mall through May 2024. The interest rate remains fixed at 4.25%.
In March 2023, the secured term loan was amended to replace LIBOR with the secured overnight financing rate ("SOFR") for purposes of calculating interest. The transition to SOFR is effective as of June 30, 2023. As of the conversion date, the interest rate is SOFR plus the applicable margin (2.75%) plus the SOFR adjustment (0.11448%).
In April 2023, the Company exercised its extension option on the loan secured by The Outlet Shoppes at Laredo for an extended maturity date of June 2024.
In May 2023, the Operating Partnership entered into an interest rate swap with a notional amount of $32,000 to fix the interest rate at 7.3975% on $32,000 of the variable rate portion of the open-air centers and outparcels loan. The swap has a maturity date of June 7, 2027. The Company designated the swap as a cash flow hedge on its variable rate debt.
In June 2023, the loan secured by Cross Creek Mall was modified for an extended maturity date of June 2025. The interest rate is fixed at 8.19%.
13
Scheduled Principal Payments
As of June 30, 2023, the scheduled principal amortization and balloon payments of the Company’s consolidated debt, excluding extensions available at the Company’s option, on all mortgage and other indebtedness, are as follows:
39,522
237,646
908,717
373,682
360,896
950
61,905
1,983,318
Principal balance of a loan with a maturity date prior to June 30, 2023 (2)
28,661
Total mortgage and other indebtedness
Of the $39,522 of scheduled principal payments for the remainder of 2023, $17,790 relates to the maturing principal balance of one operating property loan.
Interest Rate Hedge Instruments
The Company may use derivative financial instruments, including interest rate swaps, caps, options, floors and other interest rate derivative contracts, to hedge all or a portion of the interest rate risk associated with its borrowings. The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company’s operating and financial structure as well as to hedge specific anticipated transactions. The Company does not intend to utilize derivatives for speculative or other purposes other than interest rate risk management. The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are not able to perform under the agreements. To mitigate this risk, the Company only enters into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which the Company and its affiliates may also have other financial relationships. The Company does not anticipate that its counterparty will fail to meet their obligation.
The Company records its derivative instruments in its condensed consolidated balance sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the derivative has been designated as a hedge and, if so, whether the hedge has met the criteria necessary to apply hedge accounting.
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The effective portion of changes in the fair value of derivatives designated as, and that qualify as, cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Such derivatives were used to hedge the variable cash flows associated with variable-rate debt.
Instrument Type
Location in the Condensed Consolidated Balance Sheet
Notional
Index
Maturity Date
Pay fixed/Receive variable swap
32,000
1-month USD-SOFR CME
Jun-27
14
Gain Recognized in Other Comprehensive Income (Loss)
Gain Recognized in Earnings
Hedging Instrument
Location of Gain Reclassified from Accumulated Other Comprehensive Income (Loss) into Earnings
Interest Expense
95
Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates that $600 will be reclassified from other comprehensive income (loss) as a decrease to interest expense.
The Company has an agreement with each derivative counterparty that contains a provision where if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.
As of June 30, 2023, the Company did not have any derivatives with a fair value in a net liability position including accrued interest but excluding any adjustment for nonperformance risk. As of June 30, 2023, the Company has posted $1,920 of cash collateral related to the interest rate swap. The Company is not in breach of any agreement provisions.
Note 9 – 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.
15
Information on the Company’s segments is presented as follows:
Three Months Ended June 30, 2023
AllOther (2)
Revenues (3)
110,622
19,245
Property operating expenses (4)
(41,668
(4,311
(45,979
(19,968
(24,205
Loss on sales of real estate assets
Segment profit (loss)
48,986
(9,385
39,601
General and administrative expense
Income tax provision
Equity in earnings of unconsolidated affiliates
Capital expenditures (5)
4,977
3,527
8,504
Three Months Ended June 30, 2022
117,191
19,827
(40,708
(5,088
(45,796
(38,691
(16,426
Other expense
37,792
(2,518
35,274
Income tax benefit
6,367
1,351
7,718
16
Six Months Ended June 30, 2023
226,505
39,721
(88,539
(8,366
(96,905
(40,451
(47,246
97,515
(14,607
82,908
Equity in losses of unconsolidated affiliates
9,410
6,629
16,039
Six Months Ended June 30, 2022
238,619
38,501
(85,392
(8,749
(94,141
(109,850
(35,926
43,377
(6,989
36,388
10,327
3,221
13,548
1,580,656
894,756
1,695,813
982,430
Note 10 – Earnings per Share
Earnings per share ("EPS") is calculated under the two-class method. Under the two-class method, all earnings (distributed and undistributed) are allocated to common stock and participating securities. The Company grants restricted stock awards to certain employees under its share-based compensation program, which entitle recipients to receive nonforfeitable dividends during the vesting period on a basis equivalent to the dividends paid to holders of common stock. These unvested restricted stock awards meet the definition of participating securities based on their respective rights to receive nonforfeitable dividends.
Diluted EPS incorporates the potential impact of contingently issuable shares. Diluted EPS is calculated under both the two-class and treasury stock methods, and the more dilutive amount is reported. Performance stock units ("PSUs") and unvested restricted stock awards are contingently issuable common shares and are included in diluted EPS if the effect is dilutive.
The following table presents the calculation of basic and diluted EPS (in thousands, except per share amounts):
Less: Dividends allocable to unvested restricted stock
Weighted-average basic shares outstanding
Net loss per share attributable to common shareholders
Diluted earnings per share (1)
Weighted-average diluted shares outstanding
Note 11 – Contingencies
Securities Litigation
The Company and certain of its officers and directors were named as defendants in three putative securities class action lawsuits (collectively, the “Securities Class Action Litigation”), each filed in the United States District Court for the Eastern District of Tennessee, on behalf of all persons who purchased or otherwise acquired the Company’s securities during a specified period of time. Those cases were consolidated on July 17, 2019, under the caption In re CBL & Associates Properties, Inc. Securities Litigation, 1:19-cv-00149-JRG-CHS, and a consolidated amended complaint was filed on November 5, 2019, seeking to represent a class of purchasers from July 29, 2014 through March 26, 2019.
The operative complaint filed in the Securities Class Action Litigation alleges violations of the securities laws, including, among other things, that the defendants made certain materially false and misleading statements and omissions regarding the Company’s contingent liabilities, business, operations, and prospects during the period of time specified above. The plaintiffs seek compensatory damages and attorneys’ fees and costs, among other relief, but have not specified the amount of damages sought. On May 3, 2022, the court dismissed the Company from the Securities Class Action Litigation but declined to dismiss the individual defendants. The court also lifted the stay of the proceedings and, on June 9, 2022, entered a scheduling order. Plaintiffs’ motion for class certification, which was opposed, was fully briefed and pending as of December 31, 2022. Following mediation on January 31, 2023, before a private mediator, the parties reached an agreement in principle to resolve the Securities Class Action Litigation, subject to documentation and court approval. On April 19, 2023, plaintiffs submitted the settlement to the court as part of an Unopposed Motion for Preliminary Approval of Class Action Settlement. On April 24, 2023, the court entered an order preliminarily approving the proposed settlement, subject to a final fairness hearing in August 2023. The settlement is expected to be fully funded by directors and officers liability insurance, subject to the terms and conditions thereof, with no contribution expected from the Company or the individual defendants. By agreeing to resolve the matter, neither the Company nor any of the individual defendants are admitting any liability or wrongdoing, and they have expressly denied both. Rather, defendants entered into the settlement to eliminate the risks, costs, and distractions associated with further litigation of this matter.
The outcome of these legal proceedings cannot be predicted with certainty.
18
On January 12, 2023, a purported shareholder filed a putative class action lawsuit captioned John Haynes v. Charles B. Lebovitz, et al., C.A. No. 2023-0033-NAC, in the Delaware Court of Chancery (the “Delaware Action”), naming the Company and certain directors as defendants. The Delaware Action alleged a claim against the Company for violation of Delaware General Corporation Law § 213(a) due to an improper record date for the 2022 annual meeting, and a claim for breach of fiduciary duty against the director defendants. The Delaware Action sought, among other things, a declaration that the directors breached their fiduciary duties, an equitable accounting, unspecified monetary relief, and attorneys’ fees. Defendants denied that any such relief was warranted, and on February 15, 2023, the Delaware Action was voluntarily dismissed.
The Company is currently involved in certain other litigation that arises in the ordinary course of business, most of which is expected to be covered by liability insurance. Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters using the latest information available. The Company records a liability for litigation if an unfavorable outcome is probable and the amount of loss or range of loss can be reasonably estimated. If an unfavorable outcome is probable and a reasonable estimate of the loss is a range, the Company accrues the best estimate within the range. If no amount within the range is a better estimate than any other amount, the Company accrues the minimum amount within the range. If an unfavorable outcome is probable but the amount of the loss cannot be reasonably estimated, the Company discloses the nature of the litigation and indicates that an estimate of the loss or range of loss cannot be made. If an unfavorable outcome is reasonably possible and the estimated loss is material, the Company discloses the nature and estimate of the possible loss of the litigation. Based on current expectations, such matters, both individually and in the aggregate, are not expected to have a material adverse effect on the liquidity, results of operations, business or financial condition of the Company.
Environmental Contingencies
The Company evaluates potential loss contingencies related to environmental matters using the same criteria described above related to litigation matters. Based on current information, an unfavorable outcome concerning such environmental matters, both individually and in the aggregate, is considered to be reasonably possible. However, the Company believes its maximum potential exposure to loss would not be material to its results of operations or financial condition. The Company has a master insurance policy that provides coverage through 2027 for certain environmental claims up to $40,000 per occurrence and up to $40,000 in the aggregate, subject to deductibles and certain exclusions. At certain locations, individual policies are in place.
Guarantees
The Operating Partnership may guarantee 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 a higher return on the Operating Partnership's investment in the joint venture. The Operating Partnership may receive a fee from the joint venture for providing the guaranty. Additionally, when the Operating Partnership issues a guaranty, the terms of the joint venture agreement typically provide that the Operating Partnership may receive indemnification from the joint venture partner or have the ability to increase its ownership interest. The guarantees expire upon repayment of the debt, unless noted otherwise.
The following table represents the Operating Partnership's guarantees of unconsolidated affiliates' debt as reflected in the accompanying condensed consolidated balance sheets as of June 30, 2023 and December 31, 2022:
As of June 30, 2023
Obligationrecorded to reflectguaranty
Unconsolidated Affiliate
Company'sOwnershipInterest
OutstandingBalance
PercentageGuaranteedby theOperatingPartnership
MaximumGuaranteedAmount
DebtMaturityDate (1)
West Melbourne I, LLC - Phase I
50%
36,159
18,080
Feb-2025
(2)
181
185
West Melbourne I, LLC - Phase II
11,484
5,742
57
Port Orange I, LLC
48,348
24,174
242
247
Ambassador Infrastructure, LLC
65%
100%
Mar-2025
3,895
Jun-2030
Atlanta Outlet JV, LLC
Nov-2023
Total guaranty liability
556
561
For the three and six months ended June 30, 2023 and 2022, the Company evaluated each guaranty, listed in the table above, individually by evaluating the debt service ratio, cash flow forecasts and the performance of each loan, where applicable. The result of the analysis was that each loan is current and performing. The Company did not record a credit loss related to the guarantees listed in the table above for the three or six months ended June 30, 2023 and 2022.
Note 12 – Share-Based Compensation
Restricted Stock Awards
Compensation expense is recognized on a straight-line basis over the requisite service period. The share-based compensation expense related to restricted stock awards granted under the CBL & Associates Properties, Inc. 2021 Equity Incentive Plan ("EIP") was $1,797 and $3,640 for the three and six months ended June 30, 2023, respectively. The share-based compensation expense related to the restricted stock awards was $1,696 and $3,318 for the three and six months ended June 30, 2022, respectively. As of June 30, 2023, there was $16,530 of total unrecognized compensation cost related to unvested restricted stock awards, which is expected to be recognized over a weighted-average period of 2.4 years. Share-based compensation cost resulting from share-based awards is recorded at the Management Company, which is a taxable entity.
A summary of the status of the Company’s nonvested restricted stock awards as of June 30, 2023, and changes during the six months ended June 30, 2023, are presented below:
Shares
Weighted-AverageGrant-DateFair Value Per Share
Nonvested at January 1, 2023
662,875
27.42
Granted
356,278
26.21
Vested
(265,341
26.25
Forfeited
(12,780
26.13
Nonvested at June 30, 2023
741,032
27.28
The total grant-date fair value of restricted stock awards granted during the six months ended June 30, 2023 was $9,336. The total fair value of restricted stock awards that vested during the six months ended June 30, 2023 was $6,755.
Performance Stock Awards
In February 2023, the compensation committee of the board of directors established a long-term incentive program (“LTIP”) under the EIP and approved 2023 LTIP awards consisting of both a PSU component (55% - 60% of the LTIP award) and a restricted stock award component (40% - 45% of the LTIP award). The amount of common stock that may be issued for the PSU component upon the conclusion of the applicable three-year performance period will be determined by two measures: (i) a portion (40%) of the number of shares issued will be determined based on the Company’s achievement of specified levels of long-term relative Total Stockholder Return (“TSR”) performance (stock price appreciation plus aggregate dividends) versus the Retail Sector Component (excluding companies comprising the Free-Standing Subsector) of the Financial Times Stock Exchange ("FTSE") National Association of Real Estate Investment Trusts ("NAREIT") All Equity REIT Index, provided that at least a “Threshold” level must be attained for any shares to be received, and (ii) a portion (60%) of such number of shares issued will be determined based on the Company’s absolute TSR performance over such period, provided again that at least a “Threshold” level must be attained for any shares to be received. The restricted stock award component consists of time-vesting restricted stock, of which a third of the award vests equally over the three-year performance period.
Compensation cost for the PSUs granted in February 2023 is recognized on a straight-line basis over the service period since it is longer than the performance period. The resulting expense is recorded regardless of whether any PSU awards are earned as long as the required service period is met. For the PSUs granted in February 2022, each quarter, management assesses the probability that the measures associated with the Company's outstanding PSU awards will be attained. The Company begins recognizing compensation expense on a straight-line basis over the remaining service period once the PSU award measures are deemed probable of achievement. See Note 16 to the consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 for a description of the PSUs granted in February 2022. Share-based compensation expense related to the 2022 and 2023 PSUs granted under the EIP was $1,410 and $2,819 for the three and six months ended June 30, 2023, respectively; and $1,122 and $2,243 for the three and six months ended June 30, 2022, respectively. The unrecognized compensation expense related to the 2022 and 2023 PSUs was $15,626 as of June 30, 2023, which is expected to be recognized over a weighted-average period of 2.8 years.
A summary of the status of the Company’s outstanding 2022 and 2023 PSU awards as of June 30, 2023, and changes during the six months ended June 30, 2023, are presented below:
PSUs
Outstanding at January 1, 2023
607,128
24.69
2023 PSUs granted
157,789
38.79
Incremental PSUs granted (1)
22,621
23.81
(51,019
24.87
Outstanding at June 30, 2023
736,519
27.82
The total grant-date fair value of PSU awards granted during the six months ended June 30, 2023 was $6,120.
The following table summarizes the assumptions used in the Monte Carlo simulation pricing model related to the PSUs granted in 2023:
2023 PSUs
Grant date
February 17, 2023
Fair value per share on valuation date (1)
Risk-free interest rate (2)
4.37
Expected share price volatility (3)
62.50
Note 13 – Noncash Investing and Financing Activities
The Company’s noncash investing and financing activities were as follows:
Additions to real estate assets accrued but not yet paid
8,595
10,195
Accrued dividends and distributions payable
7,956
Deconsolidation upon loss of control (1):
Decrease in real estate assets
(9,015
(18,810
Decrease in mortgage and other indebtedness
37,693
56,226
Decrease in operating assets and liabilities
3,352
5,686
Decrease in intangible lease and other assets
(3,879
(6,852
Note 14 – Subsequent Events
In July 2023, the Company redeemed $102,950 in U.S. Treasury securities and purchased $102,968 in new U.S. Treasury securities with maturities through July 2024.
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 condensed consolidated financial statements and accompanying notes that are included in this Form 10-Q. 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 condensed consolidated financial statements. Unless stated otherwise or the context otherwise requires, references to the “Company,” “we,” “us” and “our” mean 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. All statements other than statements of historical fact should be considered to be forward-looking statements. In many cases, these forward-looking statements may be identified by the use of words such as “will,” “may,” “should,” “could,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “projects,” “goals,” “objectives,” “targets,” “predicts,” “plans,” “seeks,” and variations of these words and similar expressions. Any forward-looking statement speaks only as of the date on which it is made and is qualified in its entirety by reference to the factors discussed throughout this report.
Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, forward-looking statements are not guarantees of future performance or results and we can give no assurance that these expectations will be attained. It is possible that actual results may differ materially from those indicated by these forward-looking statements due to a variety of known and unknown risks and uncertainties. In addition to the risk factors described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, such known risks and uncertainties include, without limitation:
This list of risks and uncertainties is only a summary and is not intended to be exhaustive. 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 REIT that is engaged in the ownership, development, acquisition, leasing, management and operation of regional shopping malls, outlet centers, lifestyle centers, open-air centers and other properties. See Note 1 to the condensed consolidated financial statements for information on our property interests as of June 30, 2023. We have elected to be taxed as a REIT for federal income tax purposes.
Leasing metrics were the strongest in several years, with positive new and renewal lease spreads and year-over-year occupancy growth.
We continue to make progress addressing our loan maturities and de-risking our balance sheet. During the quarter, we closed a two-year extension on the loan secured by Cross Creek Mall and are currently in process on the refinancing of the loan secured by The Outlet Shoppes at Atlanta.
We had a net loss for the three and six months ended June 30, 2023 of $22.7 million and $22.1 million, respectively, as compared to a net loss for the three and six months ended June 30, 2022 of $43.8 million and $87.0 million, respectively. We had a net loss attributable to common shareholders for the three and six months ended June 30, 2023 of $21.1 million and $19.1 million, respectively, as compared to a net loss attributable to common shareholders for the three and six months ended June 30, 2022 of $41.6 million and $82.3 million, respectively.
Significant items that affected comparability between the three-month periods include:
Significant items that affected comparability between the six-month periods include:
Our focus is on continuing to execute our strategy to improve occupancy, drive rent growth and transform the offerings available at our diverse portfolio of dynamic properties to include a targeted mix of retail, service, dining, entertainment and other non-retail uses, primarily through the re-tenanting of former anchor locations as well as diversification of in-line tenancy. This operational strategy is also supported by our balance sheet strategy focused on reducing overall debt, extending our debt maturity schedule and lowering our overall cost of borrowings to limit maturity risk, improve net cash flow and enhance enterprise value. While the industry and our Company continue to face challenges, some of which may not be in our control, we believe that the strategies in place to redevelop our properties and diversify our tenant mix will contribute to stabilization of our portfolio and revenues in future years.
Same-center NOI and FFO are non-GAAP measures. For a description of same-center NOI, a reconciliation from net income (loss) to same-center NOI, and an explanation of why we believe this is a useful performance measure, see Non-GAAP Measure - Same-center Net Operating Income in Results of Operations. For a description of FFO, a reconciliation from net income (loss) attributable to common shareholders to FFO allocable to Operating Partnership common unitholders, and an explanation of why we believe this is a useful performance measure, see Non-GAAP Measure - Funds from Operations.
23
Results of Operations
Properties that were in operation for the entire year during 2022 and the six months ended June 30, 2023 are referred to as the "Comparable Properties." Since January 2022, we have deconsolidated:
Deconsolidations
Property
Location
Date of Deconsolidation
Greenbrier Mall (1)(2)
Chesapeake, VA
March 2022
Alamance Crossing East (1)
Burlington, NC
February 2023
Comparison of the Three Months Ended June 30, 2023 to the Three Months Ended June 30, 2022
ComparableProperties
Change
Core
Non-core
Deconsolidation
(6,990
(5,093
(643
(1,315
61
36
(197
(140
(18
(39
(7,151
(5,197
(661
(1,354
Rental revenues from the Comparable Properties decreased primarily due to lower percentage rents and an unfavorable variance in the estimate for uncollectable revenues as compared to the prior-year period.
Operating Expenses
(195
(437
214
(227
(275
(94
132
239
191
(20
68
Property operating expenses
(183
(521
(96
414
14,734
14,276
(179
637
2,294
Total operating expenses
17,940
16,892
1,051
272
Depreciation and amortization expense at the Comparable Properties decreased primarily due to assets becoming fully depreciated or amortized since the prior-year period related to the shorter useful lives that were implemented upon the adoption of fresh start accounting when we emerged from bankruptcy.
General and administrative expenses decreased primarily due to professional fees associated with loan modifications and extensions, and fees incurred to obtain credit ratings on our secured term loan in the prior-year period. The decrease was partially offset by higher compensation and share-based compensation expenses as compared to the prior-year period.
24
Other Income and Expenses
Interest and other income increased $2.1 million during the three months ended June 30, 2023 as compared to the prior-year period. The increase was primarily due to holding U.S. Treasury securities that carry higher interest rates in the current-year period.
Interest expense decreased $10.9 million during the three months ended June 30, 2023 as compared to the prior-year period. The decrease was primarily due to $26.0 million less accretion of property-level debt discounts as certain discounts became fully accreted since the prior-year period. The property-level debt discounts were recognized in conjunction with recording our property-level debt at fair value upon the adoption of fresh start accounting. Also, the decrease includes $6.5 million of interest expense in the prior-year period on the secured notes that were fully redeemed in 2022. The decrease in interest expense was partially offset by an increase of $13.6 million in the current period related to the open-air centers and outparcels loan that was entered into during the second quarter of 2022 and higher interest expense on the term loan due to increased variable interest rates.
Equity in earnings of unconsolidated affiliates was $0.8 million for the three months ended June 30, 2023. Equity in earnings of unconsolidated affiliates was $2.0 million for the three months ended June 30, 2022. The decrease in the current-year period as compared to the prior-year period relates to recognizing equity in losses for the three months ended June 30, 2023 in an unconsolidated affiliate where our investment in that unconsolidated affiliate had previously been zero.
Comparison of the Six Months Ended June 30, 2023 to the Six Months Ended June 30, 2022
(11,998
(8,324
(328
(3,408
62
701
403
522
(38
(76
(5
(10,894
(7,101
(366
(3,484
(1,465
(2,327
155
647
60
(580
(757
(133
301
(719
(1,031
(8
321
(1
(2,764
(4,115
1,269
30,408
29,089
(378
1,710
(13
1,139
(28
636
29,643
26,721
(364
2,979
307
Total property operating expenses at the Comparable Properties increased primarily due to the completion of previously delayed maintenance projects and the timing of certain third-party contracts.
25
Interest and other income increased $4.6 million during the six months ended June 30, 2023 as compared to the prior-year period. The increase was primarily due to holding U.S. Treasury securities that carry higher interest rates in the current-year period.
Interest expense decreased $58.1 million during the six months ended June 30, 2023 as compared to the prior-year period. The decrease was primarily due to $80.4 million less accretion of property-level debt discounts as certain discounts became fully accreted since the prior-year period. The property-level debt discounts were recognized in conjunction with recording our property-level debt at fair value upon the adoption of fresh start accounting. Also, the decrease includes $17.3 million of interest expense in the prior-year period on the secured notes that were fully redeemed in 2022. The decrease in interest expense was partially offset by an increase of $27.3 million in the current period related to the open-air centers and outparcels loan that was entered into during the second quarter of 2022 and higher interest expense on the term loan due to increased variable interest rates.
For the six months ended June 30, 2023, we recorded a $28.2 million gain on deconsolidation related to Alamance Crossing East that was deconsolidated due to a loss of control when the mall was placed into receivership in connection with the foreclosure process. For the six months ended June 30, 2022, we recorded a $36.3 million gain on deconsolidation related to Greenbrier Mall that was deconsolidated due to a loss of control when the mall was placed into receivership in connection with the foreclosure process.
Equity in losses of unconsolidated affiliates was $0.4 million for the six months ended June 30, 2023. Equity in earnings of unconsolidated affiliates was $10.6 million for the six months ended June 30, 2022. The decrease in the current-year period as compared to the prior-year period relates to recognizing equity in losses for the six months ended June 30, 2023 in an unconsolidated affiliate where our investment in that unconsolidated affiliate had previously been zero.
Non-GAAP Measure
Same-center Net Operating Income
NOI is a supplemental non-GAAP measure of the operating performance of our shopping centers and other properties. We define NOI as property operating revenues (rental revenues and other income) less property operating expenses (property operating, real estate taxes and maintenance and repairs).
We compute NOI based on the Operating Partnership's pro rata share of both consolidated and unconsolidated properties. We believe that presenting NOI and same-center NOI (described below) based on our Operating Partnership’s pro rata share of both consolidated and unconsolidated properties is useful since we conduct substantially all our business through our Operating Partnership and, therefore, it reflects the performance of the properties in absolute terms regardless of the ratio of ownership interests of our common shareholders and the noncontrolling interest in the Operating Partnership. Our definition of NOI may be different than that used by other companies, and accordingly, our calculation of NOI may not be comparable to that of other companies.
Since NOI includes only those revenues and expenses related to the operations of our shopping center properties, we believe that same-center NOI provides a measure that reflects trends in occupancy rates, rental rates, sales at our properties and operating costs and the impact of those trends on our results of operations. Our calculation of same-center NOI excludes lease termination income, straight-line rent adjustments, amortization of above and below market lease intangibles and write-offs of landlord inducement assets in order to enhance the comparability of results from one period to another.
We include a property in our same-center pool when we have owned all or a portion of the property since January 1 of the preceding calendar year and it has been in operation for both the entire preceding calendar year and current year-to-date period. New properties are excluded from same-center NOI until they meet these criteria. Properties excluded from the same-center pool that would otherwise meet these criteria are categorized as excluded properties. We exclude properties for which we are working or intend to work with the lender on a restructure of the terms of the loan secured by the property or convey the secured property to the lender (“Excluded Properties”). As of June 30, 2023, Alamance Crossing East and WestGate Mall were classified as Excluded Properties.
Due to the exclusions noted above, same-center NOI should only be used as a supplemental measure of our performance and not as an alternative to GAAP operating income (loss) or net income (loss).
26
A reconciliation of our same-center NOI to net loss for the three- and six-month periods ended June 30, 2023 and 2022 is as follows (in thousands):
Adjustments: (1)
53,467
72,357
110,709
148,921
60,786
74,252
119,792
180,838
Abandoned projects expense
Loss (gain) on sales of real estate assets, net of taxes and noncontrolling interests' share
(1,537
Gain on sales of real estate assets of unconsolidated affiliates
(784
(768
(629
Adjustment for unconsolidated affiliates with negative investment
888
(10,460
2,479
(23,007
Loss on impairment, net of taxes
186
(74
(65
(146
(613
958
Income tax provision (benefit)
219
(472
329
Lease termination fees
(793
(1,052
(1,954
(2,448
Straight-line rent and above- and below-market lease amortization
3,401
467
7,090
3,707
Net loss attributable to noncontrolling interests in other consolidated subsidiaries
General and administrative expenses
16,156
18,450
35,385
36,524
Management fees and non-property level revenues
(5,038
(525
(10,018
(1,049
Operating Partnership's share of property NOI
107,499
111,924
214,515
226,580
Non-comparable NOI
(425
(3,972
(1,918
(8,178
Total same-center NOI
107,074
107,952
212,597
218,402
Same-center NOI decreased 0.8% for the three months ended June 30, 2023 as compared to the prior-year period. The $0.8 million decrease for the three months ended June 30, 2023 compared to the same period in 2022 primarily consisted of a $1.1 million decrease in revenues offset by a $0.3 million decrease in operating expenses. Rental revenues were $1.3 million lower primarily due to decreased percentage rents and an unfavorable variance in the estimate for uncollectable revenues in the current-year period as compared to the prior-year period.
Same-center NOI decreased 2.7% for the six months ended June 30, 2023 as compared to the prior-year period. The $5.8 million decrease for the six months ended June 30, 2023 compared to the same period in 2022 primarily consisted of a $2.1 million decrease in revenues and a $3.7 million increase in operating expenses. Rental revenues were $2.9 million lower primarily due to decreased percentage rents and an unfavorable variance in the estimate for uncollectable revenues in the current-year period as compared to the prior-year period. Property operating expenses were higher in the current-year period as compared to the prior-year period primarily due to the completion of previously delayed maintenance projects and timing of certain third-party contracts.
Operational Review
The shopping center business is, to some extent, seasonal in nature with tenants typically achieving the highest levels of sales during the fourth quarter due to the holiday season, which generally results in higher percentage rents in the fourth quarter. Additionally, malls, lifestyle centers and outlet centers earn a large portion of their rents from short-term tenants during the holiday period. Thus, occupancy levels and revenue production are generally the highest in the fourth quarter of each year. Results of operations realized in any one quarter may not be indicative of the results likely to be experienced over the course of the fiscal year.
We derive the majority of our revenues from the malls, lifestyle centers and outlet centers. The sources of our revenues by property type were as follows:
Malls, Lifestyle Centers and Outlet Centers
85.1
86.1
All Other
14.9
13.9
27
Inline and Adjacent Freestanding Tenant Store Sales
Inline and adjacent freestanding tenant store sales include reporting mall, lifestyle center and outlet center tenants of 10,000 square feet or less and exclude license agreements, which are retail leases that are temporary or short-term in nature and generally last more than three months but less than twelve months. The following is a comparison of our same-center tenant sales per square foot for mall, lifestyle center and outlet center tenants of 10,000 square feet or less (Excluded Properties are not included in sales metrics):
Sales Per Square Foot for the Trailing Twelve Months Ended June 30,
% Change
Mall, Lifestyle Center and Outlet Center same-center sales per square foot
425
442
(3.8)%
Occupancy
Our portfolio occupancy is summarized in the following table (Excluded Properties are not included in occupancy metrics):
As of June 30,
Total portfolio
89.7%
89.5%
Malls, Lifestyle Centers and Outlet Centers:
Total malls
88.0%
87.9%
Total lifestyle centers
92.7%
89.4%
Total outlet centers
88.4%
87.5%
Total same-center malls, lifestyle centers and outlet centers
88.5%
All Other:
Total open-air centers
94.7%
94.4%
Total other
74.2%
91.7%
Leasing
The following is a summary of the total square feet of leases signed in the three- and six-month periods ended June 30, 2023 and 2022:
Operating portfolio:
New leases
289,181
395,752
575,194
630,642
Renewal leases
586,036
633,563
1,574,527
1,450,369
Total leased
875,217
1,029,315
2,149,721
2,081,011
28
Average annual base rents per square foot are based on contractual rents in effect as of June 30, 2023 and 2022, including the impact of any rent concessions. Average annual base rents per square foot for comparable small shop space of less than 10,000 square feet were as follows for each property type:
Total portfolio (1)
25.49
24.99
30.03
29.43
30.43
30.02
29.30
27.88
27.76
26.51
15.29
15.10
19.94
19.31
Results from new and renewal leasing of comparable small shop space of less than 10,000 square feet during the three- and six-month period ended June 30, 2023 for spaces that were previously occupied, based on the contractual terms of the related leases inclusive of the impact of any rent concessions, are as follows:
Property Type
SquareFeet
Prior GrossRent PSF
New InitialGross RentPSF
% ChangeInitial
New AverageGross RentPSF (1)
% ChangeAverage
Three Months Ended June 30, 2023:
All Property Types (2)
410,725
38.33
40.99
6.9
41.82
9.1
Malls, Lifestyle Centers & Outlet Centers
352,206
40.81
42.89
5.1
43.73
7.2
40,014
34.10
41.56
21.9
44.21
29.6
312,192
41.67
43.07
3.4
43.67
4.8
Six Months Ended June 30, 2023:
1,147,811
35.26
36.34
3.1
37.06
1,040,724
36.57
37.13
1.5
37.85
3.5
82,414
36.15
42.81
18.4
45.14
24.9
958,310
36.61
36.65
0.1
37.22
1.7
New and renewal leasing activity of comparable small shop space of less than 10,000 square feet based on the lease commencement date is as follows:
NumberofLeases
Term(inyears)
InitialRentPSF
AverageRentPSF
ExpiringRentPSF
Initial RentSpread
Average RentSpread
Commencement 2023:
New
53
159,063
6.34
37.38
39.42
31.92
5.46
17.1
7.50
23.5
Renewal
411
1,369,901
2.65
34.35
34.69
33.88
0.47
1.4
0.81
2.4
Commencement 2023 Total
464
1,528,964
3.07
34.67
35.18
33.68
0.99
2.9
1.50
4.5
Commencement 2024:
6,953
7.67
47.35
51.16
39.50
7.85
19.9
11.66
29.5
64
161,556
2.61
47.39
47.70
46.73
0.66
0.97
2.1
Commencement 2024 Total
67
168,509
2.84
47.84
46.43
0.96
1.41
3.0
Total 2023/2024
531
1,697,473
3.04
35.93
36.44
34.94
2.8
4.3
Liquidity and Capital Resources
As of June 30, 2023, we had $279.8 million available in unrestricted cash and U.S. Treasury securities. Our total pro rata share of debt, excluding unamortized deferred financing costs and debt discounts, at June 30, 2023 was $2,699.6 million, which includes a $41.1 million unconsolidated property loan that is in receivership. We had $53.9 million in restricted cash at June 30, 2023 related to cash held in escrow accounts for insurance, real estate taxes, capital expenditures and tenant allowances as required by the terms of certain mortgage notes payable, as well as amounts related to cash management agreements with lenders of certain property-level mortgage indebtedness, which are designated for debt service and operating expense obligations. We also had restricted cash of $34.8 million related to the properties that secure the corporate term loan and the open-air centers and outparcels loan of which we may receive a portion via distributions semiannually and quarterly in accordance with the provisions of the term loan and the open-air centers and outparcels loan, respectively.
During the three and six months ended June 30, 2023, we continued to reinvest the cash from maturing U.S. Treasury securities into new U.S. Treasury securities. We designated our U.S. Treasury securities as available-for-sale. As of June 30, 2023, our U.S. Treasury securities have maturities through April 2024. Subsequent to June 30, 2023, we redeemed and purchased additional U.S. Treasury securities. See Note 14 for additional information.
During the six months ended June 30, 2023, we extended the maturity dates on four loans, which had a combined outstanding balance of $320.0 million at our share as of June 30, 2023. In April 2023, the Company and its joint venture partner entered into a new $148.0 million loan secured by Friendly Center and The Shops at Friendly Center and the $7.2 million loan secured by The Outlet Shoppes of the Bluegrass - Phase II was paid off. See Note 7 and Note 8 for additional information.
In May 2023, the Operating Partnership entered into an interest rate swap with a notional amount of $32.0 million to fix the interest rate at 7.3975% on $32.0 million of the variable rate portion of the open-air centers and outparcels loan. The swap has a maturity date of June 7, 2027. We designated the swap as a cash flow hedge on our variable rate debt. See Note 8 for additional information.
In February 2023, we deconsolidated Alamance Crossing East as a result of losing control when the property was placed in receivership. The loan secured by Alamance Crossing East had an outstanding balance of $41.1 million as of June 30, 2023.
We paid common stock dividends of $0.375 per share in each of the first and second quarters of 2023. Additionally, our board of directors declared a special dividend of $2.20 per share of common stock, which was paid in cash on January 18, 2023, to stockholders of record as of the close of business on December 12, 2022.
During the six months ended June 30, 2023, we sold five land parcels which generated approximately $5.3 million in gross proceeds at our share.
After factoring in all financing activity subsequent to June 30, 2023, our total share of consolidated, unconsolidated and other outstanding debt, excluding debt discounts and deferred financing costs, maturing during 2023, assuming all extension options are elected, is $37.2 million, and our total share of consolidated, unconsolidated and other outstanding debt, excluding debt discounts and deferred financing costs, that matured prior to 2023, which remains outstanding at June 30, 2023, is $69.8 million. We are in discussions with the existing lenders to modify and extend or otherwise refinance the loans.
Cash Flows - Operating, Investing and Financing Activities
There was $113.6 million of cash, cash equivalents and restricted cash as of June 30, 2023, a decrease of $51.0 million from June 30, 2022. Of this amount, $24.9 million was unrestricted cash and cash equivalents as of June 30, 2023. Also, at June 30, 2023, we had $254.9 million in U.S. Treasuries with maturities through April 2024.
Our net cash flows are summarized as follows (in thousands):
(3,853
22,982
(70,145
Net cash flows
(51,016
30
Cash Provided By Operating Activities
Cash provided by operating activities decreased primarily due to lower percentage rents and higher interest expense due to rising variable interest rates, as well as higher operating expenses related to previously delayed maintenance projects and the timing of certain third-party contracts.
Cash Provided By Investing Activities
Cash provided by investing activities increased primarily due to more net redemptions of U.S. Treasury securities during the current-year period as compared to the prior-year period, as well as higher proceeds from sales of real estate assets during the six months ended June 30, 2023. The increase was partially offset by a decrease in distributions from unconsolidated affiliates.
Cash Used In Financing Activities
Cash used in financing activities increased primarily due to the payment of a first and second quarter 2023 common stock dividend and the special dividend that was declared during the fourth quarter of 2022. There were no dividends paid during the first and second quarters of 2022. The increase was partially offset by a reduction in principal payments during the current-year period as compared to the prior-year period.
Debt
The following tables summarize debt based on our pro rata ownership share, including our pro rata share of unconsolidated affiliates and excluding noncontrolling investors’ share of consolidated properties. Prior to consideration of unamortized deferred financing costs or debt discounts, of our $2,699.6 million outstanding debt at June 30, 2023, $2,550.5 million constituted non-recourse debt obligations and $149.1 million constituted recourse debt obligations. We believe the tables below provide investors and lenders a clearer understanding of our total debt obligations and liquidity (in thousands):
June 30, 2023:
Consolidated
Other Debt (1)
UnconsolidatedAffiliates
Weighted-AverageInterestRate (2)
(25,222
41,122
612,873
1,412,274
4.97%
Open-air centers and outparcels loan
6.95%
(3)
Recourse loans on operating properties
9,149
3.76%
622,022
1,601,423
5.18%
(13,177
50,389
92,652
8.07%
12,530
7.71%
9.26%
Secured term loan
7.92%
62,919
1,098,220
8.15%
(38,399
684,941
2,699,643
6.39%
298
(3,397
(18,506
4,680
(49,843
(33,421
681,544
2,631,294
31
December 31, 2022:
(25,420
611,215
1,429,429
4.57%
10,427
3.67%
621,642
1,619,856
4.83%
(13,387
51,539
94,642
6.91%
20,045
7.54%
8.22%
6.87%
71,584
1,124,139
7.10%
(38,807
693,226
2,743,995
5.76%
317
(2,142
(18,926
Debt discounts (3)
7,448
(64,841
(31,042
691,084
2,660,228
The weighted-average remaining term of our total share of consolidated and unconsolidated debt, excluding debt discounts and deferred financing costs, was 2.7 years and 2.4 years at June 30, 2023 and December 31, 2022, respectively. The weighted-average remaining term of our pro rata share of fixed-rate debt, excluding debt discounts and deferred financing costs, was 2.9 years and 2.3 years at June 30, 2023 and December 31, 2022, respectively.
As of June 30, 2023 and December 31, 2022, our total share of consolidated and unconsolidated variable-rate debt, excluding debt discounts and deferred financing costs, represented 40.7% and 41.0%, respectively, of our total pro rata share of debt, excluding debt discounts and deferred financing costs.
See Note 7 to the condensed consolidated financial statements for information concerning activity related to unconsolidated affiliates.
We paid common stock dividends of $0.375 per share in each of the first and second quarters of 2023. The decision to declare and pay dividends on any outstanding shares of our common stock, as well as the timing, amount and composition of any such future dividends, will be at the sole discretion of our board of directors and will depend on our earnings, taxable income, FFO, liquidity, financial condition, capital requirements, contractual prohibitions or other limitations under our then-current indebtedness, the annual distribution requirements under the REIT provisions of the Internal Revenue Code, Delaware law and such other factors as our board of directors deems relevant. Any dividends payable will be determined by our board of directors based upon the circumstances at the time of declaration. Our actual results of operations will be affected by a number of factors, including the revenues received from our properties, our operating expenses, interest expense, capital expenditures and the ability of the anchors and tenants at our properties to meet their obligations for payment of rents and tenant reimbursements.
Capital Expenditures
The following table, which excludes expenditures for developments, redevelopments and expansions, summarizes our capital expenditures, including our share of unconsolidated affiliates' capital expenditures, for the three and six months ended June 30, 2023 compared to the same period in 2022 (in thousands):
Tenant allowances (1)
3,075
4,173
6,649
7,040
Maintenance capital expenditures:
Parking area and parking area lighting
865
980
1,196
1,513
Roof replacements
1,425
126
Other capital expenditures
4,331
2,275
5,989
4,097
Total maintenance capital expenditures
6,084
3,257
8,610
5,736
Capitalized overhead
435
374
1,135
823
Capitalized interest
111
147
217
375
Total capital expenditures
9,705
7,951
16,611
13,974
Annual capital expenditures budgets are prepared for each of our properties that are 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, and readily available cash on hand will provide the necessary funding for these expenditures.
Developments
Redevelopments Completed as of June 30, 2023
(Dollars in thousands)
CBL's Share of
CBLOwnershipInterest
TotalProjectSquare Feet
TotalCost (1)
Cost toDate (2)
2023Cost
OpeningDate
InitialUnleveragedYield
Redevelopments:
The Terrace - Nordstrom Rack (former Staples)
Chattanooga, TN
92%
24,155
2,513
1,694
72
Q2 '23
13.0%
York Town Center - Burlington (former Bed Bath & Beyond)
York, PA
28,000
1,247
1,268
281
Q1 '23
18.5%
Total Properties Completed
52,155
3,760
2,962
353
Properties Under Development at June 30, 2023
Expected OpeningDate
Mall Expansion:
Sunrise Mall - Bubba's 33
Brownsville, TX
7,575
1,049
997
797
Summer '23
18.0%
Open-Air Center:
Fremaux Town Center - Marshall's
Slidell, LA
22,132
2,356
632
570
Fall '23
10.5%
Outparcel Development:
Mayfaire Town Center - hotel development
Wilmington, NC
49%
83,021
15,435
2,255
1,082
Spring '24
11.0%
Hamilton Place - Crunch Fitness
36,640
2,648
56
Winter '24
23.3%
Kirkwood Mall - Five Below
Bismarck, ND
19,478
2,323
707
704
16.3%
56,118
4,971
781
760
Total Properties Under Development
168,846
23,811
4,665
3,209
Off-Balance Sheet Arrangements
We have ownership interests in 25 unconsolidated affiliates as of June 30, 2023 that are described in Note 7 to the condensed consolidated financial statements. The unconsolidated affiliates are accounted for using the equity method of accounting and are reflected in the condensed 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:
We may guarantee 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 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 or have the ability to increase our ownership interest.
34
See Note 11 to the condensed consolidated financial statements for information related to our guarantees of unconsolidated affiliates' debt as of June 30, 2023 and December 31, 2022.
Critical Accounting Policies
Our discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the financial statements and disclosures. Some of these estimates and assumptions require application of difficult, subjective, and/or complex judgment about the effect of matters that are inherently uncertain and that may change in subsequent periods. We evaluate our estimates and assumptions on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Our Annual Report on Form 10-K for the year ended December 31, 2022 contains a discussion of our critical accounting policies and estimates in the Management's Discussion and Analysis of Financial Condition and Results of Operations section. There have been no material changes to these policies and estimates during the six months ended June 30, 2023. Our significant accounting policies are disclosed in Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022
Funds from Operations
FFO is a widely used non-GAAP measure of the operating performance of real estate companies that supplements net income (loss) determined in accordance with GAAP. NAREIT defines FFO as net income (loss) (computed in accordance with GAAP) excluding gains or losses on sales of depreciable operating properties and impairment losses of depreciable properties, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures and noncontrolling interests. Adjustments for unconsolidated partnerships, joint ventures and noncontrolling interests are calculated on the same basis. We define FFO as defined above by NAREIT. 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 real estate assets have historically risen or fallen with market conditions, we believe that FFO, which excludes historical cost depreciation and amortization, enhances investors’ understanding of our operating performance. The use of FFO as an indicator of financial performance is influenced not only by the operations of our properties and interest rates, but also by our capital structure.
We believe FFO allocable to Operating Partnership common unitholders is a useful performance measure since we conduct substantially all our business through our Operating Partnership and, therefore, it reflects the performance of our properties in absolute terms regardless of the ratio of ownership interests of our common shareholders and the noncontrolling interest in our Operating Partnership.
In our reconciliation of net income (loss) attributable to common shareholders to FFO allocable to Operating Partnership common unitholders that is presented below, we make an adjustment to add back noncontrolling interest in income (loss) of our Operating Partnership in order to arrive at FFO of the Operating Partnership common unitholders.
FFO does not represent cash flows from operations as defined by GAAP, is not necessarily indicative of cash available to fund all cash flow needs and should not be considered as an alternative to net income (loss) for purposes of evaluating our operating performance or to cash flow as a measure of liquidity.
We believe that it is important to identify the impact of certain significant items on our FFO measures for a reader to have a complete understanding of our results of operations. Therefore, we have also presented adjusted FFO measures excluding these significant items from the applicable periods. Please refer to the reconciliation of net income (loss) attributable to common shareholders to FFO allocable to Operating Partnership common unitholders below for a description of these adjustments.
FFO of the Operating Partnership increased to $32.4 million for the three months ended June 30, 2023 from $30.9 million for the prior-year period. Excluding the adjustments noted above, FFO of the Operating Partnership, as adjusted, decreased to $50.1 million for the three months ended June 30, 2023 from $59.9 million for the prior-year period. The decrease in FFO, as adjusted, for the three months ended June 30, 2023 was primarily driven by lower percentage rents, an unfavorable variance in the estimate for uncollectable revenues in the current-year period as compared to the prior-year period and higher interest expense due to rising variable interest rates. The decrease was partially offset by increased interest income on our U.S. Treasury securities.
FFO of the Operating Partnership increased to $91.7 million for the six months ended June 30, 2023 from $65.9 million for the prior-year period. Excluding the adjustments noted above, FFO of the Operating Partnership, as adjusted, decreased to $99.9 million for the six months ended June 30, 2023 from $117.3 million for the prior-year period. The decrease in FFO, as adjusted, for the six months ended June 30, 2023 was primarily driven by lower percentage rents, an unfavorable variance in the estimate for uncollectable revenues in the current-year period as compared to the prior-year period and higher interest expense due to rising variable interest rates, as well as previously delayed maintenance projects and timing of certain third-party contracts. The decrease was partially offset by increased interest income on our U.S. Treasury securities.
The reconciliation of net loss attributable to common shareholders to FFO allocable to Operating Partnership common unitholders for the three and six months ended June 30, 2023 and 2022 is as follows (in thousands):
Noncontrolling interest in loss of Operating Partnership
(44
(59
210
Depreciation and amortization expense of:
Consolidated properties
49,742
64,476
Unconsolidated affiliates
4,433
8,819
9,071
17,339
Non-real estate assets
(304
(203
(452
(401
Noncontrolling interests' share of depreciation and amortization in other consolidated subsidiaries
(708
(938
(1,373
(1,837
Gain on depreciable property
FFO allocable to Operating Partnership common unitholders
32,375
30,908
91,728
65,908
Debt discount accretion, including our share of unconsolidated affiliates and net of noncontrolling interests' share (1)
16,574
50,036
33,190
128,499
Adjustment for unconsolidated affiliates with negative investment (2)
Senior secured notes fair value adjustment (3)
(395
Litigation settlement (4)
Non-cash default interest expense (5)
287
(9,344
(18,220
Gain on deconsolidation (6)
Reorganization items, net (7)
FFO allocable to Operating Partnership common unitholders, as adjusted
50,050
59,869
99,909
117,347
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various market risk exposures, including interest rate risk. The following discussion regarding our risk management activities includes forward-looking statements that involve risk and uncertainties. Estimates of future performance and economic conditions are reflected assuming certain changes in interest rates. Caution should be used in evaluating our overall market risk from the information presented below, as actual results may differ.
Interest Rate Risk
Based on our proportionate share of consolidated and unconsolidated variable-rate debt at June 30, 2023, 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.
Based on our proportionate share of total consolidated, unconsolidated and other debt at June 30, 2023, a 0.5% increase in interest rates would decrease the fair value of debt by approximately $13.4 million, while a 0.5% decrease in interest rates would increase the fair value of debt by approximately $13.7 million.
ITEM 4: Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this quarterly 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 the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. The Company's disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and to ensure that information we are required to disclose is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings
The information in this Item 1 is incorporated by reference herein from Note 11.
ITEM 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the risks that could materially affect our business, financial condition or results of operations that are discussed under the caption “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022. There have been no material changes to such risk factors since the filing of our Annual Report.
ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
ITEM 3: Defaults Upon Senior Securities
ITEM 4: Mine Safety Disclosures
ITEM 5: Other Information
None.
ITEM 6: Exhibits
INDEX TO EXHIBITS
Exhibit
Number
Description
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 for CBL & Associates Properties, Inc.
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 for CBL & Associates Properties, Inc.
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 for CBL & Associates Properties, Inc.
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 for CBL & Associates Properties, Inc.
101.INS
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. (Filed herewith.)
101.SCH
Inline XBRL Taxonomy Extension Schema Document. (Filed herewith.)
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document. (Filed herewith.)
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document. (Filed herewith.)
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document. (Filed herewith.)
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document. (Filed herewith.)
104
Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101.*). (Filed herewith.)
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 9, 2023
/s/ Benjamin W. Jaenicke
Benjamin W. Jaenicke
Executive Vice President -
Chief Financial Officer and Treasurer
(Authorized Officer and Principal Financial Officer)