Securities Exchange Act of 1934 -- Form10-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, 1998 --------------------------- 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 (IRS Employer of incorporation or Identification organization) 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 9, 1998: Common Stock, par value $.01 per share, 24,194,386 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, 1998 AND DECEMBER 31, 1997 4 CONSOLIDATED STATEMENTS OF OPERATIONS - FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997 5 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9 PART II OTHER INFORMATION ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 25 SIGNATURE 26 2
CBL & ASSOCIATES PROPERTIES, INC. ITEM 1 - FINANCIAL INFORMATION The accompanying financial statements are unaudited; however, they have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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 periods ended September 30, 1998 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 "REIT") December 31, 1997 audited financial statements and notes thereto included in the CBL & Associates Properties, Inc. Form 10-K for the year ended December 31, 1997. 3
CBL & ASSOCIATES PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share data) (UNAUDITED) September 30, December 31, 1998 1997 ----------- ------------ ASSETS Real estate assets: Land . . . . . . . . . . . . . . . . . . . $ 258,234 $ 167,895 Buildings and improvements . . . . . . . . 1,609,231 1,019,283 ---------- ---------- 1,867,465 1,184,178 Less: Accumulated depreciation . . . . . . (174,921) (145,641) ---------- ---------- 1,692,544 1,038,537 Developments in progress . . . . . . . . . 89,369 103,787 ---------- ---------- Net investment in real estate assets . . . 1,781,913 1,142,324 Cash and cash equivalents. . . . . . . . . . 6,787 3,124 Cash in escrow . . . . . . . . . . . . . . . -- 66,108 Receivables: Tenant . . . . . . . . . . . . . . . . . . 17,665 12,891 Other. . . . . . . . . . . . . . . . . . . 1,505 1,121 Mortgage notes receivable . . . . . . . . . 11,949 11,678 Other assets . . . . . . . . . . . . . . . . 14,648 7,779 ---------- ---------- $1,834,467 $1,245,025 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Mortgage and other notes payable . . . . . . $1,184,967 $ 741,413 Accounts payable and accrued liabilities . . 41,020 41,978 ---------- ---------- Total liabilities. . . . . . . . . . . . . 1,225,987 783,391 ---------- ---------- Distributions and losses in excess of investment in unconsolidated affiliates. . 6,996 6,884 ---------- ---------- Minority interest . . . . . . . . . . . . . 193,420 123,897 ---------- ---------- Commitments and contingencies. . . . . . . . -- -- Shareholders' Equity: Preferred stock, $.01 par value, 5,000,000 shares authorized 2,875,000 issued in 1998, none in 1997 . . . . . . . . . . . 29 -- Common stock, $.01 par value, 95,000,000 shares authorized, 24,172,155 and 24,063,963 shares issued and outstanding in 1998 and 1997, respectively . . . . . 242 241 Excess stock, $.01 par value, 100,000,000 shares authorized, none issued . . . . . -- -- Additional paid - in capital . . . . . . . 431,716 359,541 Accumulated deficit. . . . . . . . . . . . (23,376) (28,433) Deferred compensation. . . . . . . . . . . (547) (496) ---------- ---------- Total shareholders' equity . . . . . . . 408,064 330,853 ---------- ---------- $1,834,467 $1,245,025 ========== ========== The accompanying notes are an integral part of these balance sheets. 4
CBL & ASSOCIATES PROPERTIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) Three Months Ended Nine Months Ended September 30, September 30, -------------------- -------------------- 1998 1997 1998 1997 --------- --------- --------- --------- REVENUES: Rentals: Minimum . . . . . . . . . . . $44,525 $28,726 $118,545 $83,266 Percentage. . . . . . . . . . 1,146 770 3,975 2,677 Other . . . . . . . . . . . . 462 256 1,282 615 Tenant reimbursements. . . . . . 20,238 12,225 52,241 36,622 Management, development and leasing fees . . . . . . . . 639 655 2,058 1,765 Interest and other . . . . . . . 703 611 2,067 1,998 ------- ------- ------- ------- Total revenues . . . . . . . . 67,713 43,243 180,168 126,943 ------- ------- ------- ------- EXPENSES: Property operating . . . . . . . 11,187 7,568 29,511 22,038 Depreciation and amortization. . 11,659 8,029 30,534 23,639 Real estate taxes. . . . . . . . 6,355 3,515 16,607 10,450 Maintenance and repairs. . . . . 3,928 2,427 10,223 7,270 General and administrative . . . 2,775 1,849 8,506 6,352 Interest . . . . . . . . . . . . 19,019 9,146 47,836 27,081 Other. . . . . . . . . . . . . . 113 3 122 45 ------- ------- ------- ------- Total expenses . . . . . . . . 55,036 35,537 143,339 96,875 ------- ------- ------- ------- Income from operations . . . . . 12,677 10,706 36,829 30,068 Gain on sales of real estate assets. . . . . . . . . . 398 774 2,910 4,156 Equity in earnings of unconsolidated affiliates. . . . 521 301 1,689 1,514 Minority interest in earnings: Operating partnership. . . . . (3,499) (3,178) (11,276) (9,763) Shopping center properties . . (101) (116) (409) (405) ------- ------- ------- ------- Income before extraordinary item . . . . . . . . . . . . . 9,996 8,487 29,743 25,570 Extraordinary loss on extinguishment of debt . . . . (676) (432) (676) (928) ------- ------- ------- ------- Net income . . . . . . . . . . . 9,320 8,055 29,067 24,642 Preferred dividend . . . . . . . (1,617) -- (1,617) -- ------- ------- ------- ------- Net income available to common shareholders . . . . . . . . . $ 7,703 $ 8,055 $27,450 $24,642 ======= ======= ======= ======= Basic per share data: Income before extraordinary item . . . . . . . . . . . . $ 0.35 $ 0.35 $ 1.17 $ 1.07 ======= ======= ======= ======= Net income . . . . . . . . . . $ 0.32 $ 0.34 $ 1.14 $ 1.03 ======= ======= ======= ======= Weighted average common shares outstanding. . . . . . . . . . 24,117 24,025 24,089 23,842 ======= ======= ======= ======= Diluted per share data: Income before extraordinary item . . . . . . . . . . . . $ 0.34 $ 0.35 $ 1.16 $ 1.06 ======= ======= ======= ======= Net income . . . . . . . . . . $ 0.32 $ 0.33 $ 1.13 $ 1.02 ======= ======= ======= ======= Weighted average common and dilutive potential common shares outstanding . . . . . . 24,409 24,300 24,345 24,104 ======= ======= ======= ======= The accompanying notes are an integral part of these statements. 5
CBL & ASSOCIATES PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED) Nine Months Ended September 30, ---------------------- 1998 1997 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income . . . . . . . . . . . . . . . . . . . $29,067 $24,642 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest in earnings. . . . . . . . . 11,685 10,168 Depreciation . . . . . . . . . . . . . . . . . 26,032 21,397 Amortization . . . . . . . . . . . . . . . . . 5,369 2,760 Extraordinary loss on extinguishment of debt . -- 62 Gain on sales of real estate assets. . . . . . (2,910) (4,156) Issuance of stock under incentive plan . . . . 287 127 Equity in earnings of unconsolidated affiliates . . . . . . . . . . . . . . . . . (1,689) (1,514) Amortization of deferred compensation. . . . . 392 239 Write-off of development projects. . . . . . . 122 45 Distribution from unconsolidated affiliates . . . . . . . . . . . . . . . . . 2,768 1,764 Distributions to minority investors. . . . . . (13,193) (12,647) Changes in assets and liabilities - Tenant and other receivables . . . . . . . (5,158) (293) Other assets . . . . . . . . . . . . . . . (6,187) (769) Accounts payable and accrued expenses. . . 12,833 6,207 -------- -------- Net cash provided by operating activities . . . . . . . . . . . . . . . 59,418 48,032 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Construction of real estate and land acquisitions, net of payables. . . . . . . . (81,290) (101,282) Acquisition of real estate assets. . . . . . . (501,156) (36,207) Capitalized interest . . . . . . . . . . . . . (3,858) (4,702) Other capital expenditures . . . . . . . . . . (16,186) (6,580) Deposits in escrow . . . . . . . . . . . . . . 66,108 -- Proceeds from sales of real estate assets . . . . . . . . . . . . . . . . . . . 6,730 8,876 Additions to mortgage notes receivable . . . . (1,497) (3,252) Payments received on mortgage notes receivable . . . . . . . . . . . . . . . . . 1,435 1,472 Additional investments in and advances to unconsolidated affiliates. . . . . . . . . . (967) (1,724) -------- -------- Net cash used in investing activities. . . . (530,681) (143,399) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from mortgage and other notes payable. . . . . . . . . . . . . . . . . . . 586,832 251,540 Principal payments on mortgage and other notes payable. . . . . . . . . . . . . (143,278) (198,279) Additions to deferred finance costs. . . . . . (2,025) (655) Proceeds from issuance of preferred stock. . . 70,112 -- Proceeds from issuance of common stock . . . . 240 74,465 Proceeds from exercise of stock options. . . . 1,391 1,104 Purchase of minority interest. . . . . . . . . (3,012) -- Prepayment penalties on extinguishment of debt. . . . . . . . . . . . . . . . . . . (676) (866) Dividends paid . . . . . . . . . . . . . . . . (34,658) (30,038) --------- -------- Net cash provided by financing activities. . 474,926 97,271 --------- -------- NET CHANGE IN CASH AND CASH EQUIVALENTS. . . . . 3,663 1,904 CASH AND CASH EQUIVALENTS, beginning of period . . . . . . . . . . . . . . . . . . . . . 3,124 4,298 --------- -------- CASH AND CASH EQUIVALENTS, end of period . . . . . $ 6,787 $ 6,202 ========= ======== Cash paid for interest, net of amounts capitalized. . . . . . . . . . . . . . . . . . . $ 42,147 $ 22,660 ========= ======== 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 September 30, 1998, the Company had investments in four partnerships and joint ventures, all of which are reflected using the equity method of accounting. Condensed combined results of operations for the unconsolidated affiliates are as follows (in thousands): Comapny's Share Total For The For The Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 1998 1997 1998 1997 -------- -------- -------- -------- Revenues . . . . . . . . $ 2,597 $ 2,515 $ 8,125 $ 7,856 -------- -------- -------- -------- Depreciation and amortization . . . . . 357 337 1,057 993 Interest expense . . . . 920 964 2,904 2,786 Other operating expenses . . . . . . . 799 913 2,475 2,563 -------- -------- -------- -------- Net income . . . . . . . $ 521 $ 301 $ 1,689 $ 1,514 ======== ======== ======== ======== 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 that exposure, if any, related to environmental cleanup will be immaterial to the financial position and results of operations of the Company. 7
Note 3 - Credit Agreements The Company has credit facilities of $230 million of which $95.6 million is available at September 30, 1998. Outstanding amounts under the credit facilities bear interest at a weighted average interest rate of 6.51% at September 30, 1998. The Company's variable rate debt as of September 30, 1998 was $521.1 million with a weighted average interest rate of 6.61% as compared to 6.98% as of September 30, 1997. Through the execution of interest rate swap agreements, the Company has fixed the interest rates on $314 million of variable rate debt on operating properties at a weighted average interest rate of 6.61%. Of the Company's remaining variable rate debt of $207.1 million, interest rate caps in place of $100.0 million and conventional permanent loan commitments of $39.4 million, leave $67.7 million of debt subject to variable rates on construction properties and no debt subject to variable rates on operating properties. There were no fees charged to the Company related to these swap agreements. The Company's swap agreements in place at September 30, 1998 are as follows: Swap Amount Fixed LIBOR (in millions) Component Expiration Date Effective Date - -------------- -------------- --------------- -------------- $65 5.72% 01/07/2000 01/07/98 81 5.54% 02/04/2000 02/04/98 50 5.70% 06/15/2001 06/15/98 38 5.73% 06/30/2001 06/26/98 80 5.49% 09/01/2001 09/01/98 In December 1997, the Company obtained two $100 million interest rate caps on LIBOR-based variable rate debt, one at 7% for 1998 and one at 7.5% for 1999. There was a fee paid to obtain these caps. Note 4- Non-Cash Financing and Investing Activities During the three months ended September 30, 1998 the Company issued operating partnership units to finance acquisitions of real estate assets with a value of $69.0 million. 8
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 the Company's Consolidated Financial Statements and Notes thereto. The 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 The Company's Consolidated Financial Statements and Notes thereto reflect the consolidated financial results of CBL & Associates Limited Partnership (the "Operating Partnership") which includes at September 30, 1998 the operations of a portfolio of properties consisting of twenty-four regional malls, thirteen associated centers, eighty-three community centers, an office building, joint venture investments in three regional malls and one associated center, and income from six mortgages ("the Properties"). The Operating Partnership also has one mall, one associated center, one power center, two community centers and one expansion currently under construction and holds 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 the redeveloped and expanded Westgate Mall in Spartanburg, South Carolina, Oak Hollow Mall in High Point, North Carolina, Springdale Mall in Mobile, Alabama which is being redeveloped and Bonita Lakes Mall in Meridian, Mississippi. 9
In July 1998, the Company acquired Hickory Hollow Mall, Rivergate Mall, The Courtyard at Hickory Hollow, The Village at Rivergate and Lionshead Village, all located in the metropolitan Nashville, Tennessee area. The purchase price of $247.4 million was funded with a ten-year fixed-rate loan in the amount of $182.7 million, 631,016 operating partnership units in the Operating Partnership with a value of $15.3 million and the balance funded from the Company's credit lines. In July 1998, the Company purchased 122,008 limited partnership units valued at $3.0 million from a former executive and minority investor in the Operating Partnership. In August 1998, the Company acquired Meridian Mall in Lansing (Oskemos), Michigan and Janesville Mall in Janesville, Wisconsin. The purchase price of $138 million was funded with an acquisition loan of $80 million, 2,118,229 limited partnership units in the Operating Partnership with a value of $53 million and, the assumption of a $17.1 million mortgage loan. Excess loan proceeds of $12.1 million were used to pay down the Company's credit lines. In the third quarter of 1998, the Company closed the purchase of three parcels of land from CBL & Associates, Inc., the predecessor company, for an aggregate price of $1,538,157. The Operating Partnership issued limited partnership interests equivalent to 62,100 common shares in exchange for the property. The Company used the land to expand existing centers. RESULTS OF OPERATIONS Operational highlights for the nine months ended September 30, 1998 as compared to the nine months ended September 30, 1997 are as follows: SALES Mall shop sales, for those tenants who have reported, in the twenty-three Stabilized Malls in the Company's portfolio increased by 4.6% on a comparable per square foot basis. Nine Months Ended September 30, ------------------------------- 1998 1997 ------------ ----------- Sales per square foot $176.76 $169.07 Total sales volume in the mall portfolio, including New Malls, increased 11.1% to $871.4 million for the nine months ended September 30, 1998 from $784.2 million for the nine months ended September 30, 1997. Occupancy costs as a percentage of sales was 12.2% for the nine months ended September 30, 1998 and 13.1% for the nine months ended September 30, 1997 for the Stabilized Malls. Occupancy costs were 11.2%, 11.5% and 12.3% for the years ended December 31, 1997, 1996, and 1995, 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. 10
OCCUPANCY Occupancy for the Company's overall portfolio is as follows: At September 30, -------------------- 1998 1997 -------- ------- Stabilized malls . . . . . . . . 91.7% 89.0% New malls . . . . . . . . . . . . 92.0% 87.9% Associated centers . . . . . . . 89.7% 83.1% Community centers . . . . . . . . 96.5% 97.4% Total Portfolio . . . . . . . . . 93.7% 92.6% AVERAGE BASE RENT Average base rents per square foot for the Company's three portfolio categories were as follows: At September 30, -------------------- 1998 1997 -------- ------- Malls . . . . . . . . . . . . . . $19.29 $19.02 Associated centers. . . . . . . . 9.41 9.46 Community centers . . . . . . . . 8.10 7.30 LEASE ROLLOVERS On spaces previously occupied, the Company achieved the following results from rollover leasing during the nine months ended September 30, 1998, over and above the base and percentage rent paid by the previous tenant: Per Square Per Square Foot Rent Foot Rent Percentage Prior Lease(1) New Lease(2) Increase -------------- ------------ ----------- Malls . . . . . . . . . $20.18 $22.96 13.8% Associated centers. . . 10.17 11.50 13.1% Community centers . . . 7.79 8.70 11.7% 11
(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. For the nine months ended September 30, 1998, malls represented 74.0% of total revenues from the Properties; revenues from associated centers represented 3.9%; revenues from community centers represented 20.7%; and revenues from mortgages and the office building represented 1.4%. Accordingly, revenues and results of operations are disproportionately impacted by the malls' results of operations. The Company's cost recovery ratio increased to 92.7% for the nine months ended September 30, 1998 as compared to 92.1% in 1997. 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 entire year. Comparison of Results of Operations for the three months ended September 30, 1998 to the Results of Operations for the three months ended September 30, 1997 Total revenues for the three months ended September 30, 1998 increased by $24.5 million, or 56.7%, to $67.7 million as compared to $43.2 million in 1997. Of this increase, minimum rents increased by $15.8 million, or 55.0%, to $44.5 million as compared to $28.7 million in 1997, and tenant reimbursements increased by $8.0 million, or 65.5%, to $20.2 million in 1998 as compared to $12.2 million in 1997. Improved occupancies and operations and increased rents in the Company's operating portfolio generated approximately $1.4 million of the increase in revenues. The majority of these increases were generated at Westgate Mall in Spartanburg, South Carolina and St. Clair Square in Fairview Heights, Illinois. New revenues of $23.1 million resulted from operations at the twenty new centers opened or acquired during the past fifteen months as follows: <TABLE> <C> <C> <C> <C> <C> Project Name Location Total GLA Type of Addition Opening Date - ------------- -------- ---------- ----------------- ------------ Salem Crossing Virginia Beach, Virginia 289,000 New Development July, 1997 Strawbridge Marketplace Virginia Beach, Virginia 44,000 New Development August, 1997 Springhurst Towne Center Louisville, Kentucky 811,000 New Development August, 1997 Bonita Lakes Mall Meridian, Mississippi 633,000 New Development October, 1997 Bonita Lakes Crossing Meridian, Mississippi 110,000 New Development October, 1997/ March, 1998 </TABLE> 12
<TABLE> <C> <C> <C> <C> <C> Project Name Location Total GLA Type of Addition Opening Date - ------------- -------- ---------- ----------------- ------------ Cortlandt Town Center Cortlandt, New York 772,000 New Development November, 1997 Chester Plaza Richmond, Virginia 10,000 New Development October, 1997 Sterling Creek Commons Portsmouth, Virginia 65,500 New Development June, 1998 Westgate Crossing Spartanburg, South Carolina 151,000 Acquisition August, 1997 Springdale Mall Mobile, Alabama 926,000 Acquisition September, 1997 Asheville Mall Asheville, North Carolina 817,000 Acquisition January, 1998 Burnsville Center Burnsville (Minneapolis), 1,070,000 Acquisition January, 1998 Minnesota Stroud Mall Stroudsburg, Pennsylvania 427,000 Acquisition April, 1998 Hickory Hollow Mall Nashville, Tennessee 1,096,000 Acquisition July, 1998 Rivergate Mall Nashville, Tennessee 1,014,000 Acquisition July, 1998 Courtyart at Hickory Nashville, Tennessee 77,000 Acquisition July, 1998 Hollow Village at Rivergate Nashville, Tennessee 166,000 Acquisition July, 1998 Lionshead Nashville, Tennessee 93,000 Acquisition July, 1998 Meridian Mall Oskemos (Lansing), Michigan 777,000 Acquisition August, 1998 Janesville Mall Janesville, Wisconsin 615,000 Acquisition August, 1998 </TABLE> Interest and other income increased in the third quarter of 1998 by $0.1 million, to $0.7 million from $0.6 million in 1997. This increase is due to interest on advances to developers in the Company's co-development program. Property operating expenses, including real estate taxes and maintenance and repairs, increased in the third quarter of 1998 by $8.0 million, or 58.9%, to $21.5 million as compared to $13.5 million in the third quarter of 1997. This increase is primarily the result of the addition of the twenty new centers referred to above. Depreciation and amortization increased in the third quarter of 1998 by $3.6 million, or 45.2%, to $11.7 million as compared to $8.0 million in the third quarter of 1997. This increase is primarily the result of the addition of the twenty new centers referred to above. Interest expense increased in the third quarter of 1998 by $9.9 million, or 107.9%, to $19.0 million as compared to $9.1 million in 1997. This increase is primarily due to interest on debt related to the twenty new centers opened or acquired during the last fifteen months. The gain on sales of real estate assets decreased in the third quarter of 1998 by $0.4 million, or 48.6%, to $0.4 million as compared to $0.8 million in 1997. The outparcel sale in the third quarter of 1998 was at Sand Lake Corner in Orlando, Florida. The sales in the third quarter of 1997 were for outparcels at Springhurst Towne Center in Louisville, Kentucky. 13
The extraordinary loss in the third quarter of 1998 was from the refinancing of the loan on College Square Mall in Morristown, Tennessee. The Company reduced the interest rate from 10% to 6.75% and extended the term to fifteen years. Comparison of Results of Operations for the nine months ended September 30, 1998 to the Results of Operations for the nine months ended September 30, 1997 Total revenues for the nine months ended September 30, 1998 increased by $53.3 million, or 42.0%, to $180.2 million as compared to $126.9 million in 1997. Of this increase, minimum rents increased by $35.2 million, or 42.3%, to $118.5 million as compared to $83.3 million in 1997, and tenant reimbursements increased by $15.6 million, or 42.6%, to $52.2 million in 1998 as compared to $36.6 million in 1997. Improved occupancies and operations and increased rents in the Company's operating portfolio generated $5.5 million of increased revenues. The majority of these increases were generated at Westgate Mall in Spartanburg, South Carolina and Coolsprings Galleria in Nashville, Tennessee. New revenues of $47.7 million resulted from operations at the twenty-five new centers opened or acquired during the past twenty-one months. These centers are as follows: <TABLE> <C> <C> <C> <C> <C> Project Name Location Total GLA Type of Addition Opening Date - ------------- -------- ---------- ----------------- ------------ Northpark Center Richmond, Virginia 61,000 New Development March, 1997 The Terrace Chattanooga, Tennessee 156,000 New Development February/ March 1997 Massard Crossing Fort Smith, Arkansas 291,000 New Development March, 1997 Salem Crossing Virginia Beach, Virginia 289,000 New Development July, 1997 Strawbridge Marketplace Virginia Beach, Virginia 44,000 New Development August, 1997 Springhurst Towne Center Louisville, Kentucky 811,000 New Development August, 1997 Bonita Lakes Mall Meridian, Mississippi 633,000 New Development October, 1997 Bonita Lakes Crossing Meridian, Mississippi 62,300 New Development October, 1997/ March 1998 Cortlandt Town Center Cortlandt, New York 772,000 New Development November, 1997 Chester Plaza Richmond, Virginia 10,000 New Development October, 1997 Hamilton Place Expansion Chattanooga, Tennessee 12,500 New Development April, 1998 Sterling Creek Commons Portsmouth, Virginia 65,500 New Development June, 1998 Governor's Plaza Clarksville, Tennessee 151,000 Acquisition June, 19978 Westgate Crossing Spartanburg, South Carolina 151,000 Acquisition August, 1997 Springdale Mall Mobile, Alabama 926,000 Acquisition September, 1997 Asheville Mall Asheville, North Carolina 817,000 Acquisition January, 1998 Burnsville Center Burnsville (Minneapolis), 1,070,000 Acquisition January, 1998 Minnesota Stroud Mall Stroudsburg, Pennsylvania 427,000 Acquisition April, 1998 Hickory Hollow Mall Nashville, Tennessee 1,095,946 Acquisition July, 1998 Rivergate Mall Nashville, Tennessee 1,013,970 Acquisition July, 1998 Courtyart at Hickory Nashville, Tennessee 77,460 Acquisition July, 1998 Hollow </TABLE> 14
<TABLE> <C> <C> <C> <C> <C> Project Name Location Total GLA Type of Addition Opening Date - ------------- -------- ---------- ----------------- ------------ Village at Rivergate Nashville, Tennessee 166,366 Acquisition July, 1998 Lionshead Nashville, Tennessee 93,290 Acquisition July, 1998 Meridian Mall Oskemos (Lansing), Michigan 776,960 Acquisition August, 1998 Janesville Mall Janesville, Wisconsin 615,000 Acquisition August, 1998 </TABLE> Management, leasing and development fees increased by $0.3 million to $2.1 million in the first nine months of 1998 as compared to $1.8 million in 1997. This increase was primarily due to fees earned in the Company's co- development program and increases in management fees on managed properties. Property operating expenses, including real estate taxes and maintenance and repairs, increased in the first nine months of 1998 by $16.6 million, or 41.7%, to $56.3 million as compared to $39.8 million in 1997. This increase is 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 1998 by $6.9 million, or 29.2%, to $30.5 million as compared to $23.6 million in 1997. This increase is primarily the result of the addition of the twenty-five new centers referred to above. Interest expense increased in the first nine months of 1998 by $20.8 million, or 76.6%, to $47.8 million as compared to $27.1 million in 1997. 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 first nine months of 1998 by $1.3 million, or 30.0%, to $2.9 million as compared to $4.2 million in 1997. Gain on sales in the first nine months of 1998 were for outparcel sales at the Company's developments in Springhurst Towne Center in Louisville, Kentucky and Sterling Creek Commons in Portsmouth, Virginia. The sales in the first nine months of 1997 were in connection with anchor pad and outparcel sales at developments in Courtlandt Town Center in Courtlandt, New York, Salem Crossing in Virginia Beach, Virginia, and Springhurst Towne Center in Louisville, Kentucky, off-set by a loss on sale at Kingston Overlook in Knoxville, Tennessee. The extraordinary loss in the first nine months of 1998 was from the refinancing of the loan on College Square Mall in Morristown, Tennessee. The Company reduced the interest rate from 10% to 6.75% and extended the term to fifteen years. Liquidity and Capital Resources The principal uses of the Company's liquidity and capital resources have historically been for property development, acquisitions, expansion and renovation programs, and debt repayment. 15
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 95% of its "Real Estate Investment Trust Taxable Income" as defined in the Internal Revenue Code of 1986, as amended (the "Code"). As of October 31, 1998, the Company had $75.2 million available in unfunded construction loans to be used for completion of construction projects and replenishment of working capital previously used for construction. Additionally, as of October 31, 1998, the Company had obtained revolving credit facilities totaling $230 million of which $83.8 million was available. Also, 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 at this time thinks 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, credit facilities, preferred stock, common stock and a minority interest in the Operating Partnership. Ownership interest in the Operating Partnership held by the Company's executive, former executive and senior officers is 26.2% which may be exchanged for approximately 9.5 million shares of common stock . Additionally, Company executive officers and directors own approximately 1.7 million shares of the outstanding common stock of the Company, for a combined total interest in the Operating Partnership of approximately 30.4%. Ownership interests granted in exchange for acquired properties may be exchanged for approximately 2.8 million shares of common stock. The minority interest in the Operating Partnership from executive ownership interest and ownership interest granted in exchange of acquired properties is 33.7%. Assuming the exchange of all limited partnership interests in the Operating Partnership for common stock, there would be outstanding approximately 36.5 million shares of common stock with a market value of approximately $938.8 million at September 30, 1998 (based on the closing price of $25.75 per share on September 30, 1998). The Company's total market equity is $1,010.7 million including 2.9 million shares of preferred stock at $25.00 per share at September 30,1998. Company executive, former executive and senior officers' ownership interests had a market value of approximately $286.0 million at September 30, 1998. Mortgage debt consists of debt on certain consolidated properties as well as on three properties in which the Company owns a non-controlling 16
interest and are accounted for under the equity method of accounting. At September 30, 1998, the Company's share of funded mortgage debt on its consolidated properties adjusted for minority investors' interests in nine properties was $1,163.4 million and its pro rata share of mortgage debt on unconsolidated properties (accounted for under the equity method) was $41.4 million for total debt obligations of $1,204.8 million with a weighted average interest rate of 7.13%. The Company's total conventional fixed rate debt as of September 30, 1998 was $683.7 million with a weighted average interest rate of 7.52% as compared to 8.1% as of September 30, 1997. The Company's variable rate debt as of September 30, 1998 was $521.1 million with a weighted average interest rate of 6.61% as compared to 6.98% as of September 30, 1997. Through the execution of interest rate swap agreements, the Company has fixed the interest rates on $314 million of variable rate debt on operating properties at a weighted average interest rate of 6.61%. Of the Company's remaining variable rate debt of $207.1 million, interest rate caps in place of $100.0 million and conventional permanent loan commitments of $39.4 million, leave $67.7 million of debt subject to variable rates on construction properties and no debt subject to variable rates on operating properties. There were no fees charged to the Company related to these swap agreements. The Company's swap agreements in place at September 30, 1998 are as follows: Swap Amount Fixed LIBOR (in millions) Component Expiration Date Effective Date - -------------- -------------- --------------- -------------- $65 5.72% 01/07/2000 01/07/98 81 5.54% 02/04/2000 02/04/98 50 5.70% 06/15/2001 06/15/98 38 5.73% 06/30/2001 06/26/98 80 5.49% 09/01/2001 09/01/98 In December 1997, the Company obtained two $100 million interest rate caps on LIBOR-based variable rate debt, one at 7% for 1998 and one at 7.5% for 1999. There was a fee paid to obtain these caps. In August 1998, Wells Fargo Reality Advisors Funding, Inc., the agent for the Company's largest credit facility, increased the Company's credit facility to $120 million from $85 million. In September 1998, the Company extended a short term loan with Compass Bank in the amount of $12.5 million at an interest rate of 50 basis points over LIBOR. The note matures in equal installments on November 15, 1998 and pays out over the next 60 days. The weighted average interest rate on the Company's credit facilities is 6.52% at September 30, 1998. 17
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 54.4% at September 30, 1998. Development, Expansions And Acquisitions In the third quarter of 1998, the Company opened a 12,000-square-foot expansion to Coolsprings Crossing in Nashville, Tennessee. The Company's other development project under construction and scheduled to open during 1998 is Sand Lake Corners in Orlando, Florida, a 594,000 square-foot community center, the non-owned first phase of which will open in November 1998 with the remainder to open by April 1999. Projects scheduled to open in 1999 are Fiddler's Run in Morganton, North Carolina, a 203,000 square- foot community center scheduled to open in March 1999 and Arbor Place Mall in Douglasville, Georgia, a suburb of Atlanta. This 983,000 square-foot mall is scheduled to open in October 1999 with an additional 250,000 square- feet planned. Preliminary grading work has already begun for the construction of an adjacent 165,000 square-foot associated center to be called The Landing at Arbor Place. In the second quarter of 1998 the Company began construction on an 83,000 square-foot Regal Cinema in Jacksonville, Florida scheduled to open in the fall of 1999. In July 1998, the Company began sitework on a 92,000 square foot Sears expansion to Lakeshore Mall in Sebring, Florida. In July 1998, the Company acquired Hickory Hollow Mall, a 1,096,000 square-foot mall, and Rivergate Mall, a 1,074,000 square-foot mall both of which are located in the metropolitan Nashville, Tennessee area. Both malls are anchored by Dillard's, JC Penney, Proffitts and Sears. The Company also acquired The Courtyard at Hickory Hollow, a 77,000 square- foot associated center, The Village at Rivergate, a 166,000 square-foot associated center, and Lionshead Village, a 93,000 square-foot community center, all located in the metropolitan Nashville, Tennessee area. In August 1998, the Company acquired Meridian Mall, a 767,000 square-foot mall, in Lansing (Oskemos), Michigan and Janesville Mall, a 615,000 square- foot mall, in Janesville, Wisconsin. The Company has entered into standby purchase agreements with third- party developers (the "Developers") for the construction, development and potential ownership of two community centers in Georgia and Texas (the "Co- Development Projects"). The Developers have utilized these standby purchase agreements to assist in obtaining financing to fund the construction of the Co-Development Projects. The standby purchase agreements, which expire in 1999, are dependent upon certain completion requirements, rental levels, the inability of the Developers to obtain adequate permanent financing and the inability to sell the Co-Development Project before the Company becomes obligated to fund its equity contribution or purchase the Co-Development Project. In return for its commitment to purchase a Co-Development Project pursuant to a standby purchase agreement, the Company receives a fee as well as a participation interest in either the cash flow or gains from sale on each Co-Development Project. In addition to the standby purchase agreements, the Company has extended credit to a Developer to cover pre-development costs. The outstanding amount on standby purchase agreements is $49.1 18
million and the committed amount on secured credit agreements is $2.7 million of which $2.2 million is outstanding at September 30, 1998. The Company has entered into a number of option agreements for the development of future regional malls and community centers as well as contingent contracts for the purchase of certain properties. Except for these projects and as further described below, the Company currently has no other 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 activity 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 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 70% - 80% of its funds from operations with the remaining 20% - 30% to be held as a reserve for capital expenditures and continued growth opportunities. The Company believes that this reserve will be sufficient to cover both tenant finish costs associated with the renewal or replacement of current tenant leases as their leases expire and 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 credit facilities. For the nine months ended September 30, 1998, revenue generating capital expenditures, or tenant allowances for improvements, were $4.9 million. These capital expenditures generate increased rents from these tenants over the term of their leases. Revenue enhancing capital expenditures, or remodeling and renovation costs, were $7.7 million for the nine months ended September 30, 1998. Revenue neutral capital expenditures, which are recovered from the tenants, were $3.5 million for the nine months ended September 30, 1998. 19
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, or 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 nine months ended September 30, 1998 increased by $11.4 million, or 23.7%, to $59.4 million from $48.0 million in 1997. This increase was primarily due to the increases in net income and depreciation and amortization related to the addition of twenty-five new properties over the last twenty-one months. Cash flows used in investing activities for the nine months ended September 30, 1998 increased by $387.3 million, or 270.1%, to $530.7 million compared to $143.4 million in 1997. This increase was due to the purchase of seven malls and three other centers in 1998 and continuing development of new properties as compared to 1997. Cash flows provided by financing activities for the nine months ended September 30, 1998, increased by $377.6 million, or 388.1%, to $474.9 million compared to $97.3 million in 1997. The increase was primarily due to increased borrowings related to the development and acquisition program and a decrease in the amount of debt repaid in the nine months ended September 30, 1998 as compared to the same period in 1997. Impact of Inflation In the last four 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. 20
YEAR 2000 READINESS DISCLOSURES The Year 2000 problem results from the use of a two digit year date instead of a four digit date in the programs that operate computers information processing technology and systems and other devices (i.e. non-information processing systems such as elevators, utility monitoring systems and time clocks that use computer chips). Systems with a Year 2000 problem have programs that were written to assume that the first two digits for any date used in the program would always be "19". Unless corrected, this assumption may result in problems when the century date occurs. On that date, these computer programs likely will misinterpret the date January 1, 2000 as January 1, 1900. This could cause systems to incorrectly process critical financial and operational information, generate erroneous information or fail altogether. The Year 2000 issue effects almost all companies and organizations. The Company has completed a program to identify both its information and non-information processing applications that are not year 2000 compliant. As a result of this identification program, the Company believes that its core accounting application and the majority of non-information processing applications are year 2000 compliant. Certain of its other information and non-information processing applications are not yet year 2000 compliant. The Company has undertaken to correct or replace all non-compliant systems and applications including embedded systems and expects the task to be completed by the end of 1998. The Company has initiated communications with its significant suppliers and tenants to determine the extent to which the Company is vulnerable to the failure of such parties to correct their year 2000 compliance issues. In addition, the Company has formed a Year 2000 Committee that includes senior personnel from most areas of the Company. These people are charged with the duty of determining the extent of the Company's exposure and taking the appropriate action to minimize any impact on the Company's operations. Costs to Address the Company's Year 2000 Issue As the Company's Year 2000 compliance issues have already been addressed, which costs were not material, the Company does not expect to incur any significant additional costs regarding the compliance of all non compliant information processing systems and non-information processing systems including embedded systems. Risks Relating to The Year 2000 Issue And Contingency Plans Although the Company is not currently aware of any specific significant Year 2000 issues involving third-parties, the Company believes that its most significant potential risk relating to the Year 2000 issue is in regard to such third parties. For example, the Company believes there could be failure in the information systems of certain service providers that the Company relies upon for electrical, telephone and data transmission and banking services. The Company believes that any service disruption with respect to these providers due to a Year 2000 issue would be of a short-term nature. The Company has existing back-up systems and procedures, developed primarily for natural disasters, that could be utilized on a short-term basis to address any service interruptions. In addition, with respect to tenants, a failure of their information systems could delay the payment of rents or even impair their ability to operate. These tenant problems are likely to be isolated and would likely not impact the operations of any particular mall or the Company as a whole. While it is not possible at this time to determine the likely impact of any of these potential problems, the Company will continue to evaluate these areas and develop additional contingency plans, as appropriate. Therefore, although the Company believes that its Year 2000 issues have been addressed and that suitable remediation and/or contingency procedures will be in place by December 31, 1999, there can be no assurance that Year 2000 issues will not have a material adverse effect on the Company's results of operations or financial condition. New Accounting Pronouncements In May 1998, the Emerging Issues Task Force ("EITF") issued EITF 98-9 "Reporting Contingent Rents" in which it reached a consensus regarding the accounting for contingent rent in interim financial periods. The Company does not expect to this to have a material impact on the Company's results of operations. 21
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 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. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A company may also implement SFAS No. 133 as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997 (and, at the company's election, before January 1, 1998). The Company has not yet quantified the impact of adopting SFAS No. 133 on its financial statements and has not determined the timing of or method of adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings and other comprehensive income. 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 (including the write-off of development projects not being pursued), gains or losses on sales of real estate assets 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. Beginning with the first quarter of 1998 the Company includes straight line rent in its FFO calculation. However, the Company continues to exclude gains or losses on outparcel sales, even though NAREIT permits their inclusion when calculating FFO. Gains or losses on outparcel sales would have added $0.4 million and $2.6 million to FFO in the three months and nine months ended September 30, 1998, respectively, and $0.8 million and $4.2 million in the same periods in 1997, respectively. FFO for the third quarter and first nine months of 1997 has been restated to include straight line rents. 22
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 GAAP 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 for purposes of evaluating the Company's operating performance or to cash flows as a measure of liquidity. For the three months ended September 30, 1998, FFO increased by $4.3 million, or 22.5%, to $23.2 million as compared to $19.0 million for the same period in 1997. For the nine months ended September 30, 1998, FFO increased by $12.2 million, or 22.1%, to $67.1 million as compared to $55.0 million for the same period in 1997. The increase in FFO for both periods was primarily attributable to the new developments opened during 1997 and 1998, the properties acquired during 1997 and 1998 and improved operations in the existing portfolio. 23
The REIT's calculation of FFO is as follows (in thousands): Three Months Ended Nine Month Ended September 30, September 30, ------------------ ------------------ 1998 1997 1998 1997 -------- -------- -------- -------- Income from operations. . . . . $ 12,677 $ 10,706 $ 36,829 $ 30,068 ADD: Depreciation & amortization from consolidated properties . . . 11,659 8,029 30,534 23,639 Income from operations of unconsolidated affiliates . . 521 301 1,689 1,514 Depreciation & amortization from unconsolidated affiliates . . 357 337 1,057 993 Write-off of development costs charged to net income . . . . 113 3 122 45 SUBTRACT: Minority investors' share of income from operations in nine properties . . . . . . . (101) (116) (409) (405) Minority investors share of depreciation and amortization in nine properties. . . . . . (216) (199) (649) (582) Depreciation and amortization of non-real estate assets and finance costs . . . . . . (168) (107) (446) (320) Preferred Dividend. . . . . . . (1,617) -- (1,617) -- -------- -------- -------- -------- TOTAL FUNDS FROM OPERATIONS . . $ 22,225 $ 18,954 $ 67,110 $ 54,952 ======== ======== ======== ======== Basic per share data: Funds from operations . . . . $ 0.66 $ 0.57 $ 1.97 $ 1.65 ======== ======== ======== ======== Weighted average common shares outstanding with operating partnership units fully converted . . . 35,073 33,501 34,067 33,281 ======== ======== ======== ======== Diluted per share data: Funds from operations . . . . $ 0.66 $ 0.56 $ 1.96 $ 1.64 ======== ======== ======== ======== Weighted average common shares and dilutive potential common shares outstanding with operating partnership units fully converted . . . . . . . . . 35,365 33,776 34,323 33,543 ======== ======== ======== ======== 24
PART II - OTHER INFORMATION ITEM 6: Exhibits and Reports on Form 8-K A. Exhibits 10 Second Amended and Restated Agreement of Limited Partnership of CBL & Associates Limited Partnership dated June 30, 1998 11.2 Amended and restated Loan Agreement between CBL & Associates, Inc. Properties and First Tennessee Bank National Association Dated June 12, 1998 11.2 First Amendment To Third Amended And Restated Credit Agreement and Third Amended And Restated Credit Agreement between CBL & Associates Properties, Inc. and Wells Fargo Bank, National Association, dated August 4, 1998 B. Reports on Form 8-K The following items were reported: Information on the purchase of Meridian Mall in Oskemos (Lansing), Michigan and Janesville Mall in Janesville, Wisconsin (Item 2) was filed on September 11, 1998. The outline from the Company's October 29, 1998 conference call with analysts and investors regarding earnings (Item 5) was filed on October 29, 1998. Additional information (Form 8-K/A) on the purchase of Meridian Mall in Oskemos (Lansing), Michigan and Janesville Mall in Janesville, Wisconsin (Item 2) was filed on November 10, 1998. 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 Executive Vice President, Chief Financial Officer and Secretary (Authorized Officer of the Registrant, Principal Financial Officer and Principal Accounting Officer) Date: November 13, 1998 26
EXHIBIT INDEX Exhibit No. ------- 10 Second Amended and Restated Agreement of Limited Partnership of CBL & Associates Limited Partnership dated June 30, 1998 11.2 Amended and restated Loan Agreement between CBL & Associates, Inc. Properties and First Tennessee Bank National Association Dated June 12, 1998 11.2 First Amendment To Third Amended And Restated Credit Agreement and Third Amended And Restated Credit Agreement between CBL & Associates Properties, Inc. and Wells Fargo Bank, National Association, dated August 4, 1998 27 Financial Data Schedule 27