UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C
. 20549


FORM 10-Q



 

 

x

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

 

 

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008

 

 

 

OR

 

 

o

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

 

 

 

FOR THE TRANSITION PERIOD FROM ____________ TO _______________

COMMISSION FILE NO. 1-12494


CBL & ASSOCIATES PROPERTIES, INC.
(Exact name of registrant as specified in its charter)



 

 

 

DELAWARE

 

62-1545718

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification Number)

2030 Hamilton Place Blvd., Suite 500, Chattanooga, TN 37421-6000
(Address of principal executive office, including zip code)

423.855.0001
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x          No o

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

 

 

 

 

Large accelerated filer x

Accelerated filer o

 

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

Smaller Reporting Company o


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o          No x

As of November 6, 2008, there were 66,352,930 shares of common stock, par value $0.01 per share, outstanding.

1




CBL & Associates Properties, Inc.

Table of Contents

 

 

 

 

 

PART I

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

5

 

 

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

Item 2.

 

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

 

24

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

48

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

49

 

 

 

 

 

PART II

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

49

 

 

 

 

 

Item 1A.

 

Risk Factors

 

49

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

60

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

60

 

 

 

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

60

 

 

 

 

 

Item 5.

 

Other Information

 

60

 

 

 

 

 

Item 6.

 

Exhibits

 

60

 

 

 

 

 

 

 

SIGNATURE

 

61

2



PART I – FINANCIAL INFORMATION

ITEM 1. Financial Statements

CBL & Associates Properties, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)

 

 

 

 

 

 

 

 

 

 

September 30,
2008

 

December 31,
2007

 

 

 


 


 

ASSETS

 

 

 

 

 

 

 

Real estate assets:

 

 

 

 

 

 

 

Land

 

$

881,218

 

$

917,578

 

Buildings and improvements

 

 

7,400,040

 

 

7,263,907

 

 

 



 



 

 

 

 

8,281,258

 

 

8,181,485

 

Accumulated depreciation

 

 

(1,269,260

)

 

(1,102,767

)

 

 



 



 

 

 

 

7,011,998

 

 

7,078,718

 

Held for sale

 

 

120,000

 

 

 

Developments in progress

 

 

280,953

 

 

323,560

 

 

 



 



 

Net investment in real estate assets

 

 

7,412,951

 

 

7,402,278

 

Cash and cash equivalents

 

 

67,485

 

 

65,826

 

Cash held in escrow

 

 

2,700

 

 

 

Receivables:

 

 

 

 

 

 

 

Tenant, net of allowance for doubtful accounts of $1,309 in 2008 and $1,126 in 2007

 

 

72,766

 

 

72,570

 

Other

 

 

12,350

 

 

10,257

 

Mortgage and other notes receivable

 

 

49,326

 

 

135,137

 

Investments in unconsolidated affiliates

 

 

212,460

 

 

142,550

 

Intangible lease assets and other assets

 

 

248,876

 

 

276,429

 

 

 



 



 

 

 

$

8,078,914

 

$

8,105,047

 

 

 



 



 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Mortgage and other notes payable

 

$

6,023,749

 

$

5,869,318

 

Accounts payable and accrued liabilities

 

 

366,839

 

 

394,884

 

 

 



 



 

Total liabilities

 

 

6,390,588

 

 

6,264,202

 

 

 



 



 

Commitments and contingencies (Notes 3, 5 and 11)

 

 

 

 

 

 

 

Minority interests

 

 

851,341

 

 

920,297

 

 

 



 



 

Shareholders’ equity:

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

7.75% Series C cumulative redeemable preferred stock, 460,000 shares outstanding in 2008 and 2007

 

 

5

 

 

5

 

7.375% Series D cumulative redeemable preferred stock, 700,000 shares outstanding in 2008 and 2007

 

 

7

 

 

7

 

Common stock, $.01 par value, 180,000,000 shares authorized, 66,336,663 and 66,179,747 shares issued and outstanding in 2008 and 2007, respectively

 

 

663

 

 

662

 

Additional paid-in capital

 

 

1,000,849

 

 

990,048

 

Accumulated other comprehensive loss

 

 

(5,855

)

 

(20

)

Accumulated deficit

 

 

(158,684

)

 

(70,154

)

 

 



 



 

Total shareholders’ equity

 

 

836,985

 

 

920,548

 

 

 



 



 

 

 

$

8,078,914

 

$

8,105,047

 

 

 



 



 

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

3



CBL & Associates Properties, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 


 


 

 

 

2008

 

2007

 

2008

 

2007

 

 

 


 


 


 


 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum rents

 

$

173,231

 

$

155,633

 

$

520,499

 

$

464,753

 

Percentage rents

 

 

3,226

 

 

3,506

 

 

9,823

 

 

11,840

 

Other rents

 

 

4,294

 

 

3,580

 

 

13,509

 

 

11,942

 

Tenant reimbursements

 

 

84,293

 

 

83,053

 

 

250,111

 

 

235,699

 

Management, development and leasing fees

 

 

11,511

 

 

1,390

 

 

16,933

 

 

6,565

 

Other

 

 

5,925

 

 

3,837

 

 

19,229

 

 

15,507

 

 

 



 



 



 



 

Total revenues

 

 

282,480

 

 

250,999

 

 

830,104

 

 

746,306

 

 

 



 



 



 



 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating

 

 

48,101

 

 

42,014

 

 

139,916

 

 

123,843

 

Depreciation and amortization

 

 

81,961

 

 

58,847

 

 

228,641

 

 

175,946

 

Real estate taxes

 

 

23,390

 

 

24,526

 

 

70,994

 

 

65,034

 

Maintenance and repairs

 

 

15,215

 

 

12,532

 

 

47,702

 

 

41,826

 

General and administrative

 

 

9,623

 

 

8,305

 

 

33,268

 

 

29,072

 

Other

 

 

5,150

 

 

3,647

 

 

18,690

 

 

12,088

 

 

 



 



 



 



 

Total expenses

 

 

183,440

 

 

149,871

 

 

539,211

 

 

447,809

 

 

 



 



 



 



 

Income from operations

 

 

99,040

 

 

101,128

 

 

290,893

 

 

298,497

 

Interest income

 

 

2,225

 

 

1,990

 

 

7,134

 

 

7,618

 

Interest expense

 

 

(77,057

)

 

(72,789

)

 

(233,736

)

 

(207,730

)

Loss on extinguishment of debt

 

 

 

 

 

 

 

 

(227

)

Impairment of marketable securities

 

 

(5,778

)

 

 

 

(5,778

)

 

 

Gain on sales of real estate assets

 

 

4,773

 

 

4,337

 

 

12,122

 

 

10,565

 

Equity in earnings of unconsolidated affiliates

 

 

515

 

 

1,086

 

 

1,308

 

 

2,768

 

Income tax provision

 

 

(8,562

)

 

(2,609

)

 

(12,757

)

 

(4,360

)

Minority interest in earnings:

 

 

 

 

 

 

 

 

 

 

 

 

Operating partnership

 

 

(3,068

)

 

(13,288

)

 

(15,195

)

 

(35,886

)

Shopping center properties

 

 

(5,498

)

 

(2,121

)

 

(17,949

)

 

(6,418

)

 

 



 



 



 



 

Income from continuing operations

 

 

6,590

 

 

17,734

 

 

26,042

 

 

64,827

 

Operating income of discontinued operations

 

 

2,174

 

 

852

 

 

6,357

 

 

1,545

 

Gain on discontinued operations

 

 

676

 

 

3,957

 

 

3,788

 

 

3,902

 

 

 



 



 



 



 

Net income

 

 

9,440

 

 

22,543

 

 

36,187

 

 

70,274

 

Preferred dividends

 

 

(5,455

)

 

(5,455

)

 

(16,364

)

 

(24,320

)

 

 



 



 



 



 

Net income available to common shareholders

 

$

3,985

 

$

17,088

 

$

19,823

 

$

45,954

 

 

 



 



 



 



 

Basic per share data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations, net of preferred dividends

 

$

0.02

 

$

0.19

 

$

0.15

 

$

0.62

 

Discontinued operations

 

 

0.04

 

 

0.07

 

 

0.15

 

 

0.08

 

 

 



 



 



 



 

Net income available to common shareholders

 

$

0.06

 

$

0.26

 

$

0.30

 

$

0.70

 

 

 



 



 



 



 

Weighted average common shares outstanding

 

 

66,047

 

 

65,343

 

 

65,978

 

 

65,233

 

Diluted per share data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations, net of preferred dividends

 

$

0.02

 

$

0.19

 

$

0.15

 

$

0.61

 

Discontinued operations

 

 

0.04

 

 

0.07

 

 

0.15

 

 

0.09

 

 

 



 



 



 



 

Net income available to common shareholders

 

$

0.06

 

$

0.26

 

$

0.30

 

$

0.70

 

 

 



 



 



 



 

Weighted average common and potential dilutive common shares outstanding

 

 

66,209

 

 

65,876

 

 

66,172

 

 

65,900

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.5450

 

$

0.5050

 

$

1.6350

 

$

1.5150

 

The accompanying notes are an integral part of these statements.

4


CBL & Associates Properties, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 


 

 

 

2008

 

2007

 

 

 


 


 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income

 

$

36,187

 

$

70,274

 

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

 

 

 

 

 

 

 

Depreciation

 

 

135,315

 

 

116,256

 

Amortization

 

 

102,703

 

 

66,135

 

Net amortization of debt premiums and discounts

 

 

(5,918

)

 

(5,779

)

Net amortization of above- and below-market leases

 

 

(6,896

)

 

(8,280

)

Gain on sales of real estate assets

 

 

(12,122

)

 

(10,565

)

Gain on discontinued operations

 

 

(3,788

)

 

(3,902

)

Impairment of marketable securities

 

 

5,778

 

 

 

Write-off of development projects

 

 

2,943

 

 

955

 

Share-based compensation expense

 

 

4,028

 

 

4,527

 

Income tax benefit from share-based compensation

 

 

7,472

 

 

4,139

 

Loss on extinguishment of debt

 

 

 

 

227

 

Equity in earnings of unconsolidated affiliates

 

 

(1,308

)

 

(2,768

)

Distributions of earnings from unconsolidated affiliates

 

 

10,904

 

 

6,924

 

Minority interest in earnings

 

 

33,144

 

 

42,304

 

Changes in:

 

 

 

 

 

 

 

Tenant and other receivables

 

 

(2,601

)

 

(1,631

)

Other assets

 

 

(7,104

)

 

(4,359

)

Accounts payable and accrued liabilities

 

 

15,361

 

 

35,319

 

 

 



 



 

Net cash provided by operating activities

 

 

314,098

 

 

309,776

 

 

 



 



 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Additions to real estate assets

 

 

(359,170

)

 

(415,019

)

Acquisitions of real estate assets and intangible lease assets

 

 

 

 

(11,506

)

Cash placed in escrow

 

 

(2,700

)

 

(33,202

)

Proceeds from sales of real estate assets

 

 

67,997

 

 

52,923

 

Purchases of marketable securities

 

 

 

 

(24,325

)

Additions to mortgage notes receivable

 

 

(544

)

 

(2,613

)

Payments received on mortgage notes receivable

 

 

105,327

 

 

4,584

 

Additional investments in and advances to unconsolidated affiliates

 

 

(95,003

)

 

(34,934

)

Distributions in excess of equity in earnings of unconsolidated affiliates

 

 

49,073

 

 

10,636

 

Purchase of minority interests in shopping center properties

 

 

 

 

(8,007

)

Purchase of minority interests in the Operating Partnership

 

 

 

 

(9,422

)

Changes in other assets

 

 

(9,243

)

 

(2,493

)

 

 



 



 

Net cash used in investing activities

 

 

(244,263

)

 

(473,378

)

 

 



 



 

5



CBL & Associates Properties, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
(Continued)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended Septenber 30,

 

 

 


 

 

 

2008

 

2007

 

 

 


 


 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from mortgage and other notes payable

 

$

1,023,692

 

$

825,294

 

Principal payments on mortgage and other notes payable

 

 

(854,285

)

 

(331,784

)

Additions to deferred financing costs

 

 

(5,303

)

 

(4,960

)

Proceeds from issuances of common stock

 

 

261

 

 

246

 

Proceeds from exercises of stock options

 

 

584

 

 

5,656

 

Income tax benefit from share-based compensation

 

 

(7,472

)

 

(4,139

)

Purchase of common stock for retirement

 

 

 

 

(1,393

)

Redemption of preferred stock

 

 

 

 

(100,000

)

Prepayment fees to extinguish debt

 

 

 

 

(227

)

Contributions from minority partners

 

 

2,832

 

 

1,822

 

Distributions to minority interests

 

 

(102,749

)

 

(86,721

)

Dividends paid to holders of preferred stock

 

 

(16,364

)

 

(20,690

)

Dividends paid to common shareholders

 

 

(108,349

)

 

(99,322

)

 

 



 



 

Net cash provided by (used in) financing activities

 

 

(67,153

)

 

183,782

 

 

 



 



 

 

 

 

 

 

 

 

 

EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH

 

 

(1,023

)

 

 

 

 



 



 

 

 

 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

1,659

 

 

20,180

 

CASH AND CASH EQUIVALENTS, beginning of period

 

 

65,826

 

 

28,700

 

 

 



 



 

CASH AND CASH EQUIVALENTS, end of period

 

$

67,485

 

$

48,880

 

 

 



 



 

SUPPLEMENTAL INFORMATION:

 

 

 

 

 

 

 

Cash paid for interest, net of amounts capitalized

 

$

239,828

 

$

208,300

 

 

 



 



 

The accompanying notes are an integral part of these statements.

6



CBL & Associates Properties, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share data)

Note 1 – Organization and Basis of Presentation

          CBL & Associates Properties, Inc. (“CBL”), a Delaware corporation, is a self-managed, self-administered, fully integrated real estate investment trust (“REIT”) that is engaged in the ownership, development, acquisition, leasing, management and operation of regional shopping malls, open-air centers, community shopping centers and office properties. CBL’s shopping center properties are located in 27 domestic states and in Brazil, but are primarily in the southeastern and midwestern United States.

          CBL conducts substantially all of its business through CBL & Associates Limited Partnership (the “Operating Partnership”). At September 30, 2008, the Operating Partnership owned controlling interests in 75 regional malls/open-air centers, 29 associated centers (each adjacent to a regional mall), seven community centers, one mixed-use center and 13 office buildings, including CBL’s corporate office building. The Operating Partnership consolidates the financial statements of all entities in which it has a controlling financial interest or where it is the primary beneficiary of a variable interest entity. At September 30, 2008, the Operating Partnership owned noncontrolling interests in nine regional malls/open-air centers, three associated centers, four community centers and six office buildings. Because one or more of the other partners have substantive participating rights, the Operating Partnership does not control these partnerships and joint ventures and, accordingly, accounts for these investments using the equity method. The Operating Partnership had four shopping center expansions and six community/open-air centers (five of which are owned in joint ventures) under construction at September 30, 2008. The Operating Partnership also holds options to acquire certain development properties owned by third parties.

          CBL is the 100% owner of two qualified REIT subsidiaries, CBL Holdings I, Inc. and CBL Holdings II, Inc. At September 30, 2008, CBL Holdings I, Inc., the sole general partner of the Operating Partnership, owned a 1.6% general partner interest in the Operating Partnership and CBL Holdings II, Inc. owned a 55.1% limited partner interest for a combined interest held by CBL of 56.7%.

          The minority interest in the Operating Partnership is held primarily by CBL & Associates, Inc. and its affiliates (collectively “CBL’s Predecessor”) and by affiliates of The Richard E. Jacobs Group, Inc. (“Jacobs”). CBL’s Predecessor contributed their interests in certain real estate properties and joint ventures to the Operating Partnership in exchange for a limited partner interest when the Operating Partnership was formed in November 1993. Jacobs contributed their interests in certain real estate properties and joint ventures to the Operating Partnership in exchange for limited partner interests when the Operating Partnership acquired the majority of Jacobs’ interests in 23 properties in January 2001 and the balance of such interests in February 2002. At September 30, 2008, CBL’s Predecessor owned a 14.9% limited partner interest, Jacobs owned a 19.6% limited partner interest and third parties owned an 8.8% limited partner interest in the Operating Partnership. CBL’s Predecessor also owned 7.2 million shares of CBL’s common stock at September 30, 2008, for a total combined effective interest of 21.0% in the Operating Partnership.

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

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

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

7



America (“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair presentation of the financial statements for these interim periods have been included. Material intercompany transactions have been eliminated. The results for the interim period ended September 30, 2008, are not necessarily indicative of the results to be obtained for the full fiscal year.

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

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

Note 2 – Recent Accounting Pronouncements

          In September 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) Financial Accounting Standard (“FAS”) 133-1 and FASB Intrepretation (“FIN”) 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No 161. FSP FAS 133-1 and FIN 45-4 amends Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities, to require disclosures by sellers of credit derivatives, including credit derivatives embedded in a hybrid instrument. It also amends FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, to require an additional disclosure regarding the current status of the payment/performance risk of a guarantee. Further, it clarifies the effective date of SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, for those entities with non-calendar fiscal year-ends. The provisions of FSP FAS 133-1 and FIN 45-4 that amend SFAS No. 133 and FIN 45 are effective for financial statements issued for fiscal years and interim periods ending after November 15, 2008, with early application encouraged. The adoption will not have an impact on the Company’s consolidated balance sheets and statements of operations.

          In June 2008, the FASB issued FSP Emerging Issues Task Force (“EITF”) 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. FSP EITF 03-6-1 requires that unvested share-based payment awards that contain nonforfeitable rights to dividends or their equivalent be treated as participating securities for purposes of inclusion in the computation of earnings per share (“EPS”) pursuant to the two-class method. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented shall be adjusted retrospectively. The adoption of FSP EITF 03-6-1 is not expected to have a material impact on the Company’s consolidated financial statements.

          In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS No. 162 identifies the source of accounting principles and the order in which to select the principles to be used in the preparation of financial statements presented in accordance with GAAP in the United States. The FASB concluded that the GAAP hierarchy should reside in the accounting literature because reporting entities are responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. SFAS No. 162 is effective sixty days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board

8



Amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The adoption of SFAS No. 162 is not expected to have an impact on the Company’s consolidated financial statements.

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

          In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51, which requires that a noncontrolling interest in a consolidated subsidiary be displayed in the consolidated statement of financial position as a separate component of equity. After control is obtained, a change in ownership interests that does not result in a loss of control should be accounted for as an equity transaction. A change in ownership of a consolidated subsidiary that results in a loss of control and deconsolidation is a significant event that triggers gain or loss recognition, with the establishment of a new fair value basis in any remaining ownership interests. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. While the adoption of SFAS No. 160 will require certain presentation modifications, it is not expected to have a material impact on the amounts reported in the Company’s consolidated financial statements.

          In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, which changes certain aspects of current business combination accounting. SFAS No. 141(R) requires, among other things, that entities generally recognize 100 percent of the fair values of assets acquired, liabilities assumed and noncontrolling interests in acquisitions of less than a 100 percent controlling interest when the acquisition constitutes a change in control of the acquired entity. Shares issued as consideration for a business combination are to be measured at fair value on the acquisition date and contingent consideration arrangements are to be recognized at their fair values on the date of acquisition, with subsequent changes in fair value generally reflected in earnings. Pre-acquisition gain and loss contingencies generally are to be recognized at their fair values on the acquisition date and any acquisition-related transaction costs are to be expensed as incurred. SFAS No. 141(R) is effective for business combination transactions for which the acquisition date is in a fiscal year beginning on or after December 15, 2008. The adoption of SFAS No. 141(R) is not expected to have a material impact on the Company’s consolidated financial statements.

Note 3 – Fair Value Measurements

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

9


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

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

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

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

          The following table sets forth information regarding the Company’s financial instruments that are measured at fair value in the Condensed Consolidated Balance Sheet as of September 30, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

 

 

 

 


 

 

 

Fair Value at
September 30, 2008

 

Quoted Prices in
Active Markets
for Identical
Assets (Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs (Level 3)

 

 

 


 


 


 


 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

$

15,614

 

 

 

$

15,614

 

 

 

$

 

 

 

$

 

 

Privately held debt and equity securities

 

 

 

4,875

 

 

 

 

 

 

 

 

 

 

 

 

4,875

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

 

$

2,968

 

 

 

$

 

 

 

$

2,968

 

 

 

$

 

 

          Other assets in the condensed consolidated balance sheets include marketable securities consisting of corporate equity securities that are classified as available for sale. Net unrealized gains and losses on available-for-sale securities that are deemed to be temporary in nature are recorded as a component of accumulated other comprehensive loss in shareholders’ equity. During the preparation process of the Company's condensed consolidated financial statements for the three and nine month periods ended September 30, 2008, it was determined that certain marketable securities were impaired on an other-than-temporary basis.  Due to this, the Company recognized a write-down of $5,778 during those periods to reduce the carrying value of those investments to their total fair value of $15,602. During the three and nine months ended September 30, 2008, the Company did not recognize any realized gains and losses related to sales or disposals of marketable securities. The fair value of the Company’s available-for-sale securities is based on quoted market prices and, thus, is classified under Level 1.

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

10



nine months ended September 30, 2008, there were no changes in the fair values of the note and warrant.

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

          SFAS No. 157 requires separate disclosure of assets and liabilities measured at fair value on a recurring basis from those measured at fair value on a nonrecurring basis. As of September 30, 2008, no assets or liabilities were measured at fair value on a nonrecurring basis.

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

Note 4 – Joint Ventures

Equity Method Investments

          At September 30, 2008, the Company had investments in the following 21 entities, which are accounted for using the equity method of accounting:

11


 

 

 

 

 

Joint Venture

 

Property Name

 

Company’s
Interest


 


 


CBL Brazil

 

Plaza Macaé

 

60.0%

CBL-TRS Joint Venture, LLC

 

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

 

50.0%

Governor’s Square IB

 

Governor’s Plaza

 

50.0%

Governor’s Square Company

 

Governor’s Square

 

47.5%

West Melbourne I, LLC

 

Hammock Landing Phase I

 

50.0%

West Melbourne II, LLC

 

Hammock Landing Phase II

 

50.0%

High Pointe Commons, LP

 

High Pointe Commons

 

50.0%

Imperial Valley Mall L.P.

 

Imperial Valley Mall

 

60.0%

Imperial Valley Peripheral L.P.

 

Imperial Valley Mall (vacant land)

 

60.0%

JG Gulf Coast Town Center

 

Gulf Coast Town Center

 

50.0%

Kentucky Oaks Mall Company

 

Kentucky Oaks Mall

 

50.0%

Mall of South Carolina L.P.

 

Coastal Grand—Myrtle Beach

 

50.0%

Mall of South Carolina Outparcel L.P.

 

Coastal Grand—Myrtle Beach (vacant land)

 

50.0%

Mall Shopping Center Company

 

Plaza del Sol

 

50.6%

Parkway Place L.P.

 

Parkway Place

 

45.0%

Port Orange I, LLC

 

The Pavilion at Port Orange

 

50.0%

Port Orange II, LLC

 

The Landing

 

50.0%

TENCO-CBL Servicos Imobiliarios S.A.

 

Brazilian property management services company

 

50.0%

Triangle Town Member LLC

 

Triangle Town Center, Triangle Town Commons and Triangle Town Place

 

50.0%

Village at Orchard Hills, LLC

 

The Village at Orchard Hills

 

50.0%

York Town Center, LP

 

York Town Center

 

50.0%

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total for the Three Months
Ended September 30,

 

Company’s Share for the
Three Months
Ended September 30,

 

 

 


 


 

 

 

2008

 

2007

 

2008

 

2007

 

 

 


 


 


 


 

Revenues

 

$

38,462

 

$

24,248

 

$

20,377

 

$

12,260

 

Depreciation and amortization

 

 

(14,848

)

 

(6,800

)

 

(7,741

)

 

(3,425

)

Interest expense

 

 

(13,619

)

 

(8,364

)

 

(7,038

)

 

(4,178

)

Other operating expenses

 

 

(13,674

)

 

(7,535

)

 

(7,370

)

 

(3,866

)

Gain on sales of real estate assets

 

 

3,621

 

 

490

 

 

2,287

 

 

295

 

 

 



 



 



 



 

Net income (loss)

 

$

(58

)

$

2,039

 

$

515

 

$

1,086

 

 

 



 



 



 



 


 

 

Total for the Nine Months
Ended September 30,

 

Company’s Share for the
Nine Months
Ended September 30,

 

 

 


 


 

 

 

2008

 

2007

 

2008

 

2007

 

 

 


 


 


 


 

Revenues

 

$

116,381

 

$

71,417

 

$

60,751

 

$

36,067

 

Depreciation and amortization

 

 

(40,851

)

 

(20,832

)

 

(21,112

)

 

(10,550

)

Interest expense

 

 

(40,898

)

 

(25,027

)

 

(20,872

)

 

(12,576

)

Other operating expenses

 

 

(38,240

)

 

(22,360

)

 

(20,175

)

 

(11,391

)

Gain on sales of real estate assets

 

 

4,087

 

 

2,281

 

 

2,716

 

 

1,218

 

 

 



 



 



 



 

Net income

 

$

479

 

$

5,479

 

$

1,308

 

$

2,768

 

 

 



 



 



 



 

          In 2003, the Company formed Galileo America, a joint venture with Galileo America, Inc., the U.S. affiliate of Australia-based Galileo America Shopping Trust, to invest in community centers throughout the United States. In 2005, the Company transferred all of its ownership interest in the joint venture to Galileo America. In conjunction with this transfer, the Company sold its management and

12



advisory contracts with Galileo America to New Plan Excel Realty Trust, Inc. (“New Plan”). New Plan retained the Company to manage nine properties that Galileo America had recently acquired from a third party for a term of 17 years beginning on August 10, 2008 and agreed to pay the Company a management fee of $1,000 per year. Subsequent to the date of this agreement, New Plan was acquired by an affiliate of Centro Properties Group (“Centro”). In October 2007, the Company received notification that Centro had determined to exercise its right to terminate the management agreement by paying the Company a termination fee, payable on August 10, 2008. Due to uncertainty regarding the collectibility of the fee, the Company did not recognize the fee as income at that time. In August 2008, the Company received the termination fee of $8,000, including the final installment of an annual advisory fee of $1,000, which have been recorded as management fee income in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2008.

          In May 2007, the Company entered into a joint venture agreement with certain third parties to develop and operate The Village at Orchard Hills, a lifestyle center in Grand Rapids Township, MI. The Company holds a 50% ownership interest in the joint venture. The Company determined that its investment represented a variable interest entity and that the Company was the primary beneficiary. As a result, the joint venture was accounted for on a consolidated basis, with the interests of the third parties reflected as minority interest. During the second quarter of 2008, the Company reconsidered whether this entity was a variable interest entity and determined that it was not. As a result, the Company ceased consolidating the entity and began accounting for it as an unconsolidated affiliate using the equity method of accounting during the second quarter of 2008.

          In April 2008, the Company entered into a 50/50 joint venture, TENCO-CBL Servicos Imobiliarios S.A., with TENCO Realty S.A. to form a property management services organization in Brazil. The Company obtained its 50% interest in the joint venture by immediately contributing cash of $2,000, and agreeing to contribute, as part of the purchase price, any future dividends up to $1,000. TENCO Realty S.A. will be responsible for managing the joint venture. Net cash flow and income (loss) will be allocated 50/50 to TENCO Realty S.A. and the Company. The Company records its investment in this joint venture using the equity method of accounting.

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

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

          During the first quarter of 2008, CBL-TRS Joint Venture, a joint venture that the Company accounts for using the equity method of accounting, completed its acquisition of properties from the Starmount Company when it acquired Renaissance Center, located in Durham, NC, for $89,639 and an anchor parcel at Friendly Center, located in Greensboro, NC, for $5,000. The aggregate purchase price

13



consisted of $58,121 in cash and the assumption of $36,518 of non-recourse debt that bears interest at a fixed rate of 5.61% and matures in July 2016.

Cost Method Investments

          In February 2007, the Company acquired a 6.2% minority interest in subsidiaries of Jinsheng Group (“Jinsheng”), an established mall operating and real estate development company located in Nanjing, China, for $10,125. As of September 30, 2008, Jinsheng owns controlling interests in four home decoration shopping centers, two general retail shopping centers and four development sites.

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

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

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

          During the first quarter of 2008, the Company became aware that a lender to Jinsheng had declared an event of default under its loan, claiming that the loan proceeds had been improperly advanced to a related party entity owned by Jinsheng’s founder. As a result, the lender sought to exercise its rights to register ownership of 100% of the shares of Jinsheng that were pledged as collateral for the loan. The loan was repaid in full, including interest, penalty and other charges, during the second quarter of 2008 and the pledged shares were released by the lender. The Company and its fellow investor are currently in final negotiations with Jinsheng’s founder for the implementation of a restructuring plan that includes, among other things, provisions for a significant settlement of the related party receivable primarily through the contribution to Jinsheng of additional commercial and residential properties. Based on information to date, the Company believes the goals of the restructuring plan will be fully achieved. As of September 30, 2008, the Company has determined that its investment in Jinsheng is not impaired.

Variable Interest Entities

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

14


Company was the primary beneficiary. As a result, the Company consolidated this entity. During the first quarter of 2008, the Company agreed to receive title to the underlying land as full payment of the $18,000 loan. The transaction had no impact on the Company’s condensed consolidated financial statements.

Note 5 – Mortgage and Other Notes Payable

          Mortgage and other notes payable consisted of the following at September 30, 2008 and December 31, 2007, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2008

 

December 31, 2007

 

 

 


 


 

 

 

Amount

 

Weighted
Average
Interest
Rate (1)

 

Amount

 

Weighted
Average
Interest
Rate (1)

 

 

 


 


 


 


 

Fixed-rate debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-recourse loans on operating properties

 

$

4,099,557

 

 

5.95%

 

$

4,293,515

 

 

5.93%

 

Secured line of credit (2)

 

 

400,000

 

 

4.45%

 

 

250,000

 

 

4.51%

 

 

 



 

 

 

 



 

 

 

 

Total fixed-rate debt

 

 

4,499,557

 

 

5.81%

 

 

4,543,515

 

 

5.85%

 

Variable-rate debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

Recourse term loans on operating properties

 

 

321,814

 

 

4.75%

 

 

81,767

 

 

6.15%

 

Unsecured line of credit

 

 

502,000

 

 

3.86%

 

 

490,232

 

 

5.98%

 

Secured lines of credit

 

 

211,050

 

 

4.14%

 

 

326,000

 

 

5.71%

 

Term facilities

 

 

449,482

 

 

4.73%

 

 

348,800

 

 

5.95%

 

Construction loans

 

 

39,846

 

 

3.85%

 

 

79,004

 

 

6.20%

 

 

 



 

 

 

 



 

 

 

 

Total variable-rate debt

 

 

1,524,192

 

 

4.34%

 

 

1,325,803

 

 

5.93%

 

 

 



 

 

 

 



 

 

 

 

Total

 

$

6,023,749

 

 

5.44%

 

$

5,869,318

 

 

5.87%

 

 

 



 

 

 

 



 

 

 

 

(1)

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

(2)

The Company has entered into interest rate swaps on notional amounts totaling $400,000 and $250,000 as of September 30, 2008 and December 31, 2007, respectively, related to its largest secured line of credit to effectively fix the interest rate on that portion of the line of credit. Therefore, this amount is currently reflected in fixed-rate debt.

Unsecured Line of Credit

          The Company has an unsecured line of credit with total availability of $560,000 that bears interest at LIBOR plus a margin of 0.75% to 1.20% based on the Company’s leverage ratio, as defined in the agreement to the facility. Additionally, the Company pays an annual fee of 0.1% of the amount of total availability under the unsecured line of credit. The line of credit matures in August 2009 and has two one-year extension options, which are at the Company’s election. At September 30, 2008, the outstanding borrowings of $502,000 under the unsecured line of credit had a weighted average interest rate of 3.86%.

Unsecured Term Facilities

          In April 2008, the Company entered into a new unsecured term facility with total availability of $228,000 that bears interest at LIBOR plus a margin of 1.50% to 1.80% based on the Company’s leverage ratio, as defined in the agreement to the facility. At September 30, 2008, the outstanding borrowings of $228,000 under the unsecured term facility had a weighted average interest rate of 4.79%. The agreement to the facility contains default provisions customary for transactions of this nature and also contains cross-default provisions for defaults of the Company’s $560,000 unsecured line of credit, the $524,850 secured line of credit and the unsecured term facility with a balance of $221,482 as of September 30, 2008 that was used for the acquisition of certain properties from the Starmount Company or its affiliates. The facility matures in April 2011 and has two one-year extension options, which are at the Company’s election. The facility was used to pay down outstanding balances on the Company’s largest unsecured line of credit.

15


          The Company has an unsecured term facility that was obtained for the exclusive purpose of acquiring certain properties from the Starmount Company or its affiliates. At September 30, 2008, the outstanding borrowings of $221,482 under this facility had a weighted average interest rate of 4.66%. The Company completed its acquisition of the properties in February 2008 and, as a result, no further draws can be made against the facility. The unsecured term facility bears interest at LIBOR plus a margin of 0.95% to 1.40% based on the Company’s leverage ratio, as defined in the agreement to the facility. Net proceeds from a sale, or the Company’s share of excess proceeds from any refinancings, of any of the properties originally purchased with borrowings from this unsecured term facility must be used to pay down any remaining outstanding balance. The agreement to the facility contains default provisions customary for transactions of this nature and also contains cross-default provisions for defaults of the Company’s $560,000 unsecured line of credit, $524,850 secured line of credit and $228,000 unsecured term facility. The facility matures in November 2010 and has two one-year extension options, which are at the Company’s election.

Secured Lines of Credit

          The Company has four secured lines of credit that are used for construction, acquisition and working capital purposes, as well as issuances of letters of credit. Each of these lines is secured by mortgages on certain of the Company’s operating properties. Borrowings under the secured lines of credit bear interest at LIBOR plus a margin ranging from 0.80% to 0.95% and had a weighted average interest rate of 4.34% at September 30, 2008. The Company also pays a fee based on the amount of unused availability under its largest secured line of credit at a rate of 0.125% of unused availability. The following summarizes certain information about the secured lines of credit as of September 30, 2008:

 

 

 

 

 

 

 

 

 

 

 

Total
Available

 

Total
Outstanding

 

Maturity Date

 

 


 


 


 

 

$

524,850

 

$

524,850

 

 

February 2009*

 

 

 

105,000

 

 

49,000

 

 

June 2010

 

 

 

20,000

 

 

20,000

 

 

March 2010

 

 

 

17,200

 

 

17,200

 

 

April 2010

 

 



 



 

 

 

 

 

$

667,050

 

$

611,050

 

 

 

 

 



 



 

 

 

 

*     The facility has one, one-year extension option, which is at the election of the Company.

Interest Rate Swaps

          On September 25, 2008, the Company entered into an $87,500 pay fixed/receive variable interest rate swap agreement, effective October 1, 2008, to hedge the interest rate risk exposure on the borrowings of one of its operating properties equal to the swap notional amount. This interest rate swap hedges the risk of changes in cash flows on the Company’s designated forecasted interest payments attributable to changes in 1-month LIBOR, the designated benchmark interest rate being hedged, thereby reducing exposure to variability in cash flows relating to interest payments on the variable-rate debt. The interest rate swap effectively fixes the interest payments on the portion of debt principal corresponding to the swap notional amount at 5.85%. The swap was valued at $(522) as of September 30, 2008 and matures on September 23, 2010.

          On January 2, 2008, the Company entered into a $150,000 pay fixed/receive variable interest rate swap agreement to hedge the interest rate risk exposure on an amount of borrowings on the Company’s largest secured line of credit equal to the swap notional amount. This interest rate swap hedges the risk of changes in cash flows on the Company’s designated forecasted interest payments attributable to changes in 1-month LIBOR, the designated benchmark interest rate being hedged, thereby reducing exposure to variability in cash flows relating to interest payments on the variable-rate debt. The interest rate swap effectively fixes the interest payments on the portion of debt principal corresponding to the swap notional

16



amount at 4.353%. The swap was valued at $(766) as of September 30, 2008 and matures on December 30, 2009.

          On December 31, 2007, the Company entered into a $250,000 pay fixed/receive variable interest rate swap agreement to hedge the interest rate risk exposure on an amount of borrowings on the Company’s largest secured line of credit equal to the swap notional amount. The interest rate swap effectively fixes the interest payments on the portion of debt principal corresponding to the swap notional amount at 4.505%. The swap was valued at $(1,680) as of September 30, 2008 and matures on December 30, 2009.

          The above swaps have met the effectiveness test criteria since inception and changes in the fair values of the swaps are, thus, reported in other comprehensive loss and will be reclassified into earnings in the same period or periods during which the hedged item affects earnings. The swaps’ total fair value of $(2,968) as of September 30, 2008 is included in accounts payable and accrued liabilities in the accompanying condensed consolidated balance sheets.

Letters of Credit

          At September 30, 2008, the Company had additional secured and unsecured lines of credit with a total commitment of $38,410 that can only be used for issuing letters of credit. The letters of credit outstanding under these lines of credit totaled $14,859 at September 30, 2008.

Covenants and Restrictions

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

Maturities

          The weighted average remaining term of the Company’s total consolidated debt was 4.1 years at September 30, 2008 and 4.4 years at December 31, 2007. The weighted average remaining term of the Company’s consolidated fixed-rate debt was 4.9 years and 5.1 years at September 30, 2008 and December 31, 2007, respectively. The Company has ten loans and two lines of credit totaling $1,525,500 that are scheduled to mature before September 30, 2009. Of the total amount scheduled to mature within the next twelve months, the two lines of credit account for $1,026,850. The lines of credit represent the Company’s largest secured and unsecured lines of credit, as discussed above. The secured line of credit has a one-year extension option and the unsecured line of credit has two one-year extension options. Of the ten loans scheduled to mature within the next twelve months, six loans totaling $272,658 have extension options. The Company expects to extend, retire or refinance its maturing loans.

Note 6 – Discontinued Operations

          In June 2008, the Company sold Chicopee Marketplace III in Chicopee, MA to a third party for a sales price of $7,523 and recognized a gain on the sale of $1,560. The results of operations of this property have been reclassified to discontinued operations for the three and nine months ended September 30, 2008 and 2007.

17


          As of March 31, 2008, the Company determined that 19 of the community center and office properties originally acquired during the fourth quarter of 2007 from the Starmount Company met the criteria to be classified as held-for-sale. In conjunction with their classification as held-for-sale, the results of operations from the properties have been reclassified to discontinued operations for the three and nine months ended September 30, 2008.

          In April 2008, the Company completed the sale of five of the community centers located in Greensboro, NC to three separate buyers for an aggregate sales price of $24,325. In June 2008, the Company completed the sale of one of the office properties for $1,200. The Company completed the sale of an additional community center located in Greensboro, NC in August 2008 for $19,500. The Company recorded a net gain of $695 and $2,261 during the three and nine months ended September 30, 2008, respectively, attributable to these sales. The proceeds were used to retire a portion of the outstanding balance on the unsecured term facility that was originally used to purchase the properties.

          In August 2007, the Company sold Twin Peaks Mall in Longmont, CO. During December 2007, the Company sold The Shops at Pineda Ridge in Melbourne, FL. The results of operations of these properties are included in discontinued operations for the three and nine months ended September 30, 2007.

          Total revenues for the properties included in discontinued operations in the accompanying condensed consolidated statements of operations were $3,482 and $12,710 for the three and nine months ended September 30, 2008, respectively, and $1,455 and $4,814 for the three and nine months ended September 30, 2007, respectively.

Note 7 – Segment Information

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2008

 

Malls

 

Associated
Centers

 

Community
Centers

 

All Other (2)

 

Total

 


 


 


 


 


 


 

Revenues

 

$

247,666

 

$

10,858

 

$

3,685

 

$

20,271

 

$

282,480

 

Property operating expenses (1)

 

 

(88,006

)

 

(2,671

)

 

(1,860

)

 

5,831

 

 

(86,706

)

Interest expense

 

 

(62,582

)

 

(2,278

)

 

(1,044

)

 

(11,153

)

 

(77,057

)

Other expense

 

 

 

 

 

 

 

 

(5,150

)

 

(5,150

)

Gain (loss) on sales of real estate assets

 

 

1,612

 

 

(2

)

 

(4

)

 

3,167

 

 

4,773

 

 

 



 



 



 



 



 

Segment profit

 

$

98,690

 

$

5,907

 

$

777

 

$

12,966

 

 

118,340

 

 

 



 



 



 



 

 

 

 

Depreciation and amortization expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(81,961

)

General and administrative expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,623

)

Interest and other income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,225

 

Impairment of marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,778

)

Equity in earnings of unconsolidated affiliates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

515

 

Income tax provision

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,562

)

Minority interest in earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,566

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Income from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

 

$

6,590

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Capital expenditures (3)

 

$

41,623

 

$

5,824

 

$

475

 

$

44,897

 

$

92,819

 

18



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2007

 

Malls

 

Associated
Centers

 

Community
Centers

 

All Other (2)

 

Total

 


 


 


 


 


 


 

Revenues

 

$

230,812

 

$

11,320

 

$

3,049

 

$

5,818

 

$

250,999

 

Property operating expenses (1)

 

 

(84,377

)

 

(2,795

)

 

(942

)

 

9,042

 

 

(79,072

)

Interest expense

 

 

(59,002

)

 

(2,336

)

 

(1,665

)

 

(9,786

)

 

(72,789

)

Other expense

 

 

 

 

 

 

 

 

(3,647

)

 

(3,647

)

Gain on sales of real estate assets

 

 

1,668

 

 

 

 

1,568

 

 

1,101

 

 

4,337

 

 

 



 



 



 



 



 

Segment profit

 

$

89,101

 

$

6,189

 

$

2,010

 

$

2,528

 

 

99,828

 

 

 



 



 



 



 

 

 

 

Depreciation and amortization expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(58,847

)

General and administrative expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,305

)

Interest and other income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,990

 

Equity in earnings of unconsolidated affiliates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,086

 

Income tax provision

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,609

)

Minority interest in earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,409

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Income from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

 

$

17,734

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Capital expenditures (3)

 

$

66,508

 

$

6,298

 

$

39

 

$

81,468

 

$

154,313

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2008

 

Malls

 

Associated
Centers

 

Community
Centers

 

All Other (2)

 

Total

 


 


 


 


 


 


 

Revenues

 

$

747,154

 

$

32,583

 

$

10,214

 

$

40,153

 

$

830,104

 

Property operating expenses (1)

 

 

(266,490

)

 

(8,161

)

 

(4,242

)

 

20,281

 

 

(258,612

)

Interest expense

 

 

(188,419

)

 

(6,885

)

 

(3,219

)

 

(35,213

)

 

(233,736

)

Other expense

 

 

 

 

 

 

 

 

(18,690

)

 

(18,690

)

Gain (loss) on sales of real estate assets

 

 

5,260

 

 

27

 

 

(48

)

 

6,883

 

 

12,122

 

 

 



 



 



 



 



 

Segment profit

 

$

297,505

 

$

17,564

 

$

2,705

 

$

13,414

 

 

331,188

 

 

 



 



 



 



 

 

 

 

Depreciation and amortization expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(228,641

)

General and administrative expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(33,268

)

Interest and other income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,134

 

Impairment of marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,778

)

Equity in earnings of unconsolidated affiliates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,308

 

Income tax provision

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,757

)

Minority interest in earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(33,144

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Income from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

 

$

26,042

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Total assets

 

$

6,832,919

 

$

344,392

 

$

190,695

 

$

710,908

 

$

8,078,914

 

Capital expenditures (3)

 

$

152,971

 

$

7,736

 

$

23,219

 

$

198,265

 

$

382,191

 

19


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2007

 

Malls

 

Associated
Centers

 

Community
Centers

 

All Other (2)

 

Total

 


 


 


 


 


 


 

Revenues

 

$

685,776

 

$

31,933

 

$

7,029

 

$

21,568

 

$

746,306

 

Property operating expenses (1)

 

 

(243,934

)

 

(7,196

)

 

(2,230

)

 

22,657

 

 

(230,703

)

Interest expense

 

 

(171,865

)

 

(6,465

)

 

(3,655

)

 

(25,745

)

 

(207,730

)

Other expense

 

 

 

 

 

 

 

 

(12,088

)

 

(12,088

)

Gain (loss) on sales of real estate assets

 

 

1,496

 

 

(10

)

 

1,557

 

 

7,522

 

 

10,565

 

 

 



 



 



 



 



 

Segment profit

 

$

271,473

 

$

18,262

 

$

2,701

 

$

13,914

 

 

306,350

 

 

 



 



 



 



 

 

 

 

Depreciation and amortization expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(175,946

)

General and administrative expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(29,072

)

Loss on extinguishment of debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(227

)

Interest and other income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,618

 

Equity in earnings of unconsolidated affiliates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,768

 

Income tax provision

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,360

)

Minority interest in earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(42,304

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Income from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

 

$

64,827

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Total assets

 

$

5,880,107

 

$

350,597

 

$

175,467

 

$

408,825

 

$

6,814,996

 

Capital expenditures (3)

 

$

210,193

 

$

21,964

 

$

9,794

 

$

188,606

 

$

430,557

 


(1)

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

(2)

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

(3)

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

Note 8 – Postretirement Benefits

          Effective March 1, 2008, the Company adopted an unfunded plan to provide medical insurance coverage for up to two years to any retirees with thirty or more years of service and no eligibility for any other group health plan coverage or Medicare. The Company accounts for the plan pursuant to SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. The Company elected to account for the obligation using the transition methodology. During the three and nine months ended September 30, 2008, the Company incurred a total charge of $35 and $207, respectively, related to the plan. Election of the transition methodology resulted in an unrecognized transition cost of $429 as of September 30, 2008.

          On March 3, 2008, the Company’s Senior Vice President and Director of Corporate Leasing announced his retirement effective March 31, 2008. In conjunction with his retirement, the Company agreed to the payment of certain compensation and to the acceleration of the vesting of any outstanding restricted stock awards, among other items. The Company incurred a total charge of $1,216 during the nine months ended September 30, 2008 related to the officer’s retirement benefits, consisting of $1,000 of base compensation, $75 of pro rata bonus compensation, $31 of health benefits and $110 of restricted stock accelerated vesting.

Note 9 – Earnings Per Share

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

20



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 


 


 

 

 

2008

 

2007

 

2008

 

2007

 

 

 


 


 


 


 

Weighted average shares outstanding

 

 

66,331

 

 

65,682

 

 

66,228

 

 

65,641

 

Effect of nonvested stock awards

 

 

(284

)

 

(339

)

 

(250

)

 

(408

)

 

 



 



 



 



 

Denominator – basic earnings per share

 

 

66,047

 

 

65,343

 

 

65,978

 

 

65,233

 

Dilutive effect of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

92

 

 

431

 

 

125

 

 

516

 

Nonvested stock awards

 

 

34

 

 

60

 

 

33

 

 

112

 

Deemed shares related to deferred compensation arrangements

 

 

36

 

 

42

 

 

36

 

 

39

 

 

 



 



 



 



 

Denominator – diluted earnings per share

 

 

66,209

 

 

65,876

 

 

66,172

 

 

65,900

 

 

 



 



 



 



 

Note 10 – Comprehensive Income

          The computation of comprehensive income for the three and nine months ended September 30, 2008 and 2007 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total for the Three Months Ended
September 30,

 

Total for the Nine Months Ended
September 30,

 

 

 


 


 

 

 

2008

 

2007

 

2008

 

2007

 

 

 


 


 


 


 

Net Income

 

$

9,440

 

$

22,543

 

$

36,187

 

$

70,274

 

 

 



 



 



 



 

Change in unrealized loss on interest rate hedge agreements

 

 

135

 

 

 

 

(2,963

)

 

 

Change in unrealized loss on available-for-sale securities

 

 

(1,103

)

 

(2,254

)

 

(5,754

)

 

(4,726

)

Impairment of marketable securities

 

 

5,778

 

 

 

 

5,778

 

 

 

Change in foreign currency translation adjustments

 

 

(4,473

)

 

 

 

(2,896

)

 

 

 

 



 



 



 



 

Total other comprehensive income (loss)

 

 

337

 

 

(2,254

)

 

(5,835

)

 

(4,726

)

 

 



 



 



 



 

Comprehensive income

 

$

9,777

 

$

20,289

 

$

30,352

 

$

65,548

 

 

 



 



 



 



 

Note 11 – Contingencies

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

          The Company has guaranteed 100% of the construction loan of West Melbourne I, LLC (“West Melbourne”), an unconsolidated affiliate in which the Company owns a 50% interest, of which the maximum guaranteed amount is $67,000. West Melbourne is currently developing Hammock Landing, an open-air shopping center in West Melbourne, FL. The total amount outstanding at September 30, 2008 on the loan was $27,162. The guaranty will expire upon the earlier of August 2010, when the related debt matures, or upon obtaining permanent financing. The Company has recorded an obligation of $670 in the accompanying condensed consolidated balance sheet as of September 30, 2008 to reflect the estimated fair value of this guaranty.

          The Company has guaranteed 100% of the construction loan of Port Orange I, LLC (“Port Orange”), an unconsolidated affiliate in which the Company owns a 50% interest, of which the maximum guaranteed amount is $112,000. Port Orange is currently developing The Pavilion at Port Orange, an open-air shopping center in Port Orange, FL. The total amount outstanding at September 30, 2008 on the loan was $30,284. The guaranty will expire upon the earlier of June 2011, when the related debt matures, or upon obtaining permanent financing. The Company has recorded an obligation of $1,120 in the accompanying condensed consolidated balance sheet as of September 30, 2008 to reflect the estimated fair value of this guaranty.

21



          The Company has guaranteed 50% of the debt of Parkway Place L.P., an unconsolidated affiliate in which the Company owns a 45% interest, which owns Parkway Place in Huntsville, AL. The total amount outstanding at September 30, 2008, was $52,942, of which the Company has guaranteed $26,471. The guaranty will expire when the related debt matures in June 2009. The Company has not recorded an obligation for this guaranty because it has determined that the fair value of the guaranty is not material.

          The Company has guaranteed the performance of York Town Center, LP (“YTC”), an unconsolidated affiliate in which the Company owns a 50% interest, under the terms of an agreement with a third party that owns property adjacent to the shopping center property YTC is currently operating. Under the terms of that agreement, YTC is obligated to cause performance of the third party’s obligations as landlord under its lease with its sole tenant, including, but not limited to, provisions such as co-tenancy and exclusivity requirements. Should YTC fail to cause performance, then the tenant under the third party landlord’s lease may pursue certain remedies ranging from rights to terminate its lease to receiving reductions in rent. The Company has guaranteed YTC’s performance under this agreement up to a maximum of $22,000, which decreases by $800 annually until the guaranteed amount is reduced to $10,000. The maximum guaranteed obligation was $20,400 as of September 30, 2008. The Company has entered into an agreement with its joint venture partner under which the joint venture partner has agreed to reimburse the Company 50% of any amounts the Company is obligated to fund under the guaranty. The Company has not recorded an obligation for this guaranty because it has determined that the fair value of the guaranty is not material.

          The Company owns a parcel of land that it is ground leasing to a third party developer for the purpose of developing a shopping center. The Company has guaranteed 27% of the third party’s construction loan and bond line of credit (the “loans”) of which the maximum guaranteed amount is $31,554. The total amount outstanding at September 30, 2008 on the loans was $32,515 of which the Company has guaranteed $8,779. The Company has recorded an obligation of $315 in the accompanying condensed consolidated balance sheets as of September 30, 2008 and December 31, 2007 to reflect the estimated fair value of the guaranty.

          The Company has issued various bonds that it would have to satisfy in the event of non-performance. At September 30, 2008, the total amount outstanding on these bonds was $46,780.

Note 12 – Share-Based Compensation

          The share-based compensation cost that was charged against income was $874 and $1,278 for the three months ended September 30, 2008 and 2007, respectively, and $3,045 and $3,476 for the nine months ended September 30, 2008 and 2007, respectively. Share-based compensation cost capitalized as part of real estate assets was $174 and $206 for the three months ended September 30, 2008 and 2007, respectively, and $696 and $597 for the nine months ended September 30, 2008 and 2007, respectively.

          The Company’s stock option activity for the nine months ended September 30, 2008 is summarized as follows:

 

 

 

 

 

 

 

 

 

 

Shares

 

Weighted
Average
Exercise
Price

 

 

 


 


 

Outstanding at January 1, 2008

 

 

652,030

 

$

15.71

 

Exercised

 

 

(44,015

)

 

13.26

 

Outstanding at September 30, 2008

 

 

608,015

 

 

15.89

 

 

 



 

 

 

 

Vested and exercisable at September 30, 2008

 

 

608,015

 

 

15.89

 

 

 



 

 

 

 

22



          A summary of the status of the Company’s stock awards as of September 30, 2008, and changes during the nine months ended September 30, 2008, is presented below:

 

 

 

 

 

 

 

 

 

 

Shares

 

Weighted
Average
Grant-Date
Fair Value

 

 

 


 


 

Nonvested at January 1, 2008

 

 

298,330

 

$

36.73

 

Granted

 

 

135,528

 

 

23.84

 

Vested

 

 

(141,508

)

 

30.88

 

Forfeited

 

 

(12,800

)

 

33.27

 

 

 



 

 

 

 

Nonvested at September 30, 2008

 

 

279,550

 

 

33.61

 

 

 



 

 

 

 

          As of September 30, 2008, there was $7,418 of total unrecognized compensation cost related to the nonvested stock awards granted under the plan, which is expected to be recognized over a weighted average period of 2.6 years.

Note 13 – Noncash Investing and Financing Activities

          The Company’s noncash investing and financing activities were as follows for the nine months ended September 30, 2008 and 2007:

 

 

 

 

 

 

 

 

 

Nine Months Ended
September 30,

 

 


 

 

2008

 

2007

 

 


 


Accrued dividends and distributions

 

$

64,389

 

$

59,526

 

 



 



Additions to real estate assets accrued but not yet paid

 

 

29,365

 

 

28,149

 

 



 



Reclassification of developments in progress to mortgage and other notes receivable

 

 

15,439

 

 

6,528

 

 



 



Note receivable received for real estate assets sold

 

 

3,533

 

 

8,735

 

 



 



Minority interest issued in acquisition of real estate assets

 

 

 

 

330

 

 



 



Payable for repurchase of Company’s common stock

 

 

 

 

3,775

 

 



 



Note 14 – Income Taxes

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

          The Company recorded an income tax provision of $8,562 and $2,609 for the three months ended September 30, 2008 and 2007, respectively. The income tax provision in 2008 consisted of a current and deferred income tax provision of $5,487 and $3,075, respectively. The income tax provision in 2007 consisted of a current income tax provision of $3,240 and a deferred income tax benefit of $631.

          The Company recorded an income tax provision of $12,757 and $4,360 for the nine months ended September 30, 2008 and 2007, respectively. The income tax provision in 2008 consisted of a current and deferred income tax provision of $9,223 and $3,534, respectively. The income tax provision in 2007 consisted of a current and deferred income tax provision of $4,135 and $225, respectively.

          The Company had a net deferred tax asset of $798 at September 30, 2008 and $4,332 at December 31, 2007. The net deferred tax asset at September 30, 2008 and December 31, 2007 consisted primarily of

23



operating expense accruals and differences between book and tax depreciation.

          The Company reports any income tax penalties attributable to its properties as property operating expenses and any corporate-related income tax penalties as general and administrative expenses in its consolidated statement of operations. In addition, any interest incurred on tax assessments is reported as interest expense. The Company reported nominal interest and penalty amounts for the three and nine months ended September 30, 2008 and 2007, respectively.

Note 15 – Subsequent Events

          On November 4, 2008, the Company announced that it would reduce the quarterly dividend rate, effective with the fourth quarter 2008 declaration, on its common stock to $0.37 per share from $0.545 per share. The quarterly cash dividend equates to an annual dividend of $1.48 per share compared with the previous annual dividend of $2.18 per share. The reduction is expected to generate approximately $80.0 million of additional free cash flow on an annual basis.

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

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

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

EXECUTIVE OVERVIEW

          We are a self-managed, self-administered, fully integrated real estate investment trust (“REIT”) that is engaged in the ownership, development, acquisition, leasing, management and operation of regional shopping malls, open-air centers, community centers and office properties. Our shopping center properties are located in 27 domestic states and in Brazil, but are primarily in the southeastern and midwestern United States. We have elected to be taxed as a REIT for federal income tax purposes.

          As of September 30, 2008, we owned controlling interests in 75 regional malls/open-air centers, 29 associated centers (each adjacent to a regional mall), seven community centers, one mixed-use center and 13 office buildings, including our corporate office building. We consolidate the financial statements of all entities in which we have a controlling financial interest or where we are the primary beneficiary of a variable interest entity. As of September 30, 2008, we owned noncontrolling interests in nine regional malls/open-air centers, three associated centers, four community centers and six office buildings. Because

24



one or more of the other partners have substantive participating rights, we do not control these partnerships and joint ventures and, accordingly, account for these investments using the equity method. We had four shopping center expansions and six community/open-air centers (five of which are owned in joint ventures) under construction at September 30, 2008.

          The majority of our revenues is derived from leases with retail tenants and generally includes base minimum rents, percentage rents based on tenants’ sales volumes and reimbursements from tenants for expenditures, including property operating expenses, real estate taxes and maintenance and repairs, as well as certain capital expenditures. We also generate revenues from sales of outparcel land at the properties and from sales of operating real estate assets when it is determined that we can realize the maximum value of the assets. Proceeds from such sales are generally used to pay off related construction loans or reduce borrowings on our credit facilities.

          As we continue to face challenges in the capital markets and economy in general, our two primary objectives are creating liquidity and maintaining our earnings growth. We are focused on achieving these goals through a number of methods. While we have a pool of unencumbered properties and continue to work closely with lenders to meet our liquidity needs, we also have other potential sources of capital through dispositions of assets, emphasizing our held-for-sale portfolio of properties, and joint venture opportunities. We recently announced the reduction of the quarterly dividend rate on our common stock, which is expected to generate additional cash of approximately $80.0 million annually. We have reduced our spending, focusing on cost containment actions at all levels of our business, including reducing capital expenditures for renovations, tenant allowances and deferred maintenance. We have also reexamined our development projects, carefully assessing those that that may need to be placed on hold until a more favorable market environment emerges.

          Store closures and bankruptcies have significantly increased in 2008, and while the majority of our retailers continue to operate with strong financial fundamentals, we believe that we will continue to see some bankruptcy and store closure activity throughout 2009. In an effort to minimize the impact from any store closures, we have a group dedicated to exploring various backfill strategies, including temporary tenants, options for space redevelopment, signing junior anchor replacements, and other alternative uses.

          We achieved positive growth in our Funds From Operations (“FFO”) for the three and nine months ended September 30, 2008 compared with the respective prior year periods. FFO was positively impacted by the properties acquired in 2007 and higher lease termination fees, management, development and leasing fees and gains on outparcel sales. Partially offsetting these increases were higher income tax expense, bad debt expense and impairment of marketable securities. FFO is a key performance measure for real estate companies. Please see the more detailed discussion of this measure on page 47.

          Our business is built on a strategy of financial discipline, proactive management and preservation of excellent relationships with our retail and financial partners. We recognize that we are facing challenging times, but we are positive that our organization and our properties are positioned to move forward effectively. We have weathered previous market and economic difficulties and we are confident that our strategy, experience and expertise will serve to help us successfully overcome these challenges.

RESULTS OF OPERATIONS

          We have acquired or opened a total of six malls/open-air centers, one associated center, 12 community centers, one mixed-use center and 19 office buildings since January 1, 2007. Of these properties, five malls/open-air centers, one associated center, two community centers, one mixed-use center and one office building are included in the Company’s continuing operations on a consolidated basis (collectively referred to as the “New Properties”). The transactions related to the New Properties impact the comparison of the results of operations for the three and nine months ended September 30, 2008 to the results of operations for the comparable periods ended September 30, 2007. Properties that

25



were in operation as of January 1, 2007 and September 30, 2008 are referred to as the “Comparable Properties.” We do not consider a property to be one of the Comparable Properties until it has been owned or open for one complete calendar year. The New Properties are as follows:

 

 

 

 

 

Property

 

Location

 

Date Acquired/
Opened


 


 


Acquisitions:

 

 

 

 

Chesterfield Mall

 

St. Louis, MO

 

Oct-07

Mid Rivers Mall

 

St. Peters, MO

 

Oct-07

South County Center

 

St. Louis, MO

 

Oct-07

West County Center

 

St. Louis, MO

 

Oct-07

 

 

 

 

 

New Developments:

 

 

 

 

The Shoppes at St. Clair Square

 

Fairview Heights, IL

 

Mar-07

Alamance Crossing East

 

Burlington, NC

 

Aug-07

Cobblestone Village at Palm Coast

 

Palm Coast, FL

 

Oct-07

Milford Marketplace

 

Milford, CT

 

Oct-07

CBL Center II

 

Chattanooga, TN

 

Jan-08

Pearland Town Center

 

Pearland, TX

 

Jul-08

          Of the total properties acquired or opened since January 1, 2007, one mall, two community centers and six office properties are held in entities that are accounted for using the equity method of accounting. Therefore, the results of operations for these properties are included in equity in earnings of unconsolidated affiliates in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2008. These properties are as follows:

 

 

 

 

 

Property

 

Location

 

Date Acquired /
Opened


 


 


Acquisitions:

 

 

 

 

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

 

Greensboro, NC

 

Nov-07

Portfolio of Six Office Buildings (50/50 joint venture)

 

Greensboro, NC

 

Nov-07

Renaissance Center (50/50 joint venture)

 

Durham, NC

 

Feb-08

 

 

 

 

 

New Developments:

 

 

 

 

York Town Center (50/50 joint venture)

 

York, PA

 

Sep-07

          Of the total properties acquired since January 1, 2007, eight community centers and twelve office properties are classified as held-for-sale.  Therefore, the results of operations for these properties are included in discontinued operations in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2008. These properties are as follows:

26




 

 

 

 

 

 

Property

 

Location

 

Date Acquired /
Opened

 


 


 


 

Brassfield Square (1)

 

Greensboro, NC

 

Nov-07

 

Caldwell Court (1)

 

Greensboro, NC

 

Nov-07

 

Garden Square (1)

 

Greensboro, NC

 

Nov-07

 

Hunt Village (1)

 

Greensboro, NC

 

Nov-07

 

New Garden Center (3)

 

Greensboro, NC

 

Nov-07

 

Northwest Centre (1)

 

Greensboro, NC

 

Nov-07

 

Oak Hollow Square

 

High Point, NC

 

Nov-07

 

Westridge Square

 

Greensboro, NC

 

Nov-07

 

1500 Sunday Drive Office Building

 

Raleigh, NC

 

Nov-07

 

Portfolio of Five Office Buildings (2)

 

Greensboro, NC

 

Nov-07

 

Portfolio of Two Office Buildings

 

Chesapeake, VA

 

Nov-07

 

Portfolio of Four Office Buildings

 

Newport News, VA

 

Nov-07

 


(1)

These properties were sold in April 2008.

(2)

One office building was sold in June 2008.

(3)

This property was sold in August 2008.

Comparison of the Three Months Ended September 30, 2008 to the Three Months Ended September 30, 2007

Revenues

          Total revenues increased 12.5% to $282.5 million for the three months ended September 30, 2008, compared to $251.0 million for the prior year quarter. Rental revenues and tenant reimbursements increased $19.3 million of which $25.2 million was attributable to the New Properties, partially offset by a decrease of $5.9 million from the Comparable Properties. The decrease in revenues from the Comparable Properties was primarily driven by lower straight line adjustment income, below-market lease amortization and real estate tax reimbursements, partially offset by an increase in lease termination fees. Straight line adjustment income decreased, for the most part, as a result of increased store closings. Below-market lease amortization decreased due to a higher amount of write-offs in the prior year quarter combined with an increasing number of tenant leases becoming fully amortized in the prior year. Real estate tax reimbursements decreased due to adjustments for tax-related settlements which occurred in, and positively impacted, the prior year quarter. There were no real estate tax settlements of this nature in the current quarter. The lease termination fees were primarily attributable to one tenant that closed stores at several property locations during the current quarter.

          Our cost recovery ratio declined to 97.2% for the three months ended September 30, 2008 from 105.0% for the prior-year quarter, primarily due to increased bad debt expense. We are in the final phases of converting tenants to a fixed common area maintenance (“CAM”) charge as compared to a pro rata charge that was applicable to more tenants in the prior year quarter. Approximately 80% of our leases have currently been converted to fixed CAM. Due to the conversion, the recovery ratio will fluctuate during the year as seasonal items impact the ratio.

          Management, development and leasing fees increased $10.1 million over the prior year quarter, primarily due to higher management and development fee income. During the third quarter of 2008, management fee income increased approximately $8.4 million over the prior year quarter, mainly attributable to fees totaling $8.0 million received from Centro related to a joint venture in 2005 with Galileo America, Inc. Development fees increased approximately $1.1 million in the current year quarter as compared to the prior year period, largely due to fees received from two of our joint venture projects.

27



          Other revenues increased $2.1 million compared to the prior year period due to higher revenues related to our subsidiary that provides security and maintenance services to third parties.

Operating Expenses

          The increase in property operating expenses, including real estate taxes and maintenance and repairs, of $7.6 million resulted from an increase of $8.2 million attributable to the New Properties, partially offset by a decrease of $0.6 million related to the Comparable Properties. The decrease in property operating expenses of the Comparable Properties is principally due to lower real estate taxes. This decline largely resulted from higher than usual real estate tax expense in the prior year quarter due to tax settlements at certain properties that covered a range of tax years. In addition to real estate taxes, we experienced a decrease at the Comparable Properties in our property and fire insurance expense. Partially offsetting these decreased expenses is an increase in bad debt expense. Bad debt expense has increased due to the larger number of store closings and bankruptcies experienced during the current year. We also experienced higher central energy expense and janitorial services during the current year quarter as compared to the prior year period.

          The increase in depreciation and amortization expense of $23.1 million resulted from an increase of $12.1 million from the New Properties and $11.0 million from the Comparable Properties. Approximately $10.5 million of the increase attributable to the Comparable Properties is due to the write-off of certain tenant allowances and intangible lease assets related to early lease terminations.

          General and administrative expenses increased $1.3 million over the prior year quarter, primarily as a result of decreased capitalized overhead and increased state taxes. These were partially offset by a decrease in our group health insurance expense. As a percentage of revenues, general and administrative expenses remained relatively stable at 3.4% for the third quarter of 2008 compared with 3.3% for the prior year quarter.

          Other expenses increased $1.5 million primarily due to increased expenses of $1.8 million related to our subsidiary that provides security and maintenance services to third parties, partially offset by a decrease of $0.3 million in abandoned projects expense.

Other Income and Expenses

          Interest expense increased $4.3 million primarily due to the debt on the New Properties, and an unsecured term facility that was obtained for the acquisition of certain properties from the Starmount Company or its affiliates. While we experienced a decrease in the weighted average fixed and variable interest rates as compared to the third quarter of 2007, the total outstanding principal amounts have increased.

          As of September 30, 2008, we recorded a $5.8 million non-cash write-down related to certain investments in marketable securities. The impairment resulted from a significant and sustained decline in the market value of the securities. There were no realized investment losses in the third quarter of 2007.

          During the third quarter of 2008, we recognized gain on sales of real estate assets of $4.8 million related to the sale of four parcels of land during the quarter. The gain of $4.3 million in the third quarter of 2007 related to the sale of four parcels of land.

          Equity in earnings of unconsolidated affiliates decreased by $0.6 million during the third quarter of 2008 compared to the prior year quarter, primarily due to higher interest expense on debt and higher depreciation and amortization expense from both the acquisition of new properties by CBL-TRS Joint Venture, LLC and write-offs of tenant allowances and intangible lease assets associated with various store

28



closures.

          The income tax provision of $8.6 million for the three months ended September 30, 2008 relates to the earnings of our taxable REIT subsidiary. The income tax provision increased by $6.0 million primarily due to the recognition of the aforementioned $8.0 million fee income, in addition to a significantly larger amount of gains in the current year period related to sales of outparcels and income from discontinued operations attributable to the taxable REIT subsidiary. Income from discontinued operations in the prior year period primarily related to the sale of an operating property that was not owned by the taxable REIT subsidiary. The provision consists of current and deferred income taxes of $5.5 million and $3.1 million, respectively. During the three months ended September 30, 2007, we recorded an income tax provision of $2.6 million, consisting of a provision for current income taxes of $3.2 million, partially offset by a deferred tax benefit of $0.6 million.

          We recognized income from discontinued operations of $2.2 million during the third quarter of 2008, compared to $0.9 million during the third quarter of 2007. Discontinued operations for the three months ended September 30, 2008 reflect the operating results of 13 retail and office properties that meet the criteria for held-for-sale classification. These properties were originally acquired in the fourth quarter of 2007. Discontinued operations for the 2008 quarter also includes the true up of estimated expenses to actual amounts for properties sold during previous periods. Discontinued operations for the three months ended September 30, 2007 reflect the results of operations of Twin Peaks Mall and The Shops at Pineda Ridge, plus the true up of estimated expenses to actual amounts for properties sold during previous periods.

          We recognized a gain on the sale of discontinued operations of $0.7 million during the three months ended September 30, 2008, due to the sale of one community center located in Greensboro, NC, for a sales price of $19.5 million.

Comparison of the Nine Months Ended September 30, 2008 to the Nine Months Ended September 30, 2007

Revenues

          The $69.7 million increase in rental revenues and tenant reimbursements was attributable to an increase of $76.6 million from the New Properties, partially offset by a decrease of $6.9 million from the Comparable Properties. The decrease in revenues of the Comparable Properties was driven by a decline in percentage rents and tenant reimbursements. Percentage rents declined due to reduced sales. The current period tenant reimbursements reflect a decrease in reimbursements for real estate taxes which were higher in the prior year due to tax-related settlements covering several tax years, resulting in higher real estate tax expense.

          Our cost recovery ratio declined to 96.7% for the nine months ended September 30, 2008 from 102.2% for the prior-year period. The decline in the current period results primarily from increases in bad debt expense.

          Management, development and leasing fees increased $10.3 million over the prior year, primarily due to higher management and development fee income. During the nine months ended September 30, 2008, management fee income increased approximately $9.0 million over the prior year-to-date period, mainly attributable to fees totaling $8.0 million received during the third quarter of 2008 from Centro related to a joint venture in 2005 with Galileo America, Inc. Development fees increased approximately $2.0 million in the current year as compared to the prior year period, largely due to fees received from two of our joint venture projects.

          Other revenues increased by $3.7 million primarily due to increased income related to our subsidiary that provides security and maintenance services to third parties.

29



Operating Expenses

          Property operating expenses, including real estate taxes and maintenance and repairs, increased $27.9 million as a result of $22.4 million of expenses attributable to the New Properties and an increase of $5.5 million of expenses related to the Comparable Properties. The increase in property operating expenses of the Comparable Properties is attributable to increases in annual compensation for property management personnel, bad debt expense and utilities expense.

          The increase in depreciation and amortization expense of $52.7 million resulted from increases of $37.4 million from the New Properties and $15.3 million from the Comparable Properties. The increase attributable to the Comparable Properties is primarily due to write-offs of approximately $12.0 million for certain tenant allowances and intangible lease assets related to early lease terminations. The remaining increase in depreciation and amortization related to the Comparable Properties is primarily attributable to ongoing capital expenditures for renovations, expansions, tenant allowances and deferred maintenance.

          General and administrative expenses increased $4.2 million primarily as a result of increases in payroll and state taxes, in addition to certain benefits related to the retirement of our Senior Vice President and Director of Corporate Leasing during the first quarter of 2008. As a percentage of revenues, general and administrative expenses remained relatively stable at 4.0% for the nine months ended September 30, 2008 compared with 3.9% for the prior year-to-date period.

          Other expenses increased $6.6 million primarily due to increased expenses of $4.6 million related to our subsidiary that provides security and maintenance services to third parties and due to an increase of $2.0 million in abandoned projects expense.

Other Income and Expenses

          Interest expense increased $26.0 million primarily due to debt on the New Properties, an unsecured term facility that was obtained for the acquisition of certain properties from the Starmount Company or its affiliates, refinancings that were completed with increased principal amounts in the prior year on the Comparable Properties and borrowings outstanding that were used to redeem our 8.75% Series B Cumulative Redeemable Preferred Stock (the “Series B Preferred Stock”) in June 2007. While we experienced a decrease in the weighted average fixed and variable interest rates as compared to the comparable period of 2007, the total outstanding principal amounts have increased.

          As of September 30, 2008, we recorded a $5.8 million non-cash write-down related to certain investments in marketable securities. The impairment resulted from a significant and sustained decline in the market value of the securities. There were no realized investment losses in the prior year period.

          During the nine months ended September 30, 2008, we recognized gain on sales of real estate assets of $12.1 million related to the sale of 13 parcels of land during the period and one parcel of land for which the gain had previously been deferred. The gain of $10.6 million in the nine months ended September 30, 2007 related to the sale of eleven land parcels and two parcels of land for which the gains had previously been deferred.

          Equity in earnings of unconsolidated affiliates decreased by $1.5 million during the nine months ended September 30, 2008, primarily due to higher interest expense on debt, the write-off of an above-market lease intangible and higher depreciation and amortization expense from both the acquisition of new properties by CBL-TRS Joint Venture, LLC and write-offs associated with various store closures.

          The income tax provision of $12.8 million for the nine months ended September 30, 2008 relates to the earnings of our taxable REIT subsidiary. The income tax provision increased by $8.4 million

30



primarily due to the recognition of the aforementioned $8.0 million fee income, in addition to a significantly larger amount of gains in the current year period related to sales of outparcels and income from discontinued operations attributable to the taxable REIT subsidiary. Income from discontinued operations in the prior year period primarily related to the sale of an operating property that was not owned by the taxable REIT subsidiary. The provision consists of current and deferred income taxes of $9.2 million and $3.6 million, respectively. During the nine months ended September 30, 2007, we recorded an income tax provision of $4.4 million, consisting of a provision for current and deferred income taxes of $4.2 million and $0.2 million, respectively.

          We recognized income from discontinued operations of $6.4 million during the nine months ended September 30, 2008, compared to $1.5 million during the nine months ended September 30, 2007. Discontinued operations for the nine months ended September 30, 2008 reflect the operating results of 19 retail and office properties that meet the criteria for held-for-sale classification. These properties were originally acquired in the fourth quarter of 2007. Discontinued operations for 2008 also include the results of Chicopee Marketplace III, a community center located in Chicopee, MA, plus the true up of estimated expense to actual amounts for properties sold during previous years. Discontinued operations for the nine months ended September 30, 2007 reflect the results of operations of Twin Peaks Mall and The Shops at Pineda Ridge, plus the true up of estimated expenses to actual amounts for properties sold during previous years.

          We recognized a gain on the sale of discontinued operations of $3.8 million during the nine months ended September 30, 2008, compared to $3.9 million during the nine months ended September 30, 2007. During the nine months ended September 30, 2008, we sold six community centers and an office property, all located in Greensboro, NC, for an aggregate sales price of $45.0 million and recognized a gain of $2.3 million. We also sold Chicopee Marketplace III for a sales price of $7.5 million and recognized a gain of $1.5 million.

          Preferred dividends decreased $7.9 million during the nine months ended September 30, 2008 compared to the prior-year period due to the redemption of 2,000,000 shares of Series B Preferred Stock in September 2007. In connection with the 2007 redemption, we incurred a charge of $3.6 million to write off direct issuance costs that were recorded as a reduction of additional paid-in-capital when the preferred stock was issued. This charge was recorded as additional preferred dividends.

Operational Review

          The shopping center business is, to some extent, seasonal in nature with tenants typically achieving the highest levels of sales during the fourth quarter because of the holiday season, which generally results in higher percentage rent income in the fourth quarter. Additionally, 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.

          We classify our regional malls into two categories – malls that have completed their initial lease-up are referred to as stabilized malls and malls that are in their initial lease-up phase and have not been open for three calendar years are referred to as non-stabilized malls. The non-stabilized malls currently include Imperial Valley Mall in El Centro, CA, which opened in March 2005; Southaven Towne Center in Southaven, MS, which opened in October 2005; Gulf Coast Town Center in Ft. Myers, FL, which opened in November 2005; and Alamance Crossing East in Burlington, NC which opened in August 2007.

31


          We derive a significant amount of our revenues from the mall properties. The sources of our revenues by property type were as follows:

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 


 

 

 

2008

 

2007

 

 

 


 


 

Malls

 

 

90.0

%

 

91.9

%

Associated centers

 

 

3.9

%

 

4.3

%

Community centers

 

 

1.2

%

 

0.9

%

Mortgages, office buildings and other

 

 

4.9

%

 

2.9

%

          Mall store sales for the trailing twelve months ended September 30, 2008 on a comparable per square foot basis were $339 per square foot compared with $350 per square foot in the prior year period, a decline of 3.1%. Current year sales numbers have been impacted by the general weakness in the economy and a reduction in our mall occupancy.

          Our portfolio occupancy, including centers acquired in 2007, is summarized in the following table:

 

 

 

 

 

 

 

 

 

 

At September 30,

 

 

 


 

 

 

2008

 

2007

 

 

 


 


 

Total portfolio occupancy

 

 

92.2

%

 

92.4

%

Total mall portfolio

 

 

91.8

%

 

92.8

%

Stabilized malls

 

 

92.1

%

 

93.2

%

Non-stabilized malls

 

 

87.2

%

 

85.8

%

Associated centers

 

 

95.1

%

 

92.0

%

Community centers

 

 

92.1

%

 

85.5

%

          Excluding the centers acquired in 2007, our total portfolio occupancy at September 30, 2008 was 92.4%, equal to the prior year.

          Bankruptcies and store closures have increased in 2008, and we believe we will continue to see some of this activity into 2009. Steve & Barry’s, Linens n’ Things, Goody’s, The Disney Store, Whitehall and Friedman’s are the major retailers that have recently declared bankruptcy. In addition, subsequent to September 30, 2008, Circuit City filed for bankruptcy protection. We are working diligently to minimize any resulting available occupancies.

          Our largest outstanding bankruptcy exposure is Steve & Barry’s. We had 21 Steve & Barry’s locations in our portfolio totaling 813,000 square feet and representing $7.3 million of annual gross rents. At this time, three of their leases have been rejected and those stores closed in September. We anticipate that four locations that are currently in process of going out of business will close by the end of November. These seven combined stores comprise 192,000 square feet and $1.9 million of annual gross rents. We are in the process of leasing the available spaces and are already working to obtain letters of intent. In addition, we have ongoing negotiations with Steve & Barry’s regarding rent reductions for certain locations; however, the bankruptcy courts must approve any actions before the bankruptcy is finalized.

          We had 13 Linens n’ Things locations in our portfolio totaling $4.8 million of annual gross rents and 359,000 square feet. We currently have nine locations that remain open, representing $3.4 million of annual gross rents and 280,000 square feet. We expect that these locations will close during the fourth quarter. We already have solid lease prospects for many of these locations.

          We have nine Goody’s locations representing 315,000 square feet and approximately $3.1 million

32



in annual gross rents. We have been notified that Goody’s will close five locations representing approximately $1.9 million in annual gross rents. We currently have a replacement tenant for one of the locations.

          We have 16 The Disney Stores representing 71,000 square feet and approximately $2.9 million in annual gross rents. Eight of these stores are expected to remain open. The remaining eight stores that have closed represent 44,000 square feet and approximately $1.8 million in annual gross rents. We have replacement tenants for two of the closed stores.

          Whitehall currently leases 24 locations from us representing 27,000 square feet and approximately $2.6 million in annual gross rents. We have not been notified of any store closures at this time.

          We originally had 23 Friedman’s stores representing 34,000 square feet and $2.3 million in annual gross rents. Whitehall assumed six locations prior to their bankruptcy filing. We are in the process of leasing the remaining locations.

          On November 10, 2008, Circuit City filed for bankruptcy protection.  Prior to the bankruptcy filing, it had issued a list of store closures. We have a total of eight Circuit City stores comprising 256,000 square feet and $1.9 million in annual gross rents. Three of these eight stores are owned by Circuit City. We have two locations on Circuit City’s store closure list, comprising 61,000 square feet and approximately $0.2 million in annual gross rents. Of these two stores, one is owned by Circuit City and one represents a ground lease.

Leasing

          During the third quarter of 2008 we signed a total of approximately 1.9 million square feet of leases including approximately 0.5 million square feet of development leases and approximately 1.4 million square feet of leases in our operating portfolio. The 1.4 million square feet in our operating portfolio was comprised of approximately 0.3 million square feet of new leases and approximately 1.1 million square feet of renewal leases. This compares with a total of approximately 1.2 million square feet of leases signed in the third quarter of 2007, including approximately 0.6 million square feet of development leases and approximately 0.6 million square feet of leases in our operating portfolio. The 0.6 million square feet in our operating portfolio was comprised of approximately 0.3 million square feet of new leases and approximately 0.3 million square feet of renewal leases. Approximately 91% of our 2008 expirations have been leased or committed. To date, we have completed the renewals of approximately 50% of our 2009 lease expirations.

          Average annual base rents per square foot for small shop spaces less than 10,000 square feet were as follows for each property type:

 

 

 

 

 

 

 

 

 

 

At September 30,

 

 

 


 

 

 

2008

 

2007

 

 

 


 


 

Stabilized malls

 

$

29.00

 

$

27.99

 

Non-stabilized malls

 

 

25.10

 

 

26.88

 

Associated centers

 

 

11.67

 

 

11.74

 

Community centers

 

 

14.91

 

 

14.47

 

Offices

 

 

17.53

 

 

19.53

 

          Results from new and renewal leasing of comparable small shop space during the three and nine months ended September 30, 2008 for spaces that were previously occupied are as follows:

33


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Square Feet

 

Prior Gross
Rent PSF

 

New Initial
Gross Rent
PSF

 

% Change
Initial

 

New Average
Gross Rent
PSF (2)

 

% Change
Average

 

 

 


 


 


 


 


 


 

Quarter:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

All Property Types (1)

 

 

674,430

 

$

36.64

 

$

38.13

 

 

4.1

%

$

39.35

 

 

7.4

%

Stabilized malls

 

 

590,178

 

 

38.98

 

 

40.92

 

 

5.0

%

 

42.25

 

 

8.4

%

New leases

 

 

177,055

 

 

43.11

 

 

48.37

 

 

12.2

%

 

51.18

 

 

18.7

%

Renewal leases

 

 

413,123

 

 

37.22

 

 

37.72

 

 

1.3

%

 

38.42

 

 

3.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year to Date:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

All Property Types (1)

 

 

2,189,781

 

$

36.09

 

$

38.62

 

 

7.0

%

$

39.72

 

 

10.1

%

Stabilized malls

 

 

1,966,139

 

 

38.02

 

 

40.88

 

 

7.5

%

 

42.06

 

 

10.6

%

New leases

 

 

553,352

 

 

42.47

 

 

48.83

 

 

15.0

%

 

51.37

 

 

21.0

%

Renewal leases

 

 

1,412,787

 

 

36.27

 

 

37.77

 

 

4.1

%

 

38.41

 

 

5.9

%


 

 

(1)

Includes stabilized malls, associated centers, community centers and other.

(2)

Average Gross Rent does not incorporate allowable future increases for recoverable common area expenses.

LIQUIDITY AND CAPITAL RESOURCES

          There was $67.5 million of cash and cash equivalents as of September 30, 2008, an increase of $1.7 million from December 31, 2007. Cash flows from operations are used to fund short-term liquidity and capital needs such as tenant construction allowances, capital expenditures and payments of dividends and distributions. For longer-term liquidity needs such as acquisitions, new developments, renovations and expansions, we typically rely on property specific mortgages (which are generally non-recourse), construction and term loans, revolving lines of credit, common stock, preferred stock, joint venture investments and a minority interest in the Operating Partnership.

          Cash provided by operating activities during the nine months ended September 30, 2008, increased $4.3 million to $314.1 million from $309.8 million during the nine months ended September 30, 2007. The increase was primarily attributable to the operations of the New Properties and the receipt of the fee income of $8.0 million related to the 2005 joint venture with Galileo America, Inc., partially offset by higher interest expense.

Debt

          We have two operating property loans totaling approximately $38.0 million that have original maturity dates in the fourth quarter of 2008. However, both loans have extensions available at our option that we intend to exercise. Upon exercise of these extension options, all of our 2008 remaining debt maturities will have been addressed. Of the approximately $1,589.8 million of consolidated debt that is scheduled to mature in 2009, we have extensions of approximately $1,261.4 million available at our option, leaving approximately $328.4 million of maturities in 2009 that must be retired or refinanced. The vast majority of these loans are held with life insurance companies. Based on the existing loan amounts and conservative estimates of valuations, the current average loan-to-value ratios of these mortgages are believed to be less than 50%. The quality of each property is considered good with a long history of stable net operating income. We are already in the process of discussing these loans with life insurance companies, pension funds and other sources of capital funding and believe that we will be able to not only successfully refinance these loans, but also obtain excess financing proceeds.

          While our secured lines of credit have original or extended maturity dates which allow for settlement in 2010, we are already in discussions with our largest secured line of credit lender, Wells Fargo, to obtain extensions beyond that time.

          As of September 30, 2008, we are in compliance with our debt covenants. We have also

34



performed stress tests on our covenant calculations assuming changes in cap rate assumptions and interest rates that would negatively impact our calculation results. Based on the results of  these tests, we believe that we currently have adequate capacity to continue meeting the requirements of our debt covenants.

          The following tables summarize debt based on our pro rata ownership share, including our pro rata share of unconsolidated affiliates and excluding minority investors’ share of consolidated properties, because we believe this provides investors and lenders a clearer understanding of our total debt obligations and liquidity (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

Minority
Interests

 

Unconsolidated
Affiliates

 

Total

 

Weighted
Average
Interest
Rate (1)

 

 

 


 


 


 


 


 

September 30, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-recourse loans on operating properties

 

$

4,099,557

 

$

(23,743

)

$

408,719

 

$

4,484,533

 

 

5.91

%

Line of credit (2)

 

 

400,000

 

 

 

 

 

 

400,000

 

 

4.45

%

 

 



 



 



 



 

 

 

 

Total fixed-rate debt

 

 

4,499,557

 

 

(23,743

)

 

408,719

 

 

4,884,533

 

 

5.79

%

 

 



 



 



 



 

 

 

 

Variable-rate debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recourse term loans on operating properties

 

 

321,814

 

 

(919

)

 

46,475

 

 

367,370

 

 

4.61

%

Construction loans

 

 

39,846

 

 

 

 

63,537

 

 

103,383

 

 

4.24

%

Land loans

 

 

 

 

 

 

11,940

 

 

11,940

 

 

3.95

%

Unsecured line of credit

 

 

502,000

 

 

 

 

 

 

502,000

 

 

3.86

%