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 ____September 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 November 6, 2001 : Common Stock, par value $.01 per share, 25,590,266 shares. 1
CBL & Associates Properties, Inc. INDEX PART I FINANCIAL INFORMATION PAGE NUMBER ITEM 1: FINANCIAL INFORMATION 3 CONSOLIDATED BALANCE SHEETS - AS OF SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 4 CONSOLIDATED STATEMENTS OF OPERATIONS - FOR THE THREE MONTHS AND THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 5 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 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 24 ITEM 2: CHANGES IN SECURITIES 24 ITEM 3: DEFAULTS UPON SENIOR SECURITIES 24 ITEM 4: SUBMISSION OF MATTERS TO HAVE A VOTE OF SECURITY HOLDERS 24 ITEM 5: OTHER INFORMATION 24 ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 24 SIGNATURE 25 2
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 September 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> September 30, December 31, 2001 2000 ----------- ----------- ASSETS <S> <C> <C> REAL ESTATE ASSETS: Land $ 525,293 $ 290,366 Buildings and improvements 2,940,245 1,919,619 ----------- ----------- 3,465,538 2,209,985 Less: Accumulated depreciation (327,805) (271,046) ----------- ----------- 3,137,733 1,938,939 Developments in progress 88,646 101,675 ----------- ----------- Net investment in real estate 3,226,379 2,040,614 CASH AND CASH EQUIVALENTS 15,737 5,184 RECEIVABLES: Tenant, net of allowance for doubtful accounts of $2,854 in 2001 and $1,854 in 2000 40,515 29,641 Other 4,234 3,472 MORTGAGE NOTES RECEIVABLE 10,773 8,756 INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES 68,694 - OTHER ASSETS 35,746 27,898 ----------- ----------- $ 3,402,078 $ 2,115,565 =============== =========== LIABILITIES AND SHAREHOLDERS' EQUITY MORTGAGE AND OTHER NOTES PAYABLE 2,347,106 1,424,337 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 82,148 78,228 ----------- ----------- Total liabilities 2,429,254 1,502,565 ----------- ----------- COMMITMENTS AND CONTINGENCIES DISTRIBUTIONS AND LOSSES IN EXCESS OF INVESTMENT IN UNCONSOLIDATED AFFILIATES - 3,510 ----------- ----------- MINORITY INTERESTS 444,217 174,665 ----------- ----------- SHAREHOLDERS' EQUITY: Preferred Stock, $.01 per value, 5,000,000 shares authorized, 2,875,000 shares issued and outstanding in 2001 and 2000 29 29 Common Stock, $.01 per value, 95,000,000 shares authorized, 25,564,671 and 25,067,287 shares issued and outstanding in 2001 and 2000, respectively 256 251 Additional paid-in capital 554,923 462,480 Other comprehensive loss (7,160) - Accumulated deficit (19,441) (27,935) ----------- ------------ Total shareholders' equity 528,607 434,825 ----------- ------------ $ 3,402,078 $ 2,115,565 ============== ============ <FN> The accompanying notes are an integral part of these statements. </FN> </TABLE> 4
CBL & Associates Properties, Inc. Consolidated Statements of Operations (In thousands, except per share data) (Unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------- 2001 2000 2001 2000 --------- -------- --------- --------- <S> <C> <C> <C> <C> REVENUES Rentals Minimum $ 90,169 $ 56,130 $ 256,368 $ 167,806 Percentage 1,581 1,527 6,641 7,458 Other 1,347 739 4,285 2,668 Tenant reimbursements 42,648 27,999 119,917 78,757 Management, development and leasing fees 1,499 1,107 3,807 3,135 Interest and other 1,270 1,119 3,473 3,663 --------- -------- --------- --------- Total revenues 138,514 88,621 394,491 263,487 --------- -------- --------- --------- EXPENSES: Property Operating 25,103 14,769 67,235 41,698 Depreciation and Amortization 22,553 15,238 64,650 45,002 Real estate taxes 11,250 7,629 31,585 22,501 Maintenance & Repairs 8,151 4,795 23,429 14,703 General, administrative and other 4,523 4,061 14,151 13,182 Interest expense 40,081 23,472 117,205 70,562 --------- -------- --------- --------- Total Expenses 111,661 69,964 318,255 207,648 --------- -------- --------- --------- Income from operations 26,853 18,657 76,236 55,839 GAIN ON SALES OF REAL ESTATE ASSETS 1,145 3,945 5,757 13,275 EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES 1,770 934 4,743 2,585 MINORITY INTEREST IN EARNINGS: Operating partnership (7,932) (6,988) (31,660) (21,346) Shopping Center properties (357) (296) (1,355) (1,022) --------- -------- --------- --------- INCOME BEFORE EXTRAORDINARY ITEM 21,479 16,252 53,721 49,331 EXTRAORDINARY LOSS ON EXTINGUISHMENT OF DEBT (11,621) (84) (13,323) (221) --------- -------- --------- --------- NET INCOME 9,858 16,168 40,398 49,110 PREFERRED DIVIDENDS (1,617) (1,617) (4,851) (4,851) --------- -------- --------- --------- NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 8,241 $ 14,551 $ 35,547 $ 44,259 ========= ========= ========= ========= BASIC EARNINGS PER SHARE: Income before extraordinary item $ 0.78 $ 0.59 $ 1.93 $ 1.79 ========= ========= ========= ========= Net income $ 0.32 $ 0.58 $ 1.40 $ 1.78 ========= ========= ========= ========= Weighted average common shares outstanding 25,474 24,954 25,307 24,845 DILUTED EARNINGS PER SHARE: Income before extraordinary item $ 0.76 $ 0.58 $ 1.90 $ 1.78 ========= ========= ========= ========= Net income $ 0.32 $ 0.58 $ 1.38 $ 1.77 ========= ========= ========= ========= Weighted average common shares and potential dilutive common shares outstanding 26,016 25,183 25,760 24,983 <FN> The accompanying notes are an integral part of these statements. </FN> </TABLE> 5
CBL & Associates Properties, Inc. Consolidated Statements of Cash Flows (In thousands) (Unaudited) <TABLE> <CAPTION> Nine Months Ended September 30, ------------------------------- 2001 2000 ----------- ----------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 40,398 $ 49,110 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest in earnings 33,015 22,368 Depreciation 52,931 35,196 Amortization 12,758 10,751 Extraordinary loss on extinguishment of debt 13,323 - Gain on sales of real estate assets (5,757) (13,275) Equity in earnings of unconsolidated affiliates (4,742) (2,585) Issuance of stock under incentive plan 1,385 826 Write-of of development projects 5 62 Distributions from unconsolidated affiliates 11,260 9,200 Distributions to minority interests (33,884) (18,782) Changes in assets and liabilities: Tenant and other receivable (11,636) (8,107) Other Assets (7,758) (1,756) Accounts payable and accrued liabilities 18,420 4,255 ----------- ----------- Net cash provided by operating activities 119,718 87,263 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to real estate assets (53,145) (97,297) Acquisitions of real estate assets (116,993) (11,100) Capitalized interest (4,670) (4,575) Other capital expenditures (41,461) (19,198) Deposits in escrow - (9,751) Proceeds from sales of real estate assets 38,887 59,618 Additions to mortgage notes receivable (2,608) (1,497) Payments received on mortgage notes receivable 591 2,189 Additional investments in and advances to unconsolidated affiliates (15,187) (6,277) Additions to other assets (3,629) - ----------- ----------- Net cash used in investing activities (198,215) (87,888) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from mortgage and other notes payable 549,836 137,539 Principal payments on mortgage and other notes payable (406,036) (98,965) Additions to deferred finance costs (7,281) (1,676) Proceeds from issuance of common stock 2,141 1,250 Proceeds from exercise of stock options 8,110 3,256 Prepayment penalties on extinguishment of debt (13,037) - Dividends paid (44,683) (42,309) ----------- ----------- Net cash used in investing activities 89,050 (905) ----------- ----------- NET CHANGE IN CASH AND CASH EQUIVALENTS 10,553 (1,530) CASH AND CASH EQUIVALENTS, beginning of period 5,184 7,074 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 15,737 $ 5,544 =========== =========== SUPPLEMENTAL INFORMATION Cash paid during the period for interest, net of amounts capitalized $ 106,021 $ 70,831 =========== =========== Debt assumed in acquisition of property interests $ 875,425 $ - =========== =========== Issuance of minority interests in acquisition of property interests $ 339,976 $ - =========== =========== The accompanying notes are an integral part of these statements. </TABLE> 6
CBL & Associates Properties, Inc. Notes to Consolidated Financial Statements Note 1 - Unconsolidated Affiliates At September 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 nine months ended September 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> Total for the Nine Months Company's Share for Nine Months Ended September 30, Ended September 30, --------------------------------- --------------------------------- 2001 2000 2001 2000 --------------- ------------- --------------- ------------- <S> <C> <C> <C> <C> Revenues $39,899 $20,162 $19,218 $9,926 --------------- ------------- --------------- ------------- Depreciation and Amortization 5,858 2,496 2,780 1,223 Interest Expense 11,056 6,141 5,318 3,027 Other operating expenses 13,135 5,926 6,377 3,091 -------------- ------------ -------------- ------------ Income from operations $9,850 $5,599 $4,743 $2,585 =============== ============== =============== ============= Total for the Three Months Company's Share for Three Months Ended September 30, Ended September 30, --------------------------------- --------------------------------- 2001 2000 2001 2000 --------------- ------------- --------------- ------------- Revenues $13,764 $6,288 $6,616 $3,092 --------------- ------------- --------------- ------------- Depreciation and Amortization 1,964 632 951 318 Interest Expense 3,853 1.952 1,849 965 Other Operating Expenses 4,265 1.450 2,046 875 --------------- ------------- --------------- ------------- Income From Operations $3.682 $2.254 $1,770 $934 =============== ============== =============== ============= </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 $124.9 million is available at September 30, 2001. Outstanding amounts under the credit facilities bear interest at a weighted average interest rate of 5.49% at September 30, 2001. The Company's consolidated and unconsolidated variable rate debt as of September 30, 2001 was $864.1 million with a weighted average interest rate of 5.09% as compared to 7.30% as of September 30, 2000. Through the execution of interest rate swap agreements, the Company has fixed the interest rates on $220 million of variable rate debt on operating properties at a weighted average interest rate of 6.40%. There were no fees charged to the Company related to these swap agreements. Of the Company's remaining variable rate debt of $644.1 million, an interest rate cap in place on $50 million leaves $594.1 million of debt subject to variable rates. Of this amount, $88.6 million of debt is associated with properties currently under construction and $505.5 million of debt is associated with operating properties. 7
CBL & Associates Properties, Inc. Notes to Consolidated Financial Statements The Company's swap agreements in place at September 30, 2001 are as follows: <TABLE> <CAPTION> Swap Amount (in millions) Fixed LIBOR Component Effective Date Expiration Date ----------------- --------------------- --------------- --------------- <S> <C> <C> <C> $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 September 30, 2001, the Company had an interest rate cap at 7.5% on $50 million of LIBOR-based variable rate debt. 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. At January 1, 2001, the Company 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 determined that new swap instruments obtained during 2001 were effective and qualified for hedge accounting. The Company measured the effectiveness of these instruments in place during the quarter and nine months ended September 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 $7.2 million in accrued liabilities and in other comprehensive loss of $7.2 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 $5.2 million of the current balance held in accumulated other comprehensive loss. 8
CBL & Associates Properties, Inc. Notes to Consolidated Financial Statements Note 4 - Segment Information Management of the Company measures performance and allocates resources according to property type, which is determined based on differences such as nature of tenants, capital requirements, economic risks and leasing terms. Rental income and tenant reimbursements from tenant leases provide the majority of revenues from all segments. Information on management's reportable segments is presented as follows (in thousands): <TABLE> <CAPTION> Associated Community Three Months Ended September 30, 2001 Malls Centers Centers All Other Total - ------------------------------------------ --------- -------- -------- -------- --------- <S> <C> <C> <C> <C> <C> Revenues $ 114,672 $ 4,067 $ 17,235 $ 2,540 $ 138,514 Property operating expenses (1) (40,346) (881) (3,747) 470 (44,504) Interest expense (32,741) (1,066) (3,458) (2,816) (40,081) Gain on sales of real estate assets 134 - 198 813 1,145 --------- -------- -------- -------- --------- Segement profit and loss $ 41,719 $ 2,120 $ 10,228 $ 1,007 55,074 ========= ======== ======== ======== Depreciation and Amortization (22,553) General, administrative and other (4,523) Equity in earnings and minority interest adjustment (6,519) --------- Income before extraordinary item $ 21,479 ========= Capital expenditures (2) $ 28,553 $ 134 $ 3,558 $ 6,326 $ 38,571 </TABLE> <TABLE> <CAPTION> Associated Community Three Months Ended September 30, 2000 Malls Centers Centers All Other Total - ------------------------------------------ --------- -------- -------- -------- --------- <S> <C> <C> <C> <C> <C> Revenues $ 66,725 $ 3,730 $ 15,905 $ 2,261 $ 88,621 Property operating expenses (1) (23,144) (627) (3,694) 272 (27,193) Interest expense (18,762) (1,042) (3,178) (490) (23,472) Gain on sales of real estate assets (115) - 3,109 951 3,945 --------- -------- -------- -------- --------- Segement profit and loss $ 24,704 $ 2,061 $ 12,142 $ 2,994 41,901 ========= ======== ======== ======== Depreciation and Amortization (15,238) General, administrative and other (4,061) Equity in earnings and minority interest adjustment (6,350) --------- Income before extraordinary item $ 16,252 ========== Capital expenditures (2) $ 29,925 $ 1,623 $ 1,869 $ 15,253 $ 48,670 </TABLE> 9
CBL & Associates Properties, Inc. Notes to Consolidated Financial Statements <TABLE> <CAPTION> Associated Community Nine Months Ended September 30, 2001 Malls Centers Centers All Other Total - ------------------------------------------ --------- -------- -------- -------- --------- <S> <C> <C> <C> <C> <C> Revenues $ 322,421 $ 12,203 $ 53,262 $ 6,605 $ 394,491 Property operating expenses (1) (109,515) (2,794) (11,742) 1,802 (122,249) Interest expense (93,906) (3,496) (10,961) (8,842) (117,205) Gain on sales of real estate assets 134 - 3,679 1,944 5,757 --------- -------- -------- -------- --------- Segement profit and loss $ 119,134 $ 5,913 $ 34,238 $ 1,509 160,794 ========= ======== ======== ======== Depreciation and Amortization (64,650) General, administrative and other (14,151) Equity in earnings and minority interest adjustment (28,272) --------- Income before extraordinary item $ 53,721 ========== Total Assets (2) $2,652,693 $122,236 $483,946 $143,203 $3,402,078 Capital expenditures (2) $1,268,393 $ 4,896 $ 52,807 $ 16,840 $1,342,936 </TABLE> <TABLE> <CAPTION> Associated Community Nine Months Ended September 30, 2000 Malls Centers Centers All Other Total - ------------------------------------------ --------- -------- -------- -------- --------- <S> <C> <C> <C> <C> <C> Revenues $ 197,298 $ 10,862 $ 49,193 $ 6,134 $ 263,487 Property operating expenses (1) (10,754) (67,204) (1,854) 910 (78,902) Interest expense (55,171) (2,683) (9,786) (2,922) (70,562) Gain on sales of real estate assets (399) - 9,801 3,873 13,275 --------- -------- -------- -------- --------- Segement profit and loss $ 74,524 $ 6,325 $ 38,454 $ 7,995 127,298 ========= ======== ======== ======== Depreciation and Amortization (45,002) General, administrative and other (13,182) Equity in earnings and minority interest adjustment (19,783) --------- Income before extraordinary item $ 49,331 ========= Total Assets (2) $1,435,819 $105,338 $432,942 $112,473 $2,086,572 Capital expenditures (2) $ 62,091 $ 4,067 $ 23,420 $ 42,175 $ 131,753 <FN> (1) Property operating expenses include property operating, real estate taxes, and maintenance and repairs expenses. (2) Developments in progress are included in the "All Other" category. </FN> </TABLE> Note 5 - Comprehensive Income Comprehensive income consisted of the following components for the nine months ended September 30, 2001 and 2000, respectively (in thousands): <TABLE> <CAPTION> For the Nine Months Ended September 30, 2001 ------------------------- 2001 2000 ------------ ---------- <S> <C> <C> Net income $ 40,398 $ 49,110 Net loss on current period cash flow hedges (7,160) - ------------ ---------- TOTAL $ 33,238 $ 49,110 ============ ========== </TABLE> Note 6 - Reclassifications Certain reclassifications have been made to prior years financial information to conform with the presentation of 2001 financial information. NOTE 7 - Proforma Information On January 21, 2001 the Company completed the acquisition of twenty-three real estate assets from the Richard E. Jacobs Group, Inc. The purchase price was comprised of $124.5 million in cash including closing costs of approximately $12 million; the assumption of $745.5 million in non-recourse mortgage debt; and the issuance of approximately 12.0 million special common units (SCUs) in the Company's operating partnership. The following unaudited pro forma financial information for the three months ended March 31, 2001 and 2000 present results for the Company as if the acquisition of the interests acquired on January 31, 2001 had occurred at January 1, 2000. The unaudited pro forma financial information neither purports to represent what the consolidated results of operations actually would have been had the acquisition and related transactions in fact occurred on the assumed date, nor purport to project the consolidated results of operations for any future period. (In thousands except per share data): <TABLE> <CAPTION> Total for the Three Months for the Nine Three Months Ended September 30, Ended September 30, --------------------------------- --------------------------------- 2001 2000 2001 2000 <S> <C> <C> <C> <C> Total revenues $ 138,514 $ 132,574 $ 414,846 $ 391,171 --------- --------- --------- --------- Total Expenses 111,661 97,599 337,457 317,313 --------- --------- --------- --------- Income from operations 26,853 34,975 77,389 73,858 --------- --------- --------- --------- Net income before extraordinary item 84,808 12,330 49,424 42,907 Net income avaiable to common shareholders $ 8,241 $ 12,246 $ 36,101 $ 42,686 ================================================================ Basic per share data Net income before extraordinary item $ 0.78 $ 0.49 $ 1.95 $ 1.73 ================================================================ Net income avaiable to common shareholders $ 0.32 $ 0.49 $ 1.43 $ 1.72 ================================================================ Diluted Per share data: Net income before extraordinary item $ 0.76 $ 0.49 $ 1.92 $ 1.72 ================================================================ Net income avaiable to common shareholders $ 0.32 $ 0.49 $ 1.40 $ 1.71 ================================================================ </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 September 30, 2001 the operations of a portfolio of properties consisting of forty-five regional malls, sixteen associated centers, seventy community centers, an office building, joint venture investments in seven regional malls and two associated centers, and income from eight mortgages (the "Properties"). The Operating Partnership also has one mall, one office building, one mall expansion and two community center expansions 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, Arbor Place Mall in Atlanta (Douglasville), Georgia which opened in October 1999, The Lakes Mall in Muskegon, Michigan which opened in August 2001, 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. During the third quarter the Company sold Park Village in Lakeland, Florida, a 48,000-square-foot community center. The Company received a note of $1.3 million and proceeds of $1.5 million which were used to pay down on the Company's credit facilities. 11
CBL & Associates Properties, Inc. Management's Discussion And Analysis Of Financial Condition And Results Of Operations RESULTS OF OPERATIONS Operational highlights for the three months and nine months ended September 30, 2001 as compared to September 30, 2000 are as follows: SALES Mall shop sales, for those tenants who have reported, in the forty-eight Stabilized Malls in the Company's portfolio decreased by 1.1% on a comparable per square foot basis. <TABLE> <CAPTION> Nine Months Ended September 30, ------------------------------- 2001 2000 ---- ---- <S> <C> <C> Sales per square foot $190.35 $192.47 </TABLE> Total sales volume in the mall portfolio, including New Malls, decreased 0.7% to $2.036 billion for the nine months ended September 30, 2001 from $2.050 billion for the nine months ended September 30, 2000. Occupancy costs as a percentage of sales for the nine months ended September 30, 2001 and 2000 for the Stabilized Malls were 12.8% 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 September 30, --------------------------------- 2001 2000 ------------------ -------------- <S> <C> <C> Core Portfolio: Stabilized malls 92.2% 92.7% New malls 86.8 89.7 Associated centers 90.8 91.4 Community centers 96.7 97.8 Total portfolio occupancy 93.3 94.5 Newly-Acquired Portfolio: Malls (21) 88.5 -- Associated centers (2) 100.0 -- Total Combined Occupancy: 92.2 -- </TABLE> Operating statistics exclude Parkway Place in Huntsville, Alabama where the leaseable area has been demolished to make way for the redevelopment. 12
CBL & Associates Properties, Inc. Management's Discussion And Analysis Of Financial Condition And Results Of Operations AVERAGE BASE RENT Average base rents per square foot for the Company's three portfolio categories were as follows: <TABLE> <CAPTION> At September 30, ------------------------------------- 2001 2000 ------------------ ------------------ <S> <C> <C> Malls $22.67 $20.97 Associated centers 10.16 9.67 Community centers 9.49 8.76 </TABLE> LEASE ROLLOVERS On spaces previously occupied, the Company achieved the following results from rollover leasing for the nine months ended September 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 $23.51 $25.90 10.2% Associated centers 13.99 13.47 (3.7)% Community centers 10.71 11.48 7.2% <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 nine months ended September 30, 2001, malls represented 83.8 % of total revenues from all properties; revenues from associated centers represented 3.1 %; revenues from community centers represented 12.4 %; and revenues from mortgages, development fees and the office building represented 0.7%. 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 SEPTEMBER 30, 2001 TO THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 Total revenues for the three months ended September 30, 2001 increased by $49.9 million, or 56.3%, to $138.5 million as compared to $88.6 million in 2000. Minimum rents increased by $34.0 million, or 60.6%, to $90.2 million as compared to $56.1 million in 2000, and tenant reimbursements increased by $14.6 million, or 52.3%, to $42.6 million in 2001 as compared to $28.0 million in 2000. Percentage rents increased by $0.1 million, or 3.5%, to $1.6 million as compared to $1.5 million in 2000. 13
CBL & Associates Properties, Inc. Management's Discussion And Analysis Of Financial Condition And Results Of Operations Management, leasing and development fees increased in the third quarter of 2001 by $0.4 million, to $1.5 million as compared to $1.1 million in 2000. This increase is primarily due to fees earned on new joint venture projects. Approximately $44.6 million of the increase in revenues resulted from operations at eighteen new centers, which were acquired on January 31, 2001 from The Richard E. Jacobs Group and are included in the consolidated financial statements . These centers are described in the Development, Expansions, Acquisitions and Dispositions section of this report: Approximately $4.5 million of the increase in revenues resulted from operations at the seven new centers opened or acquired during the past fifteen months offset by a decrease in revenues of $1.4 million from seventeen centers sold in the last twenty-one months. The seven 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 Madison Square Mall Huntsville, Alabama 934,000 Acquisition of 50% January 2001 interest Willowbrook Plaza Houston, Texas 388,000 Acquisition February 2001 Creekwood Crossing Bradenton, Florida 404,000 New Development April 2001 The Lakes Mall Muskegon. Michigan 553,000 New Development August 2001 </TABLE> Approximately $ 2.2 million of the increase in revenues resulted from improved operations, increases in occupancies and increases in recoveries, in the existing centers Property operating expenses, including real estate taxes and maintenance and repairs, increased in the third quarter of 2001 by $17.3 million or 63.7% to $44.5 million as compared to $27.2 million in the third quarter of 2000. This increase was primarily the result of the addition of the twenty-five new centers referred to above. Depreciation and amortization increased in the third quarter of 2001 by $7.3 million or 48.0% to $22.6 million as compared to $15.2 million in the third quarter of 2000. This increase is primarily due to the addition of the twenty-five new centers referred to above. General, administrative and other expense increased in the third quarter of 2001 by $0.5 million, or 11.4%, to $4.5 million as compared to $4.1 million in 2000. This increase was primarily the result of additional management staff related to the addition of the twenty-five new centers referred to above. Interest expense increased in the third quarter of 2001 by $16.6 million, or 70.8% to $40.0 million as compared to $23.5 million in 2000. This increase was primarily due to the additional interest on the twenty-five centers added during the last fifteen months as referred to above. 14
CBL & Associates Properties, Inc. Management's Discussion And Analysis Of Financial Condition And Results Of Operations The gain on sales of real estate assets decreased in the third quarter of 2001 by $2.8 million, to $1.1 million as compared to $3.9 million in 2000. The majority of gain on sales in the third quarter of 2001 was from outparcel sales at The Lake Mall in Muskegon, Michigan and outparcel land at a previously sold center in Sand Lake Corner in Orlando, Florida. During the third quarter the Company sold one completed center Park Village in Lakeland, Florida. Equity in earnings of unconsolidated affiliates increased in the third quarter of 2001 by $0.8 million to $1.8 million as compared to $0.9 million in the third 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 decreases as the result of the end of operations at Parkway Place Mall in Huntsville, Alabama which is being redeveloped and by the acquisition of the remaining interest in Madison Square Mall in Huntsville, Alabama. Since the Company now owns 100% of the interest in the Madison Square Mall, this property is now accounted for as a consolidated property rather than under the equity method. 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. COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 TO THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 Total revenues for the nine months ended September 30, 2001 increased by $131.0 million, or 49.7%, to $394.5 million as compared to $263.5 million in 2000. Of this increase, minimum rents increased by $88.6 million, or 52.8%, to $256.4 million as compared to $167.8 million in 2000, and tenant reimbursements increased by $41.2 million, or 52.3%, to $119.9 million in 2001 as compared to $78.8 million in 2000. Percentage rents decreased by $0.8 million, or 11.0% to $6.6 million as compared to $7.5 million in 2000. Management, leasing and development fees increased in the nine months ended September 20, 2001 by $0.7 million, to $3.8 million as compared to $3.1 million in 2000. This increase is primarily due to fees earned on new joint venture projects. Approximately $113.6 million of the increase in revenues resulted from operations at the eighteen new centers, which were acquired on January 31, 2001 from The Richard E. Jacobs Group and are included in the consolidated financial statements. These centers are described in the Development, Expansions, Acquisitions and Dispositions section of this report: Approximately $ 17.3 million of the increase in revenues resulted from operations at the seven new centers opened or acquired during the past twenty-one months offset by a decrease in revenues of $4.1 million from seventeen centers sold in the last twenty-one months. These new centers are described in the previous section of this report. 15
CBL & Associates Properties, Inc. Management's Discussion And Analysis Of Financial Condition And Results Of Operations Improved occupancies and operations, increased recoveries and increased rents in the Company's operating portfolio generated $ 4.2 million of increased revenues. Management, leasing and development fees increased by $0.7 million to $3.8 million in the first nine months of 2001 as compared to $3.1 million in 2000. This increase is primarily due to increases in fees earned on new joint venture projects. Property operating expenses, including real estate taxes and maintenance and repairs, increased in the first nine months of 2001 by $43.3 million, or 54.9%, to $122.2 million as compared to $78.9 million in 2000. This increase was primarily the result of the addition of the twenty-five new centers referred to above. Depreciation and amortization increased in the first nine months of 2001 by $19.6 million, or 43.7%, to $64.6 million as compared to $45.0 million in 2000. This increase was primarily the result of the addition of the twenty-five new centers referred to above. General, administrative and other expense increased in the first nine months of 2001 by $1.0 million, or 7.4%, to $14.2 million as compared to $13.2 million in 2000. This increase was primarily the result of additional management staff related to the addition of the twenty-five new centers referred to above. Interest expense increased in the first nine months of 2001 by $46.6 million, or 66.1%, to $117.2 million as compared to $70.6 million in 2000. This increase was 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 nine months ended September 30, 2001 by $7.5 million to $5.8 million as compared to $13.3 million in 2000. The majority of gain on sales of real estate assets in the first nine months of 2001 resulted from the sales of outparcels at The Lakes Mall in Muskegon, Michigan. The balance of the gain on sales was from the sales of four completed centers during the nine months ended September 30, 2001. Equity in earnings of unconsolidated affiliates increased in the first nine months of 2001 by $2.2 million to $4.7 million as compared to $2.6 million in the first nine months 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 decreases as the result of the end of operations at Parkway Place Mall in Huntsville, Alabama which is being redeveloped and by the acquisition of the remaining interest in Madison Square Mall in Huntsville, Alabama. Since the Company now owns 100% of the interest in the Madison Square Mall, this property is now accounted for as a consolidated property rather than under the equity method. 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"). 16
CBL & Associates Properties, Inc. Management's Discussion And Analysis Of Financial Condition And Results Of Operations As of September 30, 2001, the Company had $99.6 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 September 30, 2001, the Company had obtained revolving credit lines and term loans totaling $389.4 million of which $124.9 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. 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 17.7% ownership interest in the Operating Partnership held by the Company's executive and senior officers, which may be exchanged for approximately 8.9 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 21.7%. Ownership interests issued to fund acquisitions of properties in 1998 and January 2001 and interest held by former executives may be exchanged for approximately 15.6 million shares of common stock, which represents a 31.2% 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 50.1 million shares of common stock with a market value of approximately $1.365 billion at September 30, 2001 (based on the closing price of $27.25 per share on September 30, 2001). The Company's total market equity is $1.436 billion, which includes 2.9 million shares of preferred stock at the closing price of $24.75 per share on September 30, 2001. The Company's executive and senior officers' ownership interests had a market value of approximately $296.7 million at September 30, 2001. Mortgage debt consists of debt on certain consolidated properties as well as on eight properties in which the Company owns a non-controlling interest and is accounted for under the equity method of accounting. At September 30, 2001, the Company's share of funded mortgage debt on its consolidated properties, adjusted for minority investors' interests in seven properties, was $2.327 billion and its pro rata share of mortgage debt on unconsolidated properties (accounted for under the equity method of accounting) was $100.8 million for total debt obligations of $2.428 billion with a weighted average interest rate of 6.657%. The Company's total conventional fixed rate debt as of September 30, 2001 was $1.563 billion with a weighted average interest rate of 7.53% as compared to 7.46% as of September 30, 2000. 17
CBL & Associates Properties, Inc. Management's Discussion And Analysis Of Financial Condition And Results Of Operations The Company's variable rate debt as of September 30, 2001 was $864.1 million with a weighted average interest rate of 5.09% as compared to 7.30% as of September 30, 2000. Through the execution of swap agreements, the Company has fixed the interest rates on $220 million of debt on operating properties at a weighted average interest rate of 6.40%. In addition, the Company has an interest rate cap in place on $50.0 million of variable rate debt leaving $594.1 million of debt subject to variable rates. Interest on $88.6 million of this remaining variable rate debt is capitalized to projects currently under construction leaving $505.5 million of variable rate debt exposure on operating properties as of September 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 September 30, 2001 are as follows: <TABLE> <CAPTION> Swap Amount (in millions) Fixed LIBOR Component Effective Date Expiration Date ----------------- --------------------- --------------- --------------- <S> <C> <C> <C> $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 50 7.500% 09/29/2000 10/01/2001 </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. At January 1, 2001, the Company 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 determined that new swap instruments obtained during 2001 were effective and qualified for hedge 18
CBL & Associates Properties, Inc. Management's Discussion And Analysis Of Financial Condition And Results Of Operations accounting. The Company measured the effectiveness of these instruments in place during the quarter and nine months ended September 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 $7.2 million in accrued liabilities and in other comprehensive loss of $7.2 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 $5.2 million of the current balance held in accumulated other comprehensive loss. 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 62.8% at September 30, 2001. During the third quarter, the Company closed a total of $121 million in variable rate financings with terms of up to three years for three properties with a weighted average interest rate of 5.10% at September 30,2001. The proceeds along with $6.9 million from the Company's credit facilities were used to prepay three loans with principal balances of approximately $114.9 million and prepayment penalties and closing costs of $12.9 million. The weighted average interest rate of the prepaid loans was 9.30%. The properties are Fashion Square Mall in Saginaw, Michigan, Jefferson Mall in Louisville, Kentucky and Northwoods Mall in North Charleston, South Carolina. 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 $79.7 million at September 30, 2001. Of the revolving component of this facility, $69.7 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. 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, in January 2001 the Company acquired the remaining 50% interest in Madison Square Mall in Huntsville, Alabama. The centers acquired are as follows: <TABLE> <CAPTION> Gross Leaseable Mall Shop Center / Location Ownership Area Gross Anchor stores Leaseable Area - -------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Brookfield Square 100% 1,041,000 317,000 Boston Store, Sears, Brookfield, WI JCPenney Cary Towne Center 100% 953,000 296,000 Dillard's, Hecht's, Cary, NC Hudson-Belk, Sears, JCPenney Cherryvale Mall 100% 714,000 305,000 Bergner's, Marshall Rockford, IL Fields, Sears Citadel Mall 100% 1,074,000 299,000 Parisian, Dillard's, Charleston, SC Belk, Target(2), Sears Columbia Mall 48% 1,113,000 299,000 Dillard's, JCPenney, Columbia, SC Rich's, Sears Eastgate Mall (1) 100% 1,166,000 270,000 JCPenney, Kohl's, Cincinnati, OH Dillard's, Sears East Towne Mall 48% 887,000 301,000 Boston Store, Younkers, Madison, WI Sears, JCPenney Fashion Square 100% 786,000 289,000 Marshall Fields, Saginaw, MI JCPenney, Sears Fayette Mall 100% 1,108,000 309,000 Lazarus, Dillard's, Lexington, KY JCPenney, Sears 19
CBL & Associates Properties, Inc. Management's Discussion And Analysis Of Financial Condition And Results Of Operations Gross Leaseable Mall Shop Center / Location Ownership Area Gross Anchor stores Leaseable Area - -------------------------------------------------------------------------------------------------------------------------- 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% 888,000 278,000 Dillard's, Elder- Paducah, KY Beerman, JCPenney, 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% 555,000 161,000 Belk, Goldsmith's, Jackson, TN Sears, JCPenney Parkdale Mall 100% 1,411,000 475,000 Dillard's I,Dillard's II Beaumont, TX JCPenney, Foleys(2), Sears Randolph Mall 100% 376,000 147,000 Belk, JCPenney, Asheboro, NC Dillard's(2), Sears Regency Mall 100% 887,000 268,000 Boston Store, Younkers, Racine, WI JCPenney, Sears Towne Mall 100% 465,000 154,000 Elder-Beerman, Franklin, OH Dillard's, Sears Wausau Center 100% 429,000 156,000 Younkers, JCPenney, Wausau, WI Sears West Towne Mall (1) 48% 1,462,000 263,000 Boston Store, Sears, Madison, WI JCPenney, Younkers <FN> (1) Includes Associated Center. (2) Opening in 2002. </FN> </TABLE> During the third quarter the Company opened The Lakes Mall in Muskegon, Michigan a 553,000-square-foot mall anchored by Yonkers, Sears and JC Penney; the first phase of the redevelopment of Parkway Place in Huntsville, Alabama and an expansion of Springdale Mall in Mobile, Alabama where a Best Buy opened. During the third quarter the Company also acquired the remaining 20% minority interest in Cary Towne Center in Cary, North Carolina. The Company acquired the interest in a tax free exchange under The Code for $4.5 million in cash and the assumption of $12.5 million in debt. 20
CBL & Associates Properties, Inc. Management's Discussion And Analysis Of Financial Condition And Results Of Operations The Company's other development activities include the second phase of the joint venture redevelopment of Parkway Place in Huntsville, Alabama which after opening the mall shops and Dillard's will contain 605,000-square-feet. The full redevelopment is scheduled to reopen in the fall of 2002. The Comapny is also expandng Meridian Mall in Lansing, Michigan which is scheduled to open in November 2001 and the fall of 2002 and two community center expansions at Chesterfield Crossing in Richmond, Virginia and at Coastal Way in Spring Hill, Florida. In addition, the Company has under construction a new corporate headquarters; CBL Center, in Chattanooga, Tennessee. The Company announced plans to commence construction in early 2002 of The Mall of South Carolina in Myrtle Beach, South Carolina, which is a joint venture with the landowner, Burroughs & Chapin. The 1.3 million square-foot regional mall is projected to open in the fall of 2003. During the third quarter the Company sold Park Village in Lakeland, Florida a 48,000-square-foot community center. The Company received a note of $1.3 million and proceeds of $1.5 million, which were used to pay down on the Company's credit facilities. 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. 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 50% - 90% of its funds from operations with the remaining 10% - 50% 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, and a return on the funds so invested is expected to be earned. For the first nine months of 2001, revenue generating capital expenditures or tenant allowances for improvements were $17.6 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 $7.1 million for the first nine months of 2001. Revenue enhancing capital expenditures, or remodeling and renovation costs, were $17.4 million for the nine months ended September 30, 2001. 21
CBL & Associates Properties, Inc. Management's Discussion And Analysis Of Financial Condition And Results Of Operations 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. 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 nine months of 2001, increased by $32.5 million, or 37.2%, to $119.7 million from $87.3 million in 2000. This increase was primarily due to the twenty-three centers acquired in January 2001 and the opening or acquisition of seven centers over the last twenty-one months and improved operations in the existing centers. Cash flows used in investing activities for the first nine months of 2001 increased by $112.5 million to $200.4 million compared to $87.9 million in 2000 primarily due to the acquisition of properties offset by an decrease in proceeds from sales of real estate assets. Cash flows provided by financing activities for the first nine months of 2001 increased by$90.0 million, to $89.1 million compared to $0.9 used in financing activities million in 2000 primarily due to increased borrowings related to the development and acquisition program. During the first nine months of 2001 the Company assumed debt of $791,449,000 and issued minority interests of $289,373,000 to acquire real estate assets. In the same period the Company also assumed debt of $71,495,000 and issued minority interests of $50,603,000 to acquire non-controlling interests in real estate assets accounted for under the equity method of accounting. 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, 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. Gains on outparcel sales in the third quarter of 2001 were $0.9 million compared to $0.8 million in the same period in 2000. In the nine months ended September 30, 2001 gains on outparcel sales would have added $2.1 million to FFO as compared to $4.1 million in the same period in 2000. 22
CBL & Associates Properties, Inc. Management's Discussion And Analysis Of Financial Condition And Results Of Operations 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 September 30, 2001, FFO increased by $16.4 million, or 50.3%, to $49.1 million as compared to $32.6 million for the same period in 2000. For the nine months ended September 30, 2001, FFO increased by $41.9 million, or 43.2%, to $139.0 million as compared to $97.1 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 twenty-one months. The Company's calculation of FFO is as follows (in thousands): <TABLE> <CAPTION> Three Months Nine months Ended Ended September 30, September 30, ------------------------- -------------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Income from operations $ 26,853 $ 18,657 $ 76,236 $ 55,839 ADD: Depreciation and amortization from Consolidated properties 22,553 15,238 64,650 45,002 Income from operations of Unconsolidated affiliates 1,770 934 4,743 2,585 Depreciation and amortization from Unconsolidated affiliates 951 318 2,780 1,223 SUBTRACT: Minority investors' share of income from operations (357) (296) (1,355) (1,022) Minority investors' share of Depreciation and amortization (207) (246) (821) (736) Depreciation and amortization of non-real estate assets and finance costs (868) (344) (2,355) (980) Preferred dividends (1,617) (1,617) (4,851) (4,851) --------- -------- -------- -------- TOTAL FUNDS FROM OPERATIONS $ 49,078 $ 32,644 $139,027 $ 97,060 ========= ======== ======== ======== </TABLE> 23
CBL & Associates Properties, Inc. 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 B. Reports on Form 8-K The following items were reported: The outline from the Company's October 31, 2001 conference call with analysts and investors regarding earnings (Item 5) was filed on October 31, 2001. 24
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: November 14, 2001