Securities Exchange Act of 1934 -- Form 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 ----------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended to -------------------- Commission File Number 1-12494 -------------------------------------------- CBL & Associates Properties, Inc. ------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 62-1545718 --------------------------------------- ---------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) One Park Place, 6148 Lee Highway, Chattanooga, TN 37421 --------------------------------------------------- ------------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (423) 855-0001 -------------- ------------------------------------------------------------------ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of each of the registrants classes of common stock, as of August 8, 2001 : Common Stock, par value $.01 per share, 25,547,931 shares. 1
CBL & Associates Properties, Inc. INDEX PART I FINANCIAL INFORMATION PAGE NUMBER ITEM 1: FINANCIAL INFORMATION 3 CONSOLIDATED BALANCE SHEETS - AS OF JUNE 30, 2001 AND DECEMBER 31, 2000 4 CONSOLIDATED STATEMENTS OF OPERATIONS - FOR THE THREE MONTHS AND THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000 5 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 PART II OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS 25 ITEM 2: CHANGES IN SECURITIES 25 ITEM 3: DEFAULTS UPON SENIOR SECURITIES 25 ITEM 4: SUBMISSION OF MATTERS TO HAVE A VOTE OF SECURITY HOLDERS 25 ITEM 5: OTHER INFORMATION 25 ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 25 SIGNATURE 26 2 <page> CBL & Associates Properties, Inc. ITEM 1 - FINANCIAL INFORMATION The accompanying financial statements are unaudited; however, they have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair presentation of the financial statements for these interim periods have been included. The results for the interim period ended June 30, 2001 are not necessarily indicative of the results to be obtained for the full fiscal year. These financial statements should be read in conjunction with the CBL & Associates Properties, Inc. (the "Company") December 31, 2000 audited financial statements and notes thereto included in the CBL & Associates Properties, Inc. Form 10-K for the year ended December 31, 2000. 3
CBL & Associates Properties, Inc. Consolidated Balance Sheets (in thousands, except share data) (Unaudited) <TABLE> <CAPTION> June 30, December 31, 2001 2000 ----------- ----------- ASSETS Real estate assets: <S> <C> <C> Land..................................................................... $ 522,722 $ 290,366 Buildings and improvements............................................... 2,878,305 1,919,619 ----------- ----------- 3,401,027 2,209,985 Less: Accumulated depreciation......................................... (307,153) (271,046) ----------- ----------- 3,093,874 1,938,939 Developments in progress................................................. 118,122 101,675 ----------- ----------- Net investment in real estate assets................................... 3,211,996 2,040,614 Cash and cash equivalents.................................................. 8,642 5,184 Cash in escrow............................................................. 7,936 -- Receivables: Tenant, net of allowance for doubtful accounts of $1,854 in 2001 and 2000......................................................... 35,051 29,641 Other.................................................................... 3,497 3,472 Mortgage notes receivable.................................................. 9,925 8,756 Investment in unconsolidated affiliates.................................... 68,296 -- Other assets............................................................... 34,494 27,898 ----------- ----------- $3,379,837 $2,115,565 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Mortgage and other notes payable........................................... $2,318,113 $1,424,337 Accounts payable and accrued liabilities................................... 67,353 78,228 ----------- ----------- Total liabilities........................................................ 2,385,466 1,502,565 ----------- ----------- Distributions and losses in excess of investment in unconsolidated affiliates.............................................. -- 3,510 ----------- ----------- Minority interest.......................................................... 458,454 174,665 ----------- ----------- Commitments and contingencies (Note 2)..................................... Shareholders' Equity: Preferred stock, $.01 par value, 5,000,000 shares authorized, 2,875,000 outstanding in 2001 and 2000 ................................ 29 29 Common stock, $.01 par value, 95,000,000 shares authorized, 25,512,107 and 25,067,287 shares issued and outstanding in 2001 and 2000, respectively......................................... 255 251 Additional paid - in capital............................................. 553,471 462,480 Other comprehensive loss.................................................. (3,741) -- Accumulated deficit...................................................... (14,097) (27,935) ----------- ----------- Total shareholders' equity............................................. 535,917 434,825 ----------- ----------- $3,379,837 $2,115,565 =========== =========== </TABLE> The accompanying notes are an integral part of these balance sheets. 4
CBL & Associates Properties, Inc. Consolidated Statements Of Operations (in thousands, except per share data) (Unaudited) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, ---------------------------- --------------------------- 2001 2000 2001 2000 ------------ -------------- ------------ ------------- REVENUES: Rentals: <S> <C> <C> <C> <C> Minimum.......................................... $ 88,710 $ 56,375 $ 166,199 $ 111,676 Percentage....................................... 822 1,080 5,060 5,931 Other............................................ 1,456 648 2,938 1,929 Tenant reimbursements............................... 41,048 26,048 77,269 50,758 Management, development and leasing fees........... 1,581 1,402 2,308 2,028 Interest and other.................................. 1,205 1,304 2,203 2,544 ------------ -------------- ------------ ------------- Total revenues.................................... 134,822 86,857 255,977 174,866 ------------ -------------- ------------ ------------- EXPENSES: Property operating.................................. 22,927 13,238 42,132 26,929 Depreciation and amortization....................... 22,152 15,159 42,097 29,764 Real estate taxes................................... 10,793 7,767 20,335 14,872 Maintenance and repairs............................. 7,699 4,786 15,278 9,908 General and administrative.......................... 4,761 4,184 9,624 9,090 Interest............................................ 40,846 23,504 77,124 47,090 Other............................................... -- 4 4 31 ------------ -------------- ------------ ------------- Total expenses.................................... 109,178 68,642 206,594 137,684 ------------ -------------- ------------ ------------- Income from operations.............................. 25,644 18,215 49,383 37,182 Gain on sales of real estate assets................. 554 5,759 4,612 9,330 Equity in earnings of unconsolidated affiliates..... 1,350 896 2,973 1,651 Minority interest in earnings: Operating partnership............................. (11,641) (7,412) (23,728) (14,358) Shopping center properties........................ (462) (346) (998) (726) ------------ -------------- ------------ ------------- Income before extraordinary item.................... 15,445 17,112 32,242 33,079 Extraordinary loss on extinguishment of debt........ (1,702) (137) (1,702) (137) ------------ -------------- ------------ ------------- Net income.......................................... 13,743 16,975 30,540 32,942 Preferred dividends................................. (1,617) (1,617) (3,234) (3,234) ------------ -------------- ------------ ------------- Net income available to common shareholders......... $ 12,126 $ 15,358 $ 27,306 $ 29,708 ============ ============== ============ ============= Basic per share data: Income before extraordinary item................ $ 0.55 $ 0.62 $ 1.15 $ 1.20 ============ ============== ============ ============= Net income...................................... $ 0.48 $ 0.62 $ 1.08 $ 1.20 ============ ============== ============ ============= Weighted average common shares outstanding...................................... 25,312 24,827 25,222 24,790 Diluted per share data: Income before extraordinary item................ $ 0.54 $ 0.62 $ 1.13 $ 1.20 ============ ============== ============ ============= Net income...................................... $ 0.47 $ 0.61 $ 1.07 $ 1.19 ============ ============== ============ ============= Weighted average common and potential 25,762 24,995 25,633 24,905 dilutive common shares outstanding.............. </TABLE> The accompanying notes are an integral part of these statements. 5
CBL & Associates Properties, Inc. Consolidated Statements of Cash Flows (in thousands) (Unaudited) <TABLE> <CAPTION> Six Months Six Months Ended June 30, Ended June 30, -------------- -------------- 2001 2000 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: <S> <C> <C> Net income................................................................... $ 30,540 $ 32,942 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest in earnings.............................................. 24,725 15,084 Depreciation............................................................... 34,510 23,428 Amortization............................................................... 82,835 6,925 Gain on sales of real estate assets........................................ (4,612) (9,330) Extraordinary loss on extinguishment of debt.............................. 1,702 - Equity in earnings of unconsolidated affiliates............................ (2,973) (1,651) Distributions from unconsolidated affiliates............................... 7,472 3,645 Issuance of stock under incentive plan..................................... 1,086 689 Write-off of development projects.......................................... 4 31 Distributions to minority investors........................................ (18,226) (12,653) Changes in assets and liabilities - Tenant and other receivables............................................... (5,426) (1,550) Other assets............................................................... (7,016) 1,277 Accounts payable and accrued liabilities................................... 14,928 2,581 -------------- -------------- Net cash provided by operating activities.......................... 84,997 61,418 -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Construction of real estate assets and land acquisition.................. (45,286) (66,348) Acquisition of real estate assets........................................ (116,993) (11,100) Capitalized interest..................................................... (3,018) (2,843) Other capital expenditures............................................... (14,061) (5,947) Deposits in escrow....................................................... (7,936) (14,543) Proceeds from sales of real estate assets................................ 34,221 42,173 Additions to mortgage notes receivable................................... (1,524) (1,354) Payments received on mortgage notes receivable........................... 355 998 Additions to other assets............................................... (2,242) (1,826) Advances and investments in unconsolidated affiliates.................... (12,771) (2,533) -------------- -------------- Net cash used in investing activities.............................. (169,255) (63,323) -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from mortgage and other notes payable........................... 312,132 54,143 Principal payments on mortgage and other notes payable................... (197,325) (25,336) Additions to deferred financing costs.................................... (5,296) (681) Proceeds from issuance of common stock................................... 1,409 816 Prepayment penalities.................................................... (1,400) - Proceeds from exercise of stock options.................................. 7,677 3,010 Dividends paid........................................................... (29,481) (27,954) -------------- -------------- Net cash provided by financing activities.......................... 87,716 3,998 -------------- -------------- NET CHANGE IN CASH AND CASH EQUIVALENTS...................................... 3,458 2,093 CASH AND CASH EQUIVALENTS, beginning of period............................... 5,184 7,074 -------------- -------------- CASH AND CASH EQUIVALENTS, end of period..................................... $ 8,642 $ 9,167 ============== ============== Cash paid for interest, net of amounts capitalized........................... $ 71,460 $ 48,879 ============== ============== </TABLE> The accompanying notes are an integral part of these statements. 6
CBL & Associates Properties, Inc. Notes to Consolidated Financial Statements Note 1 - Unconsolidated Affiliates At June 30, 2001, the Company had investments in seven partnerships representing seven malls and two associated centers all of which are reflected using the equity method of accounting. During the six months ended June 30, 2001 the Company acquired interests in three partnerships representing four malls and one associated center and discontinued the equity method of accounting for one partnership after acquiring a controlling interest in it. Condensed combined results of operations for the unconsolidated affiliates are presented as follows (in thousands): <TABLE> <CAPTION> Company's Share Total For The For The Six Months Ended Six Months Ended June 30, June 30, -------------------------- -------------------------- 2001 2000 2001 2000 ---------- ---------- --------- ---------- <S> <C> <C> <C> <C> Revenues....................................... $ 26,135 $ 13,874 $ 12,602 $ 6,834 ---------- ---------- --------- ---------- Depreciation and amortization.................. 3,894 1,864 1,829 909 Interest expense............................... 7,203 4,189 3,469 2,062 Other operating expenses....................... 8,870 4,476 4,331 2,212 ---------- ---------- --------- ---------- Net income..................................... $ 6,168 $ 3,345 $ 2,973 $ 1,651 ========== ========== ========= ========== </TABLE> Note 2 - Contingencies The Company is currently involved in certain litigation arising in the ordinary course of business. In the opinion of management, the pending litigation will not materially affect the financial statements of the Company. Additionally, based on environmental studies completed to date on the real estate properties, management believes any exposure related to environmental cleanup will not be significant to the financial position and results of operations of the Company. Note 3 - Credit Agreements The Company has credit facilities of $389.4 million of which $147.1 million is available at June 30, 2001. Outstanding amounts under the credit facilities bear interest at a weighted average interest rate of 5.91% at June 30, 2001. The Company's consolidated and unconsolidated variable rate debt as of June 30, 2001 was $781.8 million with a weighted average interest rate of 5.79% as compared to 7.25% as of June 30, 2000. Through the execution of interest rate swap agreements, the Company has fixed the interest rates on $300 million of variable rate debt on operating properties at a weighted average interest rate of 6.35%. There were no fees charged to the Company related to these swap agreements. Of the Company's remaining variable rate debt of $481.8 million, interest rate caps in place on $50 million and a permanent loan commitment of $71.3 million leaves $360.5 million of debt subject to variable rates. Of this amount, $118.1 million of debt is associated with properties currently under construction and $242.4 million of debt is associated with operating properties. The Company's swap agreements in place at June 30, 2001 are as follows: 7
<TABLE> <CAPTION> Swap Amount (in millions) Fixed LIBOR Component Effective Date Expiration Date - ------------- --------------------- --------------- --------------- <S> <C> <C> <C> $80 5.490% 09/01/1998 09/01/2001 10 5.737% 01/03/2001 06/01/2002 5 5.737% 01/03/2001 06/01/2002 5 5.737% 01/03/2001 06/01/2002 10 5.737% 01/03/2001 06/01/2002 20 5.737% 01/03/2001 06/01/2002 20 4.670% 03/15/2001 09/26/2002 20 4.670% 03/15/2001 09/26/2002 20 4.670% 03/15/2001 09/26/2002 10 4.670% 03/15/2001 09/26/2002 10 4.670% 03/15/2001 09/26/2002 5 4.670% 03/15/2001 09/26/2002 5 4.670% 03/15/2001 09/26/2002 80 5.830% 12/22/2000 08/30/2003 </TABLE> At June 30, 2001, the Company had an interest rate cap at 7.5% on $50 million of LIBOR-based variable rate debt. The value of this cap is negligible and the Company had expensed the unamortized cost of this interest rate cap in a prior period. At January 1, 2001, the Company implemented Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended, ("SFAS No. 133") which establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Company documented and identified the swap agreements in place at January 1, 2001 with the underlying debt and determined that with the exception of two swaps that expired during the first quarter of 2001 the Company's derivative instruments were effective and qualified for hedge accounting. The Company also documented and identified new swap instruments at inception with the underlying debt and determined that they were effective and qualified for hedge accounting. The Company measured the effectiveness of these instruments in place during the quarter and six months ended June 30, 2001 and determined that the swap agreements continued to be highly effective and continued to qualify for hedge accounting. The effective swap instruments were recorded on the balance sheet at their fair values of $3.8 million in accrued liabilities and in other comprehensive loss of $3.8 million. Over time, the unrealized gains and losses held in accumulated other comprehensive loss will be reclassified to earnings as interest expense as swap payments are made to the swap counterparties. This reclassification is consistent with the timing of when hedged items are recognized in earnings. Within the next twelve months, the Company expects to reclassify to earnings as interest expense an estimated $2.6 million of the current balance held in accumulated other comprehensive loss. 8
Note 4 - Segment Information Management of the Company measures performance and allocates resources according to property type, which are determined based on differences such as nature of tenants, capital requirements, economic risks and leasing terms. Rental income and tenant reimbursements from tenant leases provide the majority of revenues from all segments. Information on management's reportable segments is presented as follows (in thousands): <TABLE> <CAPTION> Associated Community Three Months Ended June 30, 2001 Malls Centers Centers All Other Total - ----------------------------------- ----------- ------------ ------------ ------------ ---------- <S> <C> <C> <C> <C> <C> Revenues $ 109,615 $ 4,081 $ 18,528 $ 2,598 $ 134,822 Property operating expenses (1) (36,952) (981) (4,311) 825 (41,419) Interest expense (32,568) (1,119) (3,660) (3,499) (40,846) Gain on sales of real estate assets - - 554 - 554 ----------- ------------ ------------ ------------ ---------- Segment profit and loss $ 40,095 $ 1,981 $ 11,111 $ (76) 53,111 =========== ============ ============ =========== Depreciation and amortization (22,152) General and administrative and other (4,761) Equity in earnings and minority interest adjustment (10,753) ---------- Net income $ 15,445 ========== Capital expenditures (2) $ 17,992 $ 626 $ 2,087 $ 13,227 $ 33,932 </TABLE> <TABLE> <CAPTION> Associated Community Three Months Ended June 30, 2000 Malls Centers Centers All Other Total - ----------------------------------- ----------- ------------ ------------ ------------ ---------- <S> <C> <C> <C> <C> <C> Revenues $ 63,471 $ 3,665 $ 17,257 $ 2,464 $ 86,857 Property operating expenses (1) (21,588) (614) (3,831) 242 (25,791) Interest expense (18,198) (802) (3,267) (1,237) (23,504) Gain on sales of real estate assets (257) - 3,821 2,195 5,759 ----------- ------------ ------------ ------------ ---------- Segment profit and loss $ 23,428 $ 2,249 $ 13,980 $ 3,664 43,321 =========== ============ ============ =========== Depreciation and amortization (15,159) General and administrative and other (4,188) Equity in earnings and minority interest adjustment (6,862) ---------- Net income $ 17,112 ========== Capital expenditures (2) $ 17,666 $ 1,081 $ 17,192 $ (2,007) $ 33,932 </TABLE> 9
<TABLE> <CAPTION> Associated Community Six Months Ended June 30, 2001 Malls Centers Centers All Other Total - ----------------------------------- ----------- ------------ ------------ ------------ ---------- <S> <C> <C> <C> <C> <C> Revenues $ 207,743 $ 8,136 $ 36,042 $ 4,056 $ 255,977 Property operating expenses (1) (69,183) (1,913) (8,004) 1,355 (77,745) Interest expense (61,165) (2,429) (7,503) (6,027) (77,124) Gain on sales of real estate assets - - 3,480 1,132 4,612 ----------- ------------ ------------ ------------ ---------- Segment profit and loss $ 77,395 $ 3,794 $ 24,015 $ 516 105,720 =========== ============ ============ =========== Depreciation and amortization (42,097) General and administrative and other (9,628) Equity in earnings and minority interest adjustment (21,753) ---------- Net income $ 32,242 ========== Total assets (2) $2,668,904 $122,783 $489,195 $98,948 $3,379,830 Capital expenditures (2) $1,229,819 $ 4,761 $ 49,248 $20,537 $1,304,365 </TABLE> <TABLE> <CAPTION> Associated Community Six Months Ended June 30, 2000 Malls Centers Centers All Other Total - ----------------------------------- ----------- ------------ ------------ ------------ ---------- <S> <C> <C> <C> <C> <C> Revenues $ 130,576 $ 7,132 $ 33,288 $ 3,870 $ 174,866 Property operating expenses (1) (44,060) (1,206) (7,063) 620 (51,709) Interest expense (36,408) (1,641) (6,607) (2,434) (47,090) Gain on sales of real estate assets (283) - 6,692 2,921 9,330 ----------- ------------ ------------ ------------ ---------- Segment profit and loss $ 49,825 $ 4,285 $ 26,310 $ 4,977 85,397 =========== ============ ============ =========== Depreciation and amortization (29,764) General and administrative and other (9,121) Equity in earnings and minority interest adjustment (13,433) ---------- Net income $ 33,079 ========== Total assets (2) $1,411,183 $104,226 $444,973 $107,217 $2,067,599 Capital expenditures (2) $ 32,167 $ 2,444 $ 20,579 $ 25,445 $ 80,635 <FN> (1) Property operating expenses includes property operating expenses, real estate taxes, and maintenance and repairs. (2) Capital expenditures includes investment in unconsolidated affiliates. Developments in progress are included in the "All Other" category. </FN> </TABLE> 10
CBL & Associates Properties, Inc. Item 2: Management's Discussion And Analysis Of Financial Condition And Results Of Operations The following discussion and analysis of the financial condition and results of operations should be read in conjunction with CBL & Associates Properties, Inc. Consolidated Financial Statements and Notes thereto. Information included herein contains "forward-looking statements" within the meaning of the federal securities laws. Such statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, financial and otherwise, may differ materially from the events and results discussed in the forward-looking statements. We direct you to the Company's other filings with the Securities and Exchange Commission, including without limitation the Company's Annual Report on Form 10-K and the "Management's Discussion and Analysis of Financial Condition and Results of Operations" incorporated by reference therein, for a discussion of such risks and uncertainties. GENERAL BACKGROUND CBL & Associates Properties, Inc. (the "Company") Consolidated Financial Statements and Notes thereto reflect the consolidated financial results of CBL & Associates Limited Partnership (the "Operating Partnership") which includes at June 30, 2001, the operations of a portfolio of properties consisting of forty-four regional malls, sixteen associated centers, seventy-one community centers, an office building, joint venture investments in seven regional malls and two associated centers, and income from seven mortgages (the "Properties"). The Operating Partnership also has one mall, one office building, two mall expansions, two community center expansions and one mall in a joint venture currently under construction and options to acquire certain shopping center development sites. The consolidated financial statements also include the accounts of CBL & Associates Management, Inc. (the "Management Company"). The Company classifies its regional malls into two categories - malls which have completed their initial lease-up ("Stabilized Malls") and malls which are in their initial lease-up phase ("New Malls"). The New Mall category is presently comprised of a redevelopment project Springdale Mall in Mobile, Alabama, the recently opened Arbor Place Mall in Atlanta (Douglasville), Georgia, and Parkway Place Mall in Huntsville, Alabama which was acquired in December 1998 and is being redeveloped in a joint venture with a third party. RESULTS OF OPERATIONS Operational highlights for the three months and six months ended June 30, 2001 as compared to June 30, 2000 are as follows: 11
SALES Mall shop sales, for those tenants who have reported, in the forty-eight Stabilized Malls in the Company's portfolio decreased by 1.0% on a comparable per square foot basis. <TABLE> <CAPTION> Six Months Ended June 30, -------------------------------------- 2001 2000 ------------ ------------ <S> <C> <C> Sales per square foot $125.22 $126.50 </TABLE> Total sales volume in the mall portfolio, including New Malls, but excluding Parkway Place, decreased 1.1% to $1.313 million for the six months ended June 30, 2001 from $1.328 million for the six months ended June 30, 2000. Occupancy costs as a percentage of sales for the six months ended June 30, 2001 and 2000 for the Stabilized Malls were 13.5% and 13.8%, respectively. Occupancy costs were 11.9%, 11.5% and 11.1% for the years ended December 31, 2000, 1999, and 1998, respectively. Occupancy costs as a percentage of sales are generally higher in the first three quarters of the year as compared to the fourth quarter due to the seasonality of retail sales. OCCUPANCY Occupancy for the Company's overall portfolio was as follows: <TABLE> <CAPTION> At March 31, ------------------------ 2001 2000 -------- ------- Core Portfolio: <S> <C> <C> Stabilized malls................... 91.1% 92.5% New malls.......................... 87.9 84.5 Associated centers................. 96.4 91.9 Community centers.................. 96.4 98.2 -------- ------- Total portfolio occupancy.......... 93.7 94.3 Newly-Acquired Portfolio: Malls (21)......................... 86.5 -- Associated centers (2)............. 100.0 -- Total Combined Occupancy: 91.7 -- </TABLE> AVERAGE BASE RENT Average base rents for the Company's three portfolio categories were as follows: <TABLE> <CAPTION> At June 30, ------------------------ 2001 2000 -------- -------- <S> <C> <C> Stabilized and new malls........... $ 22.46 $ 20.62 Associated centers................. 9.49 9.81 Community centers.................. 9.48 8.77 </TABLE> 12
LEASE ROLLOVERS On spaces previously occupied, the Company achieved the following results from rollover leasing for the six months ended June 30, 2001 compared to the base and percentage rent previously paid: <TABLE> <CAPTION> Per Square Per Square Foot Rent Foot Rent Percentage Prior Lease (1) New Lease (2) Increase --------------- ------------- ---------- <S> <C> <C> <C> Malls......................... $22.91 $24.68 7.7% Associated centers............ 12.63 14.27 13.0% Community centers............. 8.48 11.93 40.6% <FN> (1) - Rental achieved for spaces previously occupied at the end of the lease including percentage rent. (2) - Average base rent over the term of the lease. </FN> </TABLE> For the six months ended June 30, 2001, malls represented 82.9% of total revenues from all properties; revenues from associated centers represented 2.8%; revenues from community centers represented 13.7%; and revenues from mortgages and the office building represented 0.6%. Accordingly, revenues and results of operations are disproportionately impacted by the malls' achievements. The shopping center business is somewhat seasonal in nature with tenant sales achieving the highest levels during the fourth quarter because of the holiday season. The malls earn most of their "temporary" rents (rents from short-term tenants) during the holiday period. Thus, occupancy levels and revenue production are generally the highest in the fourth quarter of each year. Results of operations realized in any one quarter may not be indicative of the results likely to be experienced over the course of the fiscal year. COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2001 TO THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000 Total revenues for the three months ended June 30, 2001 increased by $48.0 million, or 55.2%, to $134.8 million as compared to $86.9 million in 2000. Minimum rents increased by $32.2 million, or 57.4%, to $88.7 million as compared to $56.4 million in 2000, and tenant reimbursements increased by $15.0 million, or 57.6%, to $41.0 million in 2001 as compared to $26.0 million in 2000. Percentage rents decreased by $0.3 million, or 23.9%, to $0.8 million as compared to $1.1 million in 2000. Management, leasing and development fees increased by $0.2 million in the second quarter of 2001, or 12.8%, to $1.6 million as compared to $1.4 million in 2000. This increase is primarily due to increases in fees earned on new joint venture projects. Approximately $41.4 million of the increase in revenues resulted from operations at the eighteen new centers which are consolidated on the financial statements and which were acquired on January 31, 2001 from The Richard E. Jacobs Group. These centers are described in the Development, Expansions, Acquisitions and Dispositions section of this report: 13
Approximately $5.1 million of the increase in revenues resulted from operations at the six new centers opened or acquired during the past fifteen months offset by a decrease in revenues of $1.4 million from sixteen centers sold in the last eighteen months. The six new centers consist of: <TABLE> <CAPTION> Opening/ Project Name Location Total GLA Type of Addition Acquisition Date - ------------ -------- --------- ---------------- ---------------- <S> <C> <C> <C> <C> Coastal Way Spring Hill, Florida 177,000 New Development August 2000 Chesterfield Crossing Richmond, Virginia 406,000 New Development October 2000 Gunbarrel Pointe Chattanooga, Tennessee 282,000 New Development October 2000 Willowbrook Plaza Houston, Texas 388,000 Acquisition February 2001 Creekwood Crossing Bradenton, Florida 404,000 New Development April 2001 Madison Square Mall Huntsville, Alabama 934,000 Acquisition of 50% January 2001 interest </TABLE> Approximately $2.9 million of the increase in revenues resulted from improved operations in the existing centers and a lease buyout of $0.6 million at Westgate Mall in Spartanburg, South Carolina. Property operating expenses, including real estate taxes and maintenance and repairs increased in the second quarter of 2001 by $15.6 million or 60.6% to $41.4 million as compared to $25.8 million in the second quarter of 2000. This increase is primarily the result of the addition of the twenty-four new centers referred to above. Depreciation and amortization increased in the second quarter of 2001 by $7.0 million or 46.1% to $22.2 million as compared to $15.2 million in the second quarter of 2000. This increase is primarily due to the addition of the twenty-four new centers referred to above. Interest expense increased in the second quarter of 2001 by $17.3 million, or 73.8% to $40.8 million as compared to $23.5 million in 2000. This increase is primarily due to the additional interest on the twenty-four centers added during the last eighteen months and referred to above. The gain on sales of real estate assets decreased in the second quarter of 2001 by $5.2 million, to $0.6 million as compared to $5.8 million in 2000. The gain in the second quarter of 2001 was from the sale of the completed center Sand Lakes Corners in Orlando, Florida. The majority of gain on sales in the second quarter of 2000 resulted from the of $3.8 million gain on sales of five completed centers. The balance of the gains on sales in the second quarter of 2000 were from outparcel sales the majority of which occurred at Sand Lake Corners in Orlando, Florida and Gunbarrel Pointe in Chattanooga, Tennessee. Equity in earnings of unconsolidated affiliates increased in the second quarter of 2001 by $0.5 million to $1.4 million as compared to $0.8 million in the first quarter of 2000. This increase was the result of acquiring a non-controlling interest in four malls and one associated center in three partnerships, all accounted for under the equity method of accounting, The increase was offset by the end of operations at Parkway Place Mall in Huntsville, Alabama which is being redeveloped and by the conversion of a property accounted for under the equity method of accounting, Madison Square Mall in Huntsville, Alabama, to a property accounted for as a consolidated property .The new centers accounted for under the equity method are: Columbia Mall in Columbia, South Carolina; East Towne Mall, West Towne Mall and West Towne Crossing in Madison Wisconsin; and Kentucky Oaks Mall in Paducah, Kentucky. 14
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001 TO THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 Total revenues for the six months ended June 30, 2001 increased by $81.1 million, or 46.4%, to $256.0 million as compared to $174.9 million in 2000. Of this increase, minimum rents increased by $54.5 million, or 48.8%, to $166.2 million as compared to $111.7 million in 2000, and tenant reimbursements increased by $26.5 million, or 52.2%, to $77.3 million in 2001 as compared to $50.8 million in 2000. Management, leasing and development fees increased by $0.3 million in the first six months of 2001, to $2.3million as compared to $2.0 million in 2000. This increase is primarily due to increases in fees earned on new joint venture projects. Approximately $68.1 million of the increase in revenues resulted from operations at the eighteen new centers which are consolidated on the financial statements of the Company and which were acquired on January 31, 2001 from The Richard E. Jacobs Group. These centers are described in the Development, Expansions, Acquisitions and Dispositions section of this report: New revenues of $11.1 million resulted from operations at the seven new centers opened or acquired during the past eighteen months offset by a decrease in revenues of $3.0 million from sixteen community centers sold in the last eighteen months. The seven new centers are as follows: <TABLE> <CAPTION> Opening/ Project Name Location Total GLA Type of Addition Acquisition Date - ------------ -------- --------- ---------------- ---------------- <S> <C> <C> <C> <C> Marketplace at FlowerMound Dallas (Flowermound), Texas 119,000 Acquisition March 2000 Coastal Way Spring Hill, Florida 177,000 New Development August 2000 Chesterfield Crossing Richmond, Virginia 406,000 New Development October 2000 Gunbarrel Pointe Chattanooga, Tennessee 282,000 New Development October 2000 Willowbrook Plaza Houston, Texas 388,000 Acquisition February 2001 Creekwood Crossing Bradenton, Florida 404,000 New Development April 2001 Madison Square Mall Huntsville, Alabama 934,000 Acquisition of 50% January 2001 interest </TABLE> Approximately $4.7 million of the increase in revenues resulted from improved operations in the existing centers and a lease buyout of $0.6 million at Westgate Mall in Spartanburg, South Carolina. Property operating expenses, including real estate taxes and maintenance and repairs, increased in the first six months of 2001 by $26.0 million, or 50.4%, to $77.7 million as compared to $51.7 million in 2000. This increase is primarily the result of the addition of the twenty-five new centers referred to above. 15
Depreciation and amortization increased in the first six months of 2001 by $12.3 million, or 41.4%, to $42.1 million as compared to $29.8 million in 2000. This increase is primarily the result of the addition of the twenty-five new centers referred to above. Interest expense increased in the first six months of 2001 by $30.0 million, or 63.8%, to $77.1 million as compared to $41.1 million in 2000. This increase is primarily the result of interest on debt related to the addition of the twenty-five new centers referred to above. The gain on sales of real estate assets decreased for the six months ended June 30, 2001 by $4.7 million to $4.6 million as compared to $9.3 million in 2000. The majority of gain on sales in the first six months of 2001 resulted from the $3.5 million gain on sales of three completed centers. The balance of the gains on sales were from outparcel sales at the development The Lakes Mall in Muskegon, Michigan. The majority of gain on sales in the first six months of 2000 resulted from the $6.5 million gain on sales of seven completed centers. The balance of the gains on sales were from outparcel sales the majority of which occurred at Sand Lake Corners in Orlando, Florida and the development Gunbarrel Pointe in Chattanooga, Tennessee. Equity in earnings of unconsolidated affiliates increased in the second quarter of 2001 by $1.3 million to $3.0 million as compared to $1.7 million in the first quarter of 2000. This increase was the result of acquiring a non-controlling interest in four malls and one associated center in three partnerships, all accounted for under the equity method of accounting, The increase was offset by the end of operations at Parkway Place Mall in Huntsville, Alabama which is being redeveloped and by the conversion of a property accounted for under the equity method of accounting, Madison Square Mall in Huntsville, Alabama, to a property accounted for as a consolidated property .The new centers accounted for under the equity method are: Columbia Mall in Columbia, South Carolina; East Towne Mall, West Towne Mall and West Towne Crossing in Madison Wisconsin; and Kentucky Oaks Mall in Paducah, Kentucky. LIQUIDITY AND CAPITAL RESOURCES The principal uses of the Company's liquidity and capital resources have historically been for property development, expansion and renovation programs, acquisitions and debt repayment. To maintain its qualification as a real estate investment trust under the Internal Revenue Code, the Company is required to distribute to its shareholders at least 90% of its "Real Estate Investment Trust Taxable Income" as defined in the Internal Revenue Code of 1986, as amended (the "Code"). As of June 30, 2001, the Company had $84.1 million available in unfunded construction and redevelopment loans to be used for completion of the construction and redevelopment projects and replenishment of working capital previously used for construction. Additionally, as of June 30, 2001, the Company had obtained revolving credit lines and term loans totaling $389.4 million of which $147.1 million was available. As a publicly traded company, the Company has access to capital through both the public equity and debt markets. The Company has filed a Shelf Registration authorizing shares of the Company's preferred stock and common stock and warrants to purchase shares of the Company's common stock with an aggregate public offering price of up to $350 million with $278 million remaining after the Company's preferred stock offering on June 30, 1998. The Company anticipates that the combination of these sources will, for the foreseeable future, provide adequate liquidity to enable it to continue its capital programs substantially as in the past and make distributions to its shareholders in accordance with the Code's requirements applicable to real estate investment trusts. 16
During the second quarter, CBL closed a total of $276 million in financings for six properties with a weighted average interest rate of 6.2%. The proceeds were used to retire two maturing loans and prepay three loans for a total of approximately $212 million with a weighted average interest rate of 8.9%. Excess proceeds of $62.6 million were used to reduce the $212 million credit facility used on January 21, 2001 to acquire the interests of The Richard E. Jacobs Group in 23 properties. The Properties with new loans are Fayette Mall in Lexington, Kentucky with a $98 million fixed rate permanent loan at 7%, Brookfield Mall in Brookfield (Milwaukee), Wisconsin with a a fixed rate permanent loan addition of $30 million at 6.87%, Regency Mall in Racine, Wisconsin a $28.6 million refinancing funded with proceeds from the Company's credit facilities. Additionally, Midland Mall in Midland Michigan, Parkdale Mall in Beaumont, Texas and Columbia Mall in Columbia, South Carolina were refinanced with three separate variable rate loans totaling $119.4 million for terms of up to three years. Management expects to refinance the majority of the mortgage notes payable maturing over the next five years with replacement loans. The Company's policy is to maintain a conservative debt to total market capitalization ratio in order to enhance its access to the broadest range of capital markets, both public and private. The Company's current capital structure includes property specific mortgages, which are generally non-recourse, revolving lines of credit, common stock, preferred stock and a minority interest in the Operating Partnership. The minority interest in the Operating Partnership represents the 18.8% ownership interest in the Operating Partnership held by the Company's current and former executive and senior officers which may be exchanged for approximately 9.4 million shares of common stock. Additionally, Company executive officers and directors own approximately 2.0 million shares of the outstanding common stock of the Company, for a combined total interest in the Operating Partnership of approximately 22.8%. Ownership interests issued to fund acquisitions of properties in 1998 and January 2001 may be exchanged for approximately 15.1 million shares of common stock which represents a 30.2% interest in the Operating Partnership. Assuming the exchange of all limited partnership interests in the Operating Partnership for common stock, there would be outstanding approximately 50.0 million shares of common stock with a market value of approximately $1.536 billion at June 30, 2001 (based on the closing price of $30.70 per share on June 30, 2001). The Company's total market equity is $1.608 billion which includes 2.9 million shares of preferred stock at the closing price of $25.05 per share on June 30, 2001. The Company's current and former executive and senior officers' ownership interests had a market value of approximately $350.0 million at June 30, 2001. Mortgage debt consists of debt on certain consolidated properties as well as on seven properties in which the Company owns a non-controlling interest and which are accounted for under the equity method of accounting. At June 30, 2001, the Company's share of funded mortgage debt on its consolidated properties adjusted for minority investors' interests in eight properties was $2.285 billion and its pro rata share of mortgage debt on unconsolidated properties (accounted for under the equity method) was $100.1 million for total debt obligations of $2.385 billion with a weighted average interest rate of 7.34%. 17
The Company's share of total conventional fixed rate debt as of June 30, 2001 was $1.603 billion with a weighted average interest rate of 7.64% as compared to 7.41% on $776.3 million of debt as of June 30, 2000. The Company's share of variable rate debt as of June 30, 2001 was $781.8 million with a weighted average interest rate of 5.6% as compared to 7.25% on $636.8 million as of June 30, 2000. Through the execution of swap agreements, the Company has fixed the interest rates on $300 million of debt on operating properties at a weighted average interest rate of 6.5%. Of the Company's remaining variable rate debt of $481.8 million, an interest rate cap in place of $50.0 million and a permanent loan commitment of $71.3 million leaves $360.5 million of debt subject to variable rates. Interest on $118.1 million of this remaining variable rate debt is capitalized to projects currently under construction leaving $242.4 million of variable rate debt exposure on operating properties as of June 30, 2001. There were no fees charged to the Company related to its swap agreements. The Company's swap and cap agreements in place at June 30, 2001 are as follows: <TABLE> <CAPTION> Swap Amount (in millions) Fixed LIBOR Component Effective Date Expiration Date - ------------- --------------------- --------------- --------------- <S> <C> <C> <C> $80 5.490% 09/01/1998 09/01/2001 10 5.737% 01/03/2001 06/01/2002 5 5.737% 01/03/2001 06/01/2002 5 5.737% 01/03/2001 06/01/2002 10 5.737% 01/03/2001 06/01/2002 20 5.737% 01/03/2001 06/01/2002 20 4.670% 03/15/2001 09/26/2002 20 4.670% 03/15/2001 09/26/2002 20 4.670% 03/15/2001 09/26/2002 10 4.670% 03/15/2001 09/26/2002 10 4.670% 03/15/2001 09/26/2002 5 4.670% 03/15/2001 09/26/2002 5 4.670% 03/15/2001 09/26/2002 80 5.830% 12/22/2000 08/30/2003 cap 50 7.500% 10/01/2000 09/30/2001 </TABLE> At January 1, 2001, the Company implemented Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended, ("SFAS No. 133") which establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Company documented and identified the swap agreements in place at January 1, 2001 with the underlying debt and determined that with the exception of two swaps that expired during the first quarter of 2001, the Company's derivative instruments were effective and qualified for hedge 18
accounting. The Company also documented and identified new swap instruments at inception with the underlying debt and determined that they were effective and qualified for hedge accounting. The Company measured the effectiveness of these instruments in place during the quarter and during the six months ended June 30, 2001 and determined that the swap agreements continued to be highly effective and continued to qualify for hedge accounting. The effective swap instruments were recorded on the balance sheet at their fair values in accrued liabilities and in other comprehensive loss each in the amount of $3.8 million. Over time, the unrealized gains and losses held in accumulated other comprehensive loss will be reclassified to earnings as interest expense as swap payments are made to the swap counterparties. This reclassification is consistent with the timing of when the hedged items are also recognized in earnings. Within the next twelve months, the Company expects to reclassify to earnings as interest expense an estimated $2.6 million of the current balance held in accumulated other comprehensive loss. On January 31, 2001, the Company assumed in connection with the acquisition of twenty-three properties from The Richard E. Jacobs Group total debt obligations of $745.5 million, including permanent debt of $661.5 million (adjusted for minority interest in one property); variable-rate debt of $12.5 million; and its pro rata share of mortgage debt on unconsolidated Properties (accounted for under the equity method) of $71.5 million. In addition, the Company closed a $212 million unsecured credit facility provided by a consortium of banks led by Wells Fargo. The outstanding balance under this facility was $72.7 million at June 30, 2001. Of the revolving component of this facility, $76.7 million is remaining available and will be used to fund capital needs in certain of the acquired Properties. During the second quarter of 2001 the Company retired $62.6 million of the term loan component of this facility. Based on the debt (including construction projects) and the market value of equity described above, the Company's debt to total market capitalization (debt plus market value equity) ratio was 59.7% at June 30, 2001. DEVELOPMENT, EXPANSIONS AND ACQUISITIONS On January 31, 2001, the Company acquired from The Richard E. Jacobs Group interests in 21 malls and two associated centers. The total gross leasable area of the twenty-three Properties was 19.2 million square feet, or an average gross leasable area of 880,000 square feet per mall. The gross leasable area of the mall stores in the Jacobs Properties was approximately 6.0 million square feet. The malls are located in middle markets predominantly in the Southeast and the Midwest. Additionally, the Company acquired the remaining 50% interest in Madison Square Mall in Huntsville, Alabama. The centers acquired are as follows: 19
<TABLE> <CAPTION> Name of Mall/Location Acquired Total GLA (1) Mall Store GLA Anchors - ------------------------------------- -------------- ------------- -------------- ---------------------- <S> <C> <C> <C> <C> Brookfield Square.................... 100% 1,041,000 317,000 Boston Store, Sears, Brookfield, WI JCPenney Cary Towne Center.................... 80% 953,000 296,000 Dillard's, Hecht's, Cary, NC Hudson, Belk, Cherryvale Mall...................... 100% 714,000 305,000 Bergner's, Marshall Rockford, IL Fields, Sears Citadel Mall......................... 100% 1,068,000 299,000 Parisian, Dillard's, Charleston, SC Belk, Target, Sears Columbia Mall........................ 48% 1,113,000 299,000 Dillard's, JCPenney, Columbia, SC Rich's, Sears Eastgate Mall.....................(1) 100% 1,099,000 270,000 JCPenney, Kohl's, Cincinnati,OH Dillard's, Sears East Towne Mall...................... 48% 895,000 301,000 Boston Store, Younkers, Madison, WI Sears, JCPenney Fashion Square....................... 100% 786,000 289,000 Hudson's, JCPenney, Saginaw, MI Sears Fayette Mall......................... 100% 1,096,000 309,000 Lazarus, Dillard's, Lexington, KY JCPenney, Sears Hanes Mall........................... 100% 1,556,000 555,000 Dillard's, Belk, Hecht's, Winston-Salem, NC Sears, JCPenney Jefferson Mall....................... 100% 936,000 276,000 Lazarus, Dillard's, Louisville, KY Sears, JCPenney Kentucky Oaks Mall................... 48% 878,000 278,000 Dillard's, Elder- Paducah, KY Beerman, JCPenney, Shop Ko Midland Mall......................... 100% 514,000 197,000 Elder-Beerman, Midland, MI JCPenney, Sears, Target Northwoods Mall...................... 100% 833,000 314,000 Dillard's, Belk, Charleston, SC JCPenney, Sears Old Hickory Mall..................... 100% 556,000 161,000 Belk, Goldsmith's, Jackson, TN Sears, JCPenney Parkdale Mall........................ 100% 1,411,000 475,000 Dillard's, JCPenney, Beaumont,TX Foley's, Sears Randolph Mall........................ 100% 376,000 147,000 Belk, JCPenney, Asheboro, NC Dillard's, Sears Regency Mall......................... 100% 918,000 268,000 Boston Store, Younkers, Racine, WI JCPenney, Sears Towne Mall........................... 100% 521,000 154,000 Elder-Beerman, Franklin, OH Dillard's, Sears Wausau Center........................ 100% 429,000 156,000 Younkers, JCPenney, Wausau, WI Sears West Towne Mall...................(1) 48% 1,468,000 263,000 Boston Store, Sears, Madison, WI JCPenney <FN> (1) Includes associated center. </FN> </TABLE> 20
During the quarter the Company opened Creekwood Crossing in Bradenton, Florida,a 380,000-square-foot community center anchored by Lowe's, Bealls and K-Mart. Subsequent to the end of the quarter the Company opened the Parisian store and Picadilly Cafeteria at Parkway Place in Huntsville Alabama and continues the joint venture redevelopment of Parkway Place which will contain 605,000-square-feet. Dillard's and the full redevelopment is scheduled to reopen in the fall of 2002. The Company's other development activities include: The Lakes Mall in Muskegon, Michigan a 558,000-square-foot mall anchored by Sears, Yonkers and JCPenney which is scheduled to open in August, 2001. The Company has two mall expansions under construction Springdale Mall in Mobile, Alabama where a Best Buy is scheduled to open in November 2001 and at Meridian Mall in Lansing, Michigan which is scheduled to open in November 2001 and the fall of 2002. The Company also has under construction two community center expansions at Chesterfield Crossing in Richmond, Virginia and at Costal Way in Spring Hill, Florida. The Company also has under construction a new corporate headquarters CBL Center in Chattanooga, Tennessee. In May 2001, the Company sold Sand Lake Corners in Orlando, Florida a 558,000-square-foot community center that the Company had developed and opened in July 1999. The proceeds of $22 million were used to retire variable rate debt and pay down on the Company's credit facilities. At June 30, 2001, the Company had no standby purchase agreements or co-development agreement obligations. In February 2001, the Company acquired Willowbrook Plaza in Houston, Texas pursuant to a co-development agreement. The Company has entered into a number of option agreements for the development of future regional malls and community centers. Except for these projects and as further described below, the Company currently has no other material capital commitments. It is management's expectation that the Company will continue to have access to the capital resources necessary to expand and develop its business. Future development and acquisition activities will be undertaken by the Company as suitable opportunities arise. Such activities are not expected to be undertaken unless adequate sources of financing are available and a satisfactory budget with targeted returns on investment has been internally approved. The Company will fund its major development, expansion and acquisition activities with its traditional sources of construction and permanent debt financing as well as from other debt and equity financings, including public financings, and its credit facilities in a manner consistent with its intention to operate with a conservative debt to total market capitalization ratio. 21
OTHER CAPITAL EXPENDITURES Management prepares an annual capital expenditure budget for each property which is intended to provide for all necessary recurring and non-recurring capital improvements. Management believes that its annual operating reserve for maintenance and recurring capital improvements and reimbursements from tenants will provide the necessary funding for such requirements. The Company intends to distribute approximately 55% - 90% of its funds from operations with the remaining 10% - 45% to be held as a reserve for capital expenditures and continued growth opportunities. The Company believes that this reserve will be sufficient to cover (I) tenant finish costs associated with the renewal or replacement of current tenant leases as their leases expire and (II) capital expenditures which will not be reimbursed by tenants. Major tenant finish costs for currently vacant space are expected to be funded with working capital, operating reserves, or the revolving lines of credit. For the first six months of 2001, revenue generating capital expenditures or tenant allowances for improvements were $11.2 million. These capital expenditures generate increased rents from these tenants over the term of their leases. Revenue neutral capital expenditures, which are recovered from the tenants, were $2.4 million for the first six months of 2001. Revenue enhancing capital expenditures, or remodeling and renovation costs, were $0.5 million for the first six months of 2001. The Company believes that the Properties are in compliance in all material respects with all federal, state and local ordinances and regulations regarding the handling, discharge and emission of hazardous or toxic substances. Environmental assessments at Parkway Place in Huntsville, Alabama (which was acquired in a joint venture in December 1998) identified certain asbestos containing materials ("ACMs") all of which were remediated during the demolition which was completed during the quarter to make way for construction of the new mall. The Company has not been notified by any governmental authority, and is not otherwise aware, of any material noncompliance, liability or claim relating to hazardous or toxic substances in connection with any of its present or former properties. The Company has not recorded in its financial statements any material liability in connection with environmental matters. CASH FLOWS Cash flows provided by operating activities for the first six months of 2001, increased by $23.6 million, or 39.2%, to $85.0 million from $61.4 million in 2000. This increase was primarily due to the twenty-three properties acquired in January 2001 and seven properties opened or acquired in the last eighteen months. Cash flows used in investing activities for the first six months of 2001 increased by $105.9 million, to $169.3 million compared to $63.3 million in 2000. This increase was due primarily to the acquisition of twenty-five new Properties in the quarter. Cash flows provided by financing activities for the first six months of 2001 increased by $83.7 million, to $87.7 million compared to $4.0 million in 2000 primarily due to increased borrowings related to the acquisition of twenty-five properties in the last eighteen months. During the first six months of 2001 the Company assumed debt of $778,968,000 and issued minority interests of $289,373,000 to acquire real estate assets. The Company also issued minority interests of $50,603,000 and assumed debt of $71,495,000 to acquire non-controlling interests in real estate assets accounted for under the equity method of accounting. 22
IMPACT OF INFLATION In the last three years, inflation has not had a significant impact on the Company because of the relatively low inflation rate. Substantially all tenant leases do, however, contain provisions designed to protect the Company from the impact of inflation. Such provisions include clauses enabling the Company to receive percentage rentals based on tenant's gross sales, which generally increase as prices rise, and/or escalation clauses, which generally increase rental rates during the terms of the leases. In addition, many of the leases are for terms of less than ten years which may enable the Company to replace existing leases with new leases at higher base and/or percentage rentals if rents of the existing leases are below the then- existing market rate. Most of the leases require the tenants to pay their share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing the Company's exposure to increases in costs and operating expenses resulting from inflation. FUNDS FROM OPERATIONS Management believes that Funds from Operations ("FFO") provides an additional indicator of the financial performance of the Properties. FFO is defined by the Company as net income (loss) before depreciation of real estate assets, other non-cash items of gains or losses on sales of real estate and gains or losses on investments in marketable securities. FFO also includes the Company's share of FFO in unconsolidated properties and excludes minority interests' share of FFO in consolidated properties. The Company computes FFO in accordance with the National Association of Real Estate Investments Trusts ("NAREIT") recommendation concerning finance costs and non-real estate depreciation. The Company excludes gains or losses on outparcel sales, even though NAREIT permits their inclusion when calculating FFO. There were no gains on outparcel sales in the second quarter of 2001 as compared to $1.9 million in 2000. In the six months ended June 30, 2001 gains on outparcel sales would have added $1.1 million as compared to $2.8 million in 2000. The use of FFO as an indicator of financial performance is influenced not only by the operations of the Properties, but also by the capital structure of the Operating Partnership and the Company. Accordingly, management expects that FFO will be one of the significant factors considered by the Board of Directors in determining the amount of cash distributions the Operating Partnership will make to its partners (including the REIT). FFO does not represent cash flow from operations as defined by accounting principals generally accepted in the United States and 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 the Company's operating performance or to cash flow as a measure of liquidity. For the three months ended June 30, 2001, FFO increased by $14.9 million, or 46.1%, to $47.2 million as compared to $32.3 million for the same period in 2000. For the six months ended June 30, 2001, FFO increased by $25.5 million, or 39.6%, to $89.9 million as compared to $64.4 million for the same period in 2000. The increases in FFO for both periods was primarily attributable to the acquisition of twenty-three properties in January, 2001 and the opening or acquisition of seven properties in the last eighteen months. 23
The Company's calculation of FFO is as follows: (in thousands) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 2001 2000 2001 2000 -------- -------- -------- -------- <S> <C> <C> <C> <C> Income from operations............................ $ 25,644 $ 18,215 $ 49,383 $ 37,182 ADD: Depreciation & amortization from consolidated properties........................................ 22,152 15,159 42,097 29,764 Income from operations of unconsolidated affiliates........................ 1,350 896 2,973 1,651 Depreciation & amortization from unconsolidated affiliates........................ 1,106 591 1,829 905 SUBTRACT: Preferred dividends............................... (1,617) (1,617) (3,234) (3,234) Minority investors' share of income from operations in nine properties.................................. (462) (346) (998) (726) Minority investors share of depreciation and amortization in nine properties.............................. (338) (246) (614) (490) Depreciation and amortization of non-real estate assets and finance costs...... (660) (360) (1,487) (636) -------- -------- -------- -------- TOTAL FUNDS FROM OPERATIONS....................... $ 47,175 $ 32,292 $ 89,949 $ 64,416 ======== ======== ======== ======== Weighted average common and potential dilutive common shares with operating partnership units fully converted.............. 50,248 32,292 47,951 36,887 </TABLE> 24
PART II - OTHER INFORMATION ITEM 1: Legal Proceedings None ITEM 2: Changes in Securities None ITEM 3: Defaults Upon Senior Securities None ITEM 4: Submission of Matter to a Vote of Security Holders None ITEM 5: Other Information None ITEM 6: Exhibits and Reports on Form 8-K A. Exhibits None B. Reports on Form 8-K The following items were reported: The outline from the Company's July 25, 2001 conference call with analysts and investors regarding earnings (Item 5) was filed on July 25, 2001. 25
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CBL & ASSOCIATES PROPERTIES, INC. /s/ John N. Foy --------------------------------------------------- John N. Foy Vice Chairman of the Board, Chief Financial Officer and Treasurer (Authorized Officer of the Registrant, Principal Financial Officer and Principal Accounting Officer) Date: August 14, 2001 26
EXHIBIT INDEX Exhibit No.