SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): August 26, 2004
CBL & ASSOCIATES PROPERTIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 1-12494 62-154718
(State or Other Jurisdiction of (Commission File Number) (I.R.S. Employer
Incorporation) Identification No.)
Suite 500, 2030 Hamilton Place Blvd, Chattanooga, TN 37421 (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)
1
ITEM 5. Other Events
CBL & Associates Properties, Inc. (the "Company") is updating its
consolidated financial statements included in its Annual Report on Form 10-K for
the year ended December 31, 2003 to reflect the application of the requirements
of Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets."
During June 2004, the Company sold a community center and, in accordance
with SFAS No. 144, has reported revenues, expenses and gain on sale from the
community center as discontinued operations for each period presented in its
quarterly reports filed since the date of the sale, including any comparable
periods of the prior year that are presented. The same reclassification as
discontinued operations required by SFAS No. 144 following the sale of the
community center is required for previously issued annual financial statements
for each of the three years shown in the Company's last annual report on Form
10-K, if those financial statements are incorporated by reference in subsequent
filings with the SEC made under the Securities Act of 1933, as amended, even
though those financial statements relate to periods prior to the date of the
sale.
This reclassification has no effect on the Company's reported net income
available to common shareholders. This Form 8-K updates Items 6, 7, 8 and 15 of
the Company's Form 10-K to reflect the community center sold in June 2004 as
discontinued operations. All other items of the Form 10-K remain unchanged. No
attempt has been made to update matters in the Form 10-K, except to the extent
expressly provided above.
Index to Exhibit 99.1 Page Number
---------------------------------------------------------------- -----------
Selected Financial Data 5
Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
Financial Statements 26
ITEM 7. Exhibits
Exhibit
Number Description
-------- -------------
23.1 Consent of Deloitte & Touche LLP
99.1 Items 6, 7, 8 and 15 of the Company's Annual Report on Form 10-K for
the Year Ended December 31, 2003 as revised for the adoption of SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets"
2
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CBL & ASSOCIATES PROPERTIES, INC.
_______________/s/ John N. Foy_______________
John N. Foy
Vice Chairman,
Chief Financial Officer and Treasurer
(Authorized Officer of the Registrant,
Principal Financial Officer and
Principal Accounting Officer)
Date: August 26, 2004
3
Exhibit 23.1
CONSENT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements Nos.
333-73376, 333-04295, 333-41768, and 333-88914 on Form S-8 and Registration
Statements Nos. 033-92218, 333-47041, 333-90395, 333-62830, 333-97831,
333-104882 and 333-108947 on Form S-3 of CBL & Associates Properties, Inc. of
our report dated February 27, 2004, except for Notes 3, 4, 9, 12 and 13 as to
which the date is August 20, 2004, (which report expresses an unqualified
opinion and includes an explanatory paragraph relating to the impact of the
adoption of Statement of Financial Accounting Standards No. 144), appearing in
this Current Report on Form 8-K of CBL & Associates Properties, Inc.
/s/ DELOITTE & TOUCHE LLP
Atlanta, Georgia
August 30, 2004
4
Exhibit 99.1
Item 6. Selected Financial Data:
The following table sets forth selected financial and operating information for
CBL & Associates Properties, Inc. (the "Company") for each of the five years in
the period ended December 31, 2003, which has been updated to reflect the
application of the requirements of Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," to the sale of a community center in June 2004 that requires the
results of operations of this community center be retroactively reclassified as
discontinued operations in all periods presented. This reclassification has no
effect on the reported net income available to common shareholders in any prior
period. Refer to Note 4 to the Company's consolidated financial statements. The
following information should be read in conjunction with the Company's
consolidated financial statements and notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations included elsewhere
in this report.
5
(In thousands, except per share data)
Year Ended December 31, (2)
---------------------------------------------------------
2003 2002 2001 2000 1999
---------------------------------------------------------
Total revenues $ 667,193 $ 586,682 $ 536,972 $ 345,674 $ 305,433
Total expenses 350,337 302,654 278,141 179,449 160,309
---------------------------------------------------------
Income from operations 316,856 284,028 258,831 166,225 145,124
Interest income 2,485 1,853 1,891 2,644 2,128
Interest expense (153,322) (143,041) (156,558) (95,827) (83,026)
Loss on extinguishment of debt (167) (3,910) (13,558) (367) -
Gain on sales of real estate assets 77,765 2,804 10,649 15,978 6,248
Equity in earnings of unconsolidated
affiliates 4,941 8,215 7,155 3,684 3,263
Minority interest in earnings:
Operating partnership (106,532) (64,251) (49,643) (28,507) (23,264)
Shopping center properties (2,758) (3,280) (1,654) (1,504) (1,194)
---------------------------------------------------------
Income before discontinued operations 139,268 82,418 57,113 62,326 49,279
Discontinued operations 4,871 2,488 3,795 3,396 5,316
---------------------------------------------------------
Net income 144,139 84,906 60,908 65,722 54,595
Preferred dividends (19,633) (10,919) (6,468) (6,468) (6,468)
---------------------------------------------------------
Net income available to common
shareholders $ 124,506 $ 73,987 $ 54,440 $ 59,254 $ 48,127
=========================================================
Basic earnings per common share:
Income before discontinued
operations, net of preferred
dividends $ 4.00 $ 2.49 $ 2.00 $ 2.25 $ 1.74
=========================================================
Net income available to common
shareholders $ 4.16 $ 2.58 $ 2.15 $ 2.38 $ 1.95
=========================================================
Weighted average shares outstanding 29,936 28,690 25,358 24,881 24,647
Diluted earnings per common share:
Income before discontinued
operations, net of preferred
dividends $ 3.84 $ 2.41 $ 1.96 $ 2.23 $ 1.72
=========================================================
Net income available to common
shareholders $ 3.99 $ 2.49 $ 2.10 $ 2.37 $ 1.94
=========================================================
Weighted average shares and
potential dilutive common shares
outstanding 31,193 29,668 25,833 25,021 24,834
Dividends declared per common share $ 2.69 $ 2.32 $ 2.13 $ 2.04 $ 1.95
December 31, (2)
----------------------------------------------------------
2003 2002 2001 2000 1999
----------------------------------------------------------
BALANCE SHEET DATA:
Net investment in real estate assets $3,912,220 $3,611,485 $3,201,622 $2,040,614 $1,960,554
Total assets 4,264,310 3,795,114 3,372,851 2,115,565 2,018,838
Total mortgage and other notes
payable 2,738,102 2,402,079 2,315,955 1,424,337 1,360,753
Minority interests 527,431 500,513 431,101 174,665 170,750
Shareholders' equity 837,299 741,190 522,088 434,825 419,887
OTHER DATA:
Cash flows provided by (used in):
Operating activities $ 274,349 $ 273,923 $ 213,075 $ 139,118 $ 130,557
Investing activities (333,379) (274,607) (201,245) (122,215) (204,856)
Financing activities 66,007 3,902 (6,877) (17,958) 75,546
Funds From Operations (FFO) (1)
of the Operating Partnership 271,588 235,474 182,687 137,132 125,168
FFO applicable to the Company 146,552 126,127 94,945 92,594 84,364
(1) Please refer to Management's Discussion and Analysis of Financial Condition
and Results of Operations for the definition of FFO. FFO does not represent
cash flow from operations as defined by accounting principles generally
accepted in the United States and is not necessarily indicative of the cash
available to fund all cash requirements.
(2) Please refer to Notes 3 and 5 to the consolidated financial statements for
a description of acquisitions and joint venture transactions that have
impacted the comparability of the financial information presented.
6
Item 7: 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 annual report.
Capitalized terms used, but not defined, in this Management's Discussion and
Analysis of Financial Condition and Results of Operations have the same meanings
as defined in the notes to the consolidated financial statements. 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. 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.
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 and
community centers. Our shopping center properties are located primarily in the
Southeast and Midwest, as well as in select markets in other regions of the
United States.
As of December 31, 2003, we owned controlling interests in 56 regional
malls, 21 associated centers (each adjacent to a regional shopping mall), 17
community centers, and our corporate office building. We consolidate the
financial statements of all entities in which we have a controlling financial
interest. As of December 31, 2003, we owned non-controlling interests in four
regional malls, two associated centers and 42 community centers. Because major
decisions such as the acquisition, sale or refinancing of principal partnership
or joint venture assets must be approved by one or more of the other partners,
we do not control these partnerships and joint ventures and, accordingly,
account for these investments using the equity method. We had two malls, both
owned in joint ventures, three mall expansions, one associated center, two
community centers and one community center expansion under construction as of
December 31, 2003.
The majority of our revenues are derived from leases with retail tenants
and generally include 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 reduce borrowings on the credit
facilities.
Our regional mall portfolio performed well during 2003 as evidenced by
consistently high occupancy levels, increased rents on expiring leases, and
7
growth in both specialty leasing income and same-store mall store sales. The
properties we acquired over the past two years also made significant
contributions to our growth in 2003 as we continued to leverage our expertise to
improve the tenant mix in these properties and to capitalize on opportunities
for specialty leasing income.
We expanded our portfolio with the acquisition of six malls and two
associated centers during 2003, representing a total investment of $494.6
million. The acquisition market is competitive and we continue to pursue
potential acquisition opportunities where we believe that we can leverage our
expertise to enhance the value of the property.
During 2003, we obtained a new secured credit facility and capitalized on
the favorable interest rate environment by obtaining non-recourse, fixed-rate
mortgage loans on several of our properties. We also made a strategic decision
to contribute ownership interests in 51 of our community centers to Galileo
America LLC ("Galileo America'), a joint venture we have formed with
Australia-based Galileo America Shopping Trust. Galileo America Shopping Trust
has a controlling 90% interest in the joint venture and we have a 10%
noncontrolling interest. While this transaction will result in a short-term
dilution to earnings, we believe it allows us to develop and acquire real estate
assets that will be more productive in the long-term and provides us access to a
new capital market.
On October 23, 2003, we completed the first phase of the transaction when
we sold interests in 41 community centers to Galileo America. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets", the results of operations of
these properties have not been reflected as discontinued operations in the
consolidated financial statements since we have significant continuing
involvement with the properties through our 10% ownership interest in Galileo
America and the long-term agreement under which we will be the exclusive manager
of the properties.
Bankruptcy filings and store closings by retail tenants are normal in the
course of our business. Our leasing personnel continually work to re-lease
spaces that become vacant due to bankruptcies, store closings and lease
expirations. During 2003, bankruptcies resulted in 63 store closings,
representing $5.1 million in annual gross rentals. Subsequent to year-end, KB
Toys, Gadzooks, One Price Clothing, and Footstar filed for bankruptcy. The total
annual gross rentals related to the stores these retailers have notified us will
be closing is $4.2 million.
Results of Operations
Comparison of the Year Ended December 31, 2003 to the Year Ended December 31,
2002
The following significant transactions impacted the consolidated results of
operations for the year ended December 31, 2003, compared to the year ended
December 31, 2002:
|X| The acquisition of six malls and two associated centers and the opening of
one new associated center and two new community centers during 2003.
Additionally, there was a full year of operations in 2003 for three malls
and one associated center that were acquired during 2002 and one associated
center that was opened in 2002. The properties opened or acquired during
2003 and 2002 are collectively referred to as the "New Properties" and are
as follows:
8
Property Location Date Acquired / Opened
------------------------------------------------------------------------------
Acquisitions:
-------------
Richland Mall Waco, TX May 2002
Panama City Mall Panama City, FL May 2002
Westmoreland Mall Greensburg, PA December 2002
Westmoreland Crossing Greensburg, PA December 2002
Sunrise Mall Brownsville, TX April 2003
Sunrise Commons Brownsville, TX April 2003
Cross Creek Mall Fayetteville, NC September 2003
River Ridge Mall Lynchburg, VA October 2003
Valley View Mall Roanoke, VA October 2003
Southpark Mall Colonial Heights, VA December 2003
Harford Mall Bel Air, MD December 2003
Harford Annex Bel Air, MD December 2003
New Developments:
-----------------
Parkdale Crossing Beaumont, TX November 2002
The Shoppes at Hamilton Place Chattanooga, TN May 2003
Cobblestone Village St. Augustine, FL May 2003
Waterford Commons Waterford, CT September 2003
|X| The consolidation of a full year of operations for East Towne Mall, West
Towne Mall and West Towne Crossing (the "Newly Consolidated Properties") in
which we acquired the remaining ownership interest during December 2002. We
had previously owned a non-controlling interest in these properties and had
accounted for them using the equity method of accounting.
|X| The sale of interests in 41 community centers to Galileo America in October
2003 ("the Galileo Transaction").
Revenues
The $80.6 million increase in revenues was primarily attributable to
increases of $44.7 million from the New Properties, $23.6 million from the Newly
Consolidated Properties and $20.6 million from properties that were in operation
for all of 2003 and 2002, offset by a reduction of $6.7 million from the Galileo
Transaction.
The increase in revenues at properties that were in operation for all of
2003 and 2002 was primarily driven by our ability to maintain high occupancy
levels while achieving increases in rents from both new leases and lease
renewals on comparable spaces. Additionally, our cost recovery ratio improved to
99.2% in 2003 compared to 91.4% in 2002 due primarily to the partial recovery of
certain capital expenditures incurred in connection with the significant number
of mall renovations completed during the past three years.
Management, leasing and development fees decreased $1.6 million because of
a reduction in fees related to the Newly Consolidated Properties.
Operating Expenses
Property operating expenses (including real estate taxes and maintenance
and repairs) increased $20.0 million due to increases of $15.5 million from the
New Properties and $7.4 million from the Newly Consolidated Properties, offset
by a reduction of $2.9 million from the Galileo Transaction.
The $19.5 million increase in depreciation and amortization expense
resulted from increases of $9.2 million from the New Properties, $4.2 million
from the Newly Consolidated Properties and $7.1 million from the comparable
centers, which is primarily attributable to the 16 property renovations and
expansions that were completed during 2003 and 2002. These increases were offset
by a reduction of $1.0 million from the Galileo Transaction.
9
General and administrative expenses increased $7.1 million because we had a
lower level of development activity in 2003 than in 2002. As a result, we
capitalized less in salaries of leasing and development personnel, which
resulted in higher compensation expense. There were also additional salaries and
benefits for the personnel added to manage the properties acquired during 2003
and 2002 combined with normal wage increases for existing personnel.
Other Income and Expenses
Interest expense increased $10.3 million due to the debt on the New
Properties and the Newly Consolidated Properties. We also refinanced $196.0
million of short-term, variable-rate debt with fixed-rate, non-recourse
long-term debt with a higher interest rate. The increase was offset somewhat by
a reduction in debt related to the Galileo Transaction and normal principal
amortization. While converting to fixed-rate debt is dilutive in the short-term,
it is consistent with our strategy of minimizing exposure to variable-rate debt
when we can obtain fixed-rate debt on terms that are deemed favorable for the
long-term.
The net gain on sales of $77.8 million in 2003 was primarily attributable
to the $71.9 million gain recognized on the Galileo Transaction. The remaining
$5.9 million of gain was related to gains on sales of 20 outparcels at various
properties and sales of two options on potential development sites.
Equity in earnings decreased by $3.3 million in 2003 as a result of the
Newly Consolidated Properties no longer being accounted for using the equity
method.
Six community centers were sold during 2003 for a net gain on discontinued
operations of $4.0 million and one community center was sold in June 2004 for a
gain on discontinued operations of $0.6 million. Operating income from
discontinued operations decreased in 2003 because the properties were owned for
a shorter period of time in 2003 than in 2002, and because 2002 includes the
operations of properties that were sold during 2002.
Comparison of the Year Ended December 31, 2002 to the Year Ended December 31,
2001
The following significant transactions impacted the consolidated results of
operations for the year ended December 31, 2002, compared to the year ended
December 31, 2001:
|X| The acquisition of ownership interests in 21 malls and two associated
centers from The Richard E. Jacobs Group ("Jacobs") on January 31, 2001;
therefore, the results of operations for 2002 include an additional month
of operations for these properties as compared to 2001. In March 2002, the
second and final stage of the Jacobs acquisition was completed with the
acquisition of additional interests in four malls and one associated
center.
|X| The acquisition or opening of three additional properties during 2001 and
six additional properties during 2002. The new properties opened or
acquired are:
10
Property Location Date Acquired/Opened
----------------------------- ------------------------ --------------------
Acquisitions:
-------------
Willowbrook Plaza Houston, TX February 2001
Richland Mall Waco, TX May 2002
Panama City Mall Panama City, FL May 2002
Westmoreland Mall Greensburg, PA December 2002
Westmoreland Crossing Greensburg, PA December 2002
Developments:
-------------
Creekwood Crossing Bradenton, FL April 2001
The Lakes Mall Muskegon, MI August 2001
CBL Center Chattanooga, TN January 2002
Parkdale Crossing Beaumont, TX November 2002
|X| Six community centers were sold during 2001 and their results of operations
are included in income from operations in 2001 through each property's
respective disposal date. The results of operations of the five community
centers and the office building sold during 2002 are included in
discontinued operations for all periods presented as a result of the
adoption of SFAS No. 144.
|X| During the first quarter of 2002, we began to include Columbia Place in
Columbia, SC, in the consolidated financial statements after acquiring an
additional 31% interest in the property, which resulted in our owning a 79%
controlling interest. In August 2002, we acquired the remaining 21%
interest in Columbia Place. Our interest in Columbia Place was previously
accounted for using the equity method of accounting.
|X| In February 2002, we contributed 90% of our interests in Pemberton Plaza,
an associated center in Vicksburg, MS, and Massard Crossing and Willowbrook
Plaza, community centers located in Ft. Smith, AR, and Houston, TX,
respectively, to a joint venture that is accounted for using the equity
method of accounting. Prior to the date of contribution, the results of
operations of these properties were included in our consolidated statements
of operations.
Revenues
The $49.7 million increase in revenues was primarily attributable to:
|X| $21.9 million from an additional month of operations in 2002 related to the
Jacobs properties combined with improvements in leasing and occupancy at
the Jacobs properties,
|X| $30.1 million from the additional nine properties opened or acquired during
2002 and 2001,
|X| $5.5 million from both the continued improvement in leasing and occupancy
at comparable properties and an increase in lease termination fees of $1.4
million to $5.5 million in 2002 compared to $4.1 million in 2001,
|X| an increase of $2.0 million in management, leasing and development fees as
a result of management and leasing fees from unconsolidated affiliates that
were acquired in the Jacobs transaction and from an unconsolidated
affiliate that began operations during 2002
|X| a reduction of $5.0 million related to the properties sold during 2001 and
|X| a reduction of $6.4 million related to the three properties that were
contributed to a joint venture early in 2002.
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Operating Expenses
Property operating expenses (including real estate taxes and maintenance
and repairs) increased by $10.7 million due to:
|X| an increase of $4.6 million related to the additional month in 2002 for the
Jacobs properties,
|X| an increase of $11.4 million related to the other nine properties opened or
acquired during 2002 and 2001 and
|X| a reduction of $2.3 million related to both the properties sold during 2001
and the three properties contributed to a joint venture in 2002.
Depreciation and amortization expense increased by $10.5 million due to:
|X| an increase of $2.0 million related to the additional month for the Jacobs
properties,
|X| an additional $3.5 million related to the other nine properties opened or
acquired during 2002 and 2001,
|X| additional depreciation of $6.9 million related to the capital expenditures
made during 2002 and 2001 in connection with the ongoing renovations at
existing properties and
|X| a reduction of $1.9 million related to both the properties sold during 2001
and the three properties contributed to a joint venture.
General and administrative expenses increased $4.5 million primarily due to
additional salaries and benefits for the personnel added to manage the
properties acquired during 2002 and 2001. Increased professional fees and the
costs to move to our new corporate headquarters also contributed to the
increase.
Other Income and Expenses
Interest expense decreased $13.5 million due to reductions of debt with net
proceeds of $114.7 million from the March 2002 common stock offering and net
proceeds of $96.4 million from the June 2002 preferred stock offering.
The loss on extinguishment of debt decreased from $13.6 million in 2001 to
$3.9 million in 2002 because we retired less debt subject to prepayment
penalties in 2002 as compared to 2001.
The net gain on sales of real estate assets of $2.8 million in 2002 was
related to total gains of $3.3 million on seven outparcel sales and total losses
of $0.5 million on three outparcel sales. The net gain on sales of $10.6 million
in 2001 includes a net gain on sales of operating properties of $8.4 million and
a net gain of $1.8 million from sales of nine outparcels.
Equity in earnings of unconsolidated affiliates increased because we
acquired additional partnership interests in East Towne Mall, West Towne Mall
and West Towne Crossing in Madison, WI, and Kentucky Oaks Mall in Paducah, KY,
in March 2002. The increase was offset by the effect of accounting for Columbia
Place as a consolidated property in 2002 as compared to an unconsolidated
affiliate in 2001.
Five community centers and an office building were sold during 2002 for a
net gain on discontinued operations of $0.4 million. The fluctuation between
years in operating income from discontinued operations results from the timing
of the dispositions during each year.
Operational Review
The shopping center business is, to some extent, seasonal in nature with
tenants achieving the highest levels of sales during the fourth quarter because
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of the holiday season. 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 ("Stabilized Malls") and malls that are in
their initial lease-up phase ("Non-Stabilized Malls"). Non-Stabilized Malls
currently include The Lakes Mall in Muskegon, MI, which opened in August 2001;
and Parkway Place in Huntsville, AL, which opened in October 2002.
We derive a significant amount of our revenues from the mall properties.
The sources of our revenues by property type were as follows:
Year Ended December 31,
---------------------------------
2003 2002
----------------- ---------------
Malls 85.7% 83.6%
Associated centers 3.6% 3.2%
Community centers 7.8% 10.1%
Mortgages, office building and other 2.9% 3.1%
Sales and Occupancy Costs
Mall store sales (for those tenants who occupy 10,000 square feet or less
and have reported sales) in the Stabilized Malls increased by 1.1% on a
comparable per square foot basis to $300.16 per square foot for 2003 compared
with $296.95 per square foot for 2002. The increase in 2003 represented the
first year-over-year increase in three years, as sales were either flat or down
slightly in those years.
Occupancy costs as a percentage of sales for the Stabilized Malls were
12.2% and 12.0% for 2003 and 2002, respectively.
Occupancy
The occupancy of the portfolio was as follows:
December 31,
---------------------------------
2003 2002
----------------- ---------------
Total portfolio occupancy 93.3% 93.5%
Total mall portfolio: 94.2% 93.5%
Stabilized Malls 94.4% 94.1%
Non-Stabilized Malls 87.7% 78.5%
Associated centers 88.6% 95.2%
Community centers (1) 91.9% 91.4%
(1) Excludes the community centers that were in the first phase of the Galileo
Transaction
The occupancy of the Associated Centers declined during 2003 because of the
vacancy of a 36,000 square foot Just For Feet Store at the Village at Rivergate
in Nashville, TN and a 46,000 square foot Appliance Factory Warehouse at
Hamilton Corner in Chattanooga, TN. The continued vacancy of a 68,000 square
foot former Ames store at Westmoreland Crossing, which was vacant when the
center was acquired in December 2002, also had a negative impact on the
occupancy of the Associated Centers.
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Leasing
Average annual base rents per square foot were as follows for each property
type:
At December 31,
------------------------------------
2003 2002
----------------- ------------------
Stabilized Malls $25.03 $23.54
Non-Stabilized Malls 25.82 22.78
Associated centers 9.90 9.87
Community centers (1) 9.15 9.61
(1) Excludes the community centers that were in the first phase of the Galileo
Transaction.
The increase in average base rents resulted from our ability to achieve
positive results from renewal and replacement leasing during 2003 for spaces
that were previously occupied as demonstrated in the following table:
Base Rent Base Rent
Per Square Per Square
Foot Foot
Prior Lease (1) New Lease (2) Increase
---------------- -------------- ------------
Stabilized Malls $22.47 $24.50 9.0%
Associated centers 13.66 13.99 2.4%
Community centers (3) 11.40 11.78 3.3%
(1) Represents the rent that was in place at the end of the lease term.
(2) Average base rent over the term of the new lease.
(3) Excludes the community centers that were in the first phase of the Galileo
Transaction.
Liquidity and Capital Resources
There was $20.3 million of unrestricted cash and cash equivalents as of
December 31, 2003, an increase of $7.0 million from December 31, 2002. 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 Flows
Cash provided by operating activities increased $0.4 million to $274.3
million. Although the addition of New Properties and Newly Consolidated
Properties, combined with improved results at existing centers, contributed to
an increase in operating cash flows, the increase was offset by decreases
related to the timing of reductions in accounts payable and accrued liabilities.
Cash used in investing activities increased $58.8 million to $333.4
million. Cash used to acquire real estate assets increased by $106.8 million to
$273.3 million due to the acquisition of six malls and two associated centers
during 2003 compared to three malls and one associated center acquired in 2002.
Cash paid for capital expenditures increased $45.5 million to $227.4 million
primarily due to the Company's investments in development projects, the
renovations of six malls in 2003 and expenditures for tenant allowances and
deferred maintenance. The increases in cash outflows for investing activities
were offset by an increase of $121.0 million in net proceeds received from sales
of real estate assets to $205.8 million as a result of the Galileo Transaction
and the sales of six community centers and 20 outparcels in 2003 compared to
five community centers, an office building and 10 outparcels sold in 2002.
Additionally, we paid $21.0 million to purchase the minority interest held by
one of our former executive officers who retired in 1997.
14
Cash provided by financing activities increased $62.1 million to $66.0
million in 2003 compared to $3.9 million in 2002. The increase was primarily due
to a significant reduction in the amount of debt retired in 2003 compared to
2002. This was partially offset by the redemption of our 9.0% Series A preferred
stock and an increase in dividends and distributions paid.
Debt
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 a clearer understanding of our total debt obligations and
liquidity (in thousands):
Weighted
Average
Minority Unconsolidated Interest
Consolidated Interests Affiliates Total Rate(1)
-------------- ---------------- ----------------- --------------- ---------------
December 31, 2003:
Fixed-rate debt:
Non-recourse loans on operating properties $2,256,544 $ (19,577) $ 57,985 $2,294,952 6.64%
-------------- ---------------- ----------------- --------------- ---------------
Variable-rate debt:
Recourse term loans on operating properties 105,558 -- 30,335 135,893 2.73%
Construction loans -- -- 46,801 46,801 2.94%
Lines of credit 376,000 -- -- 376,000 2.23%
-------------- ---------------- ----------------- --------------- ---------------
Total variable-rate debt 481,558 -- 77,136 558,694 2.39%
-------------- ---------------- ----------------- --------------- ---------------
Total $2,738,102 $ (19,557) $ 135,121 $2,853,646 5.81%
-------------- ---------------- ----------------- --------------- ---------------
December 31, 2002:
Fixed-rate debt:
Non-recourse loans on operating properties $1,867,915 $ (20,127) $ 38,269 $1,886,057 7.19%
-------------- ---------------- ----------------- --------------- ---------------
Variable-rate debt:
Recourse term loans on operating properties 290,954 -- 28,228 319,182 3.89%
Construction loans 21,935 (1,795) -- 20,140 3.08%
Lines of credit 221,275 -- -- 221,275 2.69%
-------------- ---------------- ----------------- --------------- ---------------
Total variable-rate debt 534,164 (1,795) 28,228 560,597 3.39%
-------------- ---------------- ----------------- --------------- ---------------
Total $2,402,079 $ (21,922) $ 66,497 $2,446,654 6.31%
-------------- ---------------- ----------------- --------------- ---------------
(1) Weighted average interest rate before amortization of deferred financing
costs.
On February 28 2003, we entered into a new secured credit facility for
$255.0 million that replaced both a secured credit facility of $130.0 million
and an unsecured credit facility of $105.3 million. By entering into the new
credit facility, we were able to lower the interest rate to LIBOR plus 1.00%
from LIBOR plus 1.5% on the previous unsecured line of credit. We currently have
four secured credit facilities with total availability of $365.0 million, of
which $304.0 million was outstanding as of December 31, 2003. There were also
letters of credit totaling $17.3 million outstanding under these secured credit
facilities as of December 31, 2003. The secured credit facilities bear interest
at LIBOR plus 1.00%.
We have a short-term, unsecured credit facility of $130.0 million that
matures May 31, 2004 and bears interest at LIBOR plus 1.30%. We have the option
to extend the maturity to September 30, 2004. We obtained this credit facility
to provide resources for the acquisitions that were completed during the fourth
quarter of 2003. There was $72.0 million outstanding under this facility at
December 31, 2003.
We also have secured lines of credit with total availability of $21.6
million that can only be used to issue letters of credit. There was $16.6
million outstanding under these lines at December 31, 2003.
On September 12, 2003, we closed four long-term, non-recourse, fixed-rate
mortgage loans totaling $196.0 million that are secured by three of our regional
15
malls and one associated center. The loans bear interest at rates ranging from
4.52% to 5.45% and have terms of five to ten years.
We assumed $209.8 million of debt in connection with the acquisitions
completed during 2003. The loan of $40.0 million related to Sunrise Mall bears
interest at LIBOR plus 3.00%, with a minimum rate of 4.90%, and matures in May
2004. The loan on Sunrise Mall was assumed subject to a pre-existing interest
rate cap agreement of 5.50% that also matures in May 2004. The remaining loans
that were assumed during 2003 bear interest at fixed rates ranging from 7.00% to
8.60% and mature at various dates from January 2007 to May 2012. Since the
stated interest rates on the fixed-rate loans were above market rates for
similar debt instruments as of the respective dates of acquisition, debt
premiums of $26.3 million were recorded to reflect the assumed debt at estimated
fair values.
The secured and unsecured credit facilities contain, among other
restrictions, certain financial covenants including the maintenance of certain
coverage ratios, minimum net worth requirements, and limitations on cash flow
distributions. We were in compliance with all financial covenants and
restrictions under our credit facilities at December 31, 2003. Additionally,
certain property-specific mortgage notes payable require the maintenance of debt
service coverage ratios. At December 31, 2003, the properties subject to these
mortgage notes payable were in compliance with the applicable ratios.
We expect to refinance the majority of mortgage and other notes payable
maturing over the next five years with replacement loans. Based on our pro rata
share of total debt, there is $238.3 million of debt that is scheduled to mature
in 2004. There are extension options in place that will extend the maturity of
$94.3 million of this debt to 2005. We repaid $32.0 million of these loans
subsequent to December 31, 2003, and expect to either repay or refinance the
remaining $112.0 million of maturing loans.
Equity
On August 22, 2003, we issued 4,600,000 depositary shares in a public
offering, each representing one-tenth of a share of 7.75% Series C cumulative
redeemable preferred stock with a par value of $0.01 per share. The Series C
preferred stock has a liquidation preference of $250.00 per share ($25.00 per
depositary share). The net proceeds of $111.2 million were used to partially
fund acquisitions and for general corporate purposes.
We redeemed the remaining 2,675,000 outstanding shares of the 9.0% Series A
cumulative redeemable preferred stock at its face value of $25.00 per share plus
accrued and unpaid dividends on November 28, 2003. We also recorded a charge of
$2.2 million to write-off direct issuance costs that were recorded as a
reduction of additional paid-in capital when the Series A preferred stock was
issued. The charge was reflected in preferred dividends in the consolidated
statement of operations.
As a publicly traded company, we have access to capital through both the
public equity and debt markets. We have an effective shelf registration
statement authorizing us to publicly issue shares of preferred stock, common
stock and warrants to purchase shares of common stock with an aggregate public
offering price up to $562.0 million, of which approximately $447.0 million
remains after the Series C preferred stock offering.
We anticipate that the combination of equity and debt sources will, for the
foreseeable future, provide adequate liquidity to continue our capital programs
substantially as in the past and make distributions to our shareholders in
accordance with the requirements applicable to real estate investment trusts.
Our policy is to maintain a conservative debt-to-total-market
capitalization ratio in order to enhance our access to the broadest range of
capital markets, both public and private. Based on our share of total
consolidated and unconsolidated debt and the market value of equity, our
debt-to-total-market capitalization (debt plus market-value equity) ratio was as
follows at December 31, 2003 (in thousands, except stock prices):
16
Shares
Outstanding Stock Price (1) Value
------------------ ----------------- -----------------
Common stock and operating partnership units 55,546 $ 56.50 $3,138,349
8.75% Series B Cumulative Redeemable Preferred Stock 2,000 $ 50.00 100,000
7.75% Series C Cumulative Redeemable Preferred Stock 460 $ 250.00 115,000
-----------------
Total market equity 3,353,349
Company's share of total debt 2,853,646
-----------------
Total market capitalization $ 6,206,995
=================
Debt-to-total-market capitalization ratio 46.0%
=================
(1) Stock price for common stock and operating partnership units equals the
closing price of the common stock on December 31, 2003. The stock price for
the preferred stock represents the face value of each respective series of
preferred stock.
Contractual Obligations
The following table summarizes our significant contractual obligations as
of December 31, 2003 (dollars in thousands):
Payments Due By Period
----------------------------------------------------------------
Less Than 1 - 3 3 - 5 More Than
Total 1 Year Years Years 5 Years
------------- ------------ ------------ ---------- -------------
Long-term debt:
Total consolidated debt service (1) $3,593,528 $425,843 $873,813 $818,281 $1,475,591
Minority investors' share of debt service in shopping
center properties (24,978) (1,982) (3,964) (17,602) (1,430)
Our share of unconsolidated affiliates debt service (2) 132,736 37,138 60,732 34,866 --
------------- ------------ ------------ ---------- -------------
Our share of total debt service obligations 3,701,286 460,999 930,581 835,545 1,474,161
------------- ------------ ------------ ---------- -------------
Operating Leases: (3)
Ground leases on consolidated properties 23,648 559 921 945 21,223
Our share of ground leases on unconsolidated affiliates 5,601 62 123 122 5,294
------------- ------------ ------------ ---------- -------------
Our share of total ground lease obligations 29,249 621 1,044 1,067 26,517
------------- ------------ ------------ ---------- -------------
Purchase Obligations: (4)
Construction contracts on consolidated properties 49,559 49,559 -- -- --
Our share of construction contracts of unconsolidated
affiliates 17,229 15,130 2,099 -- --
------------- ------------ ------------ ---------- -------------
Our share of total construction contracts 66,788 64,689 2,099 -- --
------------- ------------ ------------ ---------- -------------
Letters of credit (5) 33,955 26,773 7,182 -- --
------------- ------------ ------------ ---------- -------------
Other long-term liabilities:
Master lease obligation to Galileo America (6) 2,184 436 874 874 --
------------- ------------ ------------ ---------- -------------
Total contractual obligations $3,833,462 $553,518 $941,780 $837,486 $1,500,678
============= ============ ============ ========== =============
(1) Represents principal and interest payments due under terms of mortgage and
other notes payable and includes $481,558 of variable-rate debt on four
operating properties, four secured credit facilities and one unsecured
credit facility. The variable-rate loans on the four operating properties
call for payments of interest only with the total principal due at
maturity. The credit facilities do not require scheduled principal
payments. The future contractual obligations for all variable-rate
indebtedness reflect payments of interest only throughout the term of the
debt with the total outstanding principal at December 31, 2003 due at
maturity. The future interest payments are projected based on the interest
rates that were in effect at December 31, 2003. See Note 6 to the
consolidated financial statements for additional information regarding the
terms of long-term debt.
(2) Includes $77,136 of variable-rate indebtedness. Future contractual
obligations have been projected using the same assumptions as used in (1)
above.
(3) Obligations where we own the buildings and improvements, but lease the
underlying land under long-term ground leases. The maturities of these
leases range from September 2006 to July 2089 and generally provide for
renewal options. Renewal options have not been included in the future
contractual obligations.
(4) Represents the remaining balance to be incurred under construction
contracts that had been entered into as of December 31, 2003, but were not
complete. The contracts are primarily for development, renovation and
expansion of properties and all are expected to be completed in 2004 with
the exception of one, which is expected to be completed in March 2005. The
maturities under this contract have been presented assuming the unpaid
outstanding commitment will be paid in equal monthly installments through
March 2005.
(5) Represents amounts outstanding under letters of credit. The outstanding
amounts under each letter of credit are shown as due in the period in which
the related letter of credit expires.
(6) See Note 5 to the consolidated financial statements for a description of
the master lease obligation to Galileo America. The future contractual
obligations shown above only include the remaining obligation that was
recorded in the consolidated balance sheet at December 31, 2003 related to
one community center in the first phase. As discussed in Note 5, an
additional obligation of $7,305 was recorded subsequent to December 31,
2003 when six additional community centers were sold to Galileo America in
January 2004. We have executed leases with tenants for certain spaces
totaling $4,855 that will reduce the $7,305 to $2,450.
17
Capital Expenditures
We expect to continue to have access to the capital resources necessary to
expand and develop our business. Future development and acquisition activities
will be undertaken as suitable opportunities arise. We do not expect to pursue
these activities unless adequate sources of financing are available and a
satisfactory budget with targeted returns on investment has been internally
approved.
An annual capital expenditures budget is prepared for each property that is
intended to provide for all necessary recurring and non-recurring capital
expenditures. We believe that property operating cash flows, which include
reimbursements from tenants for certain expenses, will provide the necessary
funding for these expenditures.
Developments and Expansions
The following is a summary of the projects currently under construction
(dollars in thousands):
Our
Share of
Gross Our Cost As of Scheduled
Leasable Share December 31, Opening
Property Location Area of Cost 2003 Date
-----------------------------------------------------------------------------------------------------------------------
New Mall Developments:
----------------------
Coastal Grand (50/50 joint venture) Myrtle Beach, SC 908,000 $ 60,422 $ 42,378 March 2004
Imperial Valley Mall (60/40 joint
venture) El Centro, CA 741,000 44,200 6,202 March 2005
Mall Expansions:
----------------
Arbor Place (Rich's-Macy's) Douglasville, GA 140,000 10,000 3,609 November 2004
East Towne Mall Madison, WI 139,000 20,529 8,634 November 2004
West Towne Mall Madison, WI 94,000 16,165 4,548 November 2004
Associated Centers:
-------------------
The Shoppes at Panama City Panama City, FL 56,000 9,607 6,793 February 2004
Community Centers:
------------------
Garden City Plaza Expansion Garden City, KS 26,500 2,412 1,045 March 2004
Wilkes-Barre Township Marketplace Wilkes-Barre Township, PA 281,000 9,792 6,756 March 2004
Charter Oak Marketplace Hartford, CT 312,000 13,257 2,365 November 2004
---------------------------------------
2,697,500 $ 186,384 $ 82,330
=======================================
There are construction loans in place for the costs of the new mall
developments. The costs of the remaining projects will be funded with operating
cash flows and the credit facilities.
We have entered into a number of option agreements for the development of
future regional malls and community centers. Except for the projects discussed
under Developments and Expansions above, we do not have any other material
capital commitments.
Acquisitions
We acquired six malls and two associated centers during 2003 for an
aggregate purchase price of $494.6 million, including transaction costs. We
assumed $209.8 million of debt and paid $273.1 million in cash to fund the
purchase prices of these acquisitions. The cash portion of the purchase prices
was funded with borrowings under the credit facilities, proceeds from the Series
C preferred stock offering and proceeds from the Galileo Transaction. These
acquisitions are expected to generate an initial weighted-average, unleveraged
return of 8.58%.
18
Dispositions
During 2003, we generated aggregate net proceeds of $284.3 million from the
Galileo Transaction, the sales of six community centers and the sales of 20
outparcels. The net proceeds were used to either fund acquisitions, reduce
borrowings under the credit facilities or were placed in escrow to be used in
like-kind exchanges. In January 2004, we sold six additional community centers
to Galileo America. The net proceeds of $62.7 million were used to deposit funds
in escrow to be used in like-kind exchanges and to reduce outstanding balances
under our lines of credit. In June 2004, we sold one community center for $1.8
million.
Other Capital Expenditures
Including our share of unconsolidated affiliates' capital expenditures, we
spent $35.0 million in 2003 for tenant allowances, which generate increased
rents from tenants over the terms of their leases. Deferred maintenance
expenditures were $21.0 million for 2003 and included $3.1 million for
resurfacing and improved lighting of parking lots, $5.1 million for roof repairs
and replacements and $12.8 million for various other expenditures. Renovation
expenditures were $68.5 million in 2003 and included $9.7 million for
resurfacing and improved lighting of parking lots and $4.6 million for roof
repairs and replacements.
Deferred maintenance expenditures are billed to tenants as common area
maintenance expense, and most are recovered over a 5- to 15-year period.
Renovation expenditures are primarily for remodeling and upgrades of malls, of
which approximately 30% is recovered from tenants over a 5- to 15-year period.
We expect to complete three renovation projects during 2004 at a total
estimated cost of $22.5 million, which will be funded from operating cash flows.
Off-Balance Sheet Arrangements
Unconsolidated Affiliates
We have ownership interests in ten unconsolidated affiliates that are
described in Note 5 to the consolidated financial statements. The unconsolidated
affiliates are accounted for using the equity method of accounting and are
reflected in the consolidated balance sheets as "Investments in Unconsolidated
Affiliates." The following are circumstances when we may consider entering into
a joint venture with a third party:
|X| Third parties may approach us with opportunities where they have obtained
land and performed some pre-development activities, but they may not have
sufficient access to the capital resources or the development and leasing
expertise to bring the project to fruition. We enter into such arrangements
when we determine such a project is viable and we can achieve a
satisfactory return. We typically earn development fees from the joint
venture and provide management and leasing services to the property once it
is placed in operation.
|X| We determine that we may have the opportunity to capitalize on the value we
have created in a property by selling an interest in a property to a third
party. This provides us with an additional source of capital that can be
used to develop or acquire additional real estate assets that we believe
will provide greater potential for growth. When we retain an interest in an
asset rather than selling a 100% interest, it is typically because this
allows us to continue to manage the property, which provides us the
opportunity to earn fees for management, leasing, development, financing
and acquisition services provided to the joint venture.
19
Guarantees
We have guaranteed 100% of the debt to be incurred to develop the
properties that will be owned by two of our joint ventures and 50% of the debt
of another joint venture. We have issued these guarantees primarily because it
allows the joint ventures to obtain funding at a lower cost than could be
obtained otherwise. This results in a higher return for the joint venture on its
investment, and in a higher return on our investment in the joint venture. We
may receive a fee from the joint venture for providing the guaranty.
Additionally, when we are required to perform under a guaranty, the terms of the
guaranty typically provide that the joint venture partners' interests in the
joint venture is assigned to us, to the extent of our guaranty.
The Company's guarantees and the related accounting are more fully
described in Note 17 to the consolidated financial statements.
Critical Accounting Policies
Our significant accounting policies are disclosed in Note 2 to the
consolidated financial statements. The following discussion describes our most
critical accounting policies, which are those that are both important to the
presentation of our financial condition and results of operations and that
require significant judgment or use of complex estimates.
Revenue Recognition
Minimum rental revenue from operating leases is recognized on a
straight-line basis over the initial terms of the related leases. Certain
tenants are required to pay percentage rent if their sales volumes exceed
thresholds specified in their lease agreements. Percentage rent is recognized as
revenue when the thresholds are achieved and the amounts become determinable.
We receive reimbursements from tenants for real estate taxes, insurance,
common area maintenance, and other recoverable operating expenses as provided in
the lease agreements. Tenant reimbursements are recognized as revenue in the
period the related operating expenses are incurred. Tenant reimbursements
related to certain capital expenditures are billed to tenants over periods of 5
to 15 years and are recognized as revenue when billed.
We receive management, leasing and development fees from third parties and
unconsolidated affiliates. Management fees are charged as a percentage of
revenues (as defined in the management agreement) and are recognized as revenue
when earned. Development fees are recognized as revenue on a pro rata basis over
the development period. Leasing fees are charged for newly executed leases and
lease renewals and are recognized as revenue when earned. Development and
leasing fees received from unconsolidated affiliates during the development
period are recognized as revenue to the extent of the third-party partners'
ownership interest. Fees to the extent of our ownership interest are recorded as
a reduction to our investment in the unconsolidated affiliate.
Gains on sales of real estate assets are recognized when it is determined
that the sale has been consummated, the buyer's initial and continuing
investment is adequate, our receivable, if any, is not subject to future
subordination, and the buyer has assumed the usual risks and rewards of
ownership of the asset. When we have an ownership interest in the buyer, gain is
recognized to the extent of the third party partner's ownership interest and the
portion of the gain attributable to our ownership interest is deferred.
Real Estate Assets
We capitalize predevelopment project costs paid to third parties. All
previously capitalized predevelopment costs are expensed when it is no longer
probable that the project will be completed. Once development of a project
20
commences, all direct costs incurred to construct the project, including
interest and real estate taxes, are capitalized. Additionally, certain general
and administrative expenses are allocated to the projects and capitalized based
on the amount of time applicable personnel work on the development project.
Ordinary repairs and maintenance are expensed as incurred. Major replacements
and improvements are capitalized and depreciated over their estimated useful
lives.
All acquired real estate assets are accounted for using the purchase method
of accounting and accordingly, the results of operations are included in the
consolidated statements of operations from the respective dates of acquisition.
The purchase price is allocated to (i) tangible assets, consisting of land,
buildings and improvements, and tenant improvements, (ii) and identifiable
intangible assets generally consisting of above- and below-market leases and
in-place leases. We use estimates of fair value based on estimated cash flows,
using appropriate discount rates, and other valuation methods to allocate the
purchase price to the acquired tangible and intangible assets. Liabilities
assumed generally consist of mortgage debt on the real estate assets acquired.
Assumed debt with a stated interest rate that is significantly different from
market interest rates is recorded at its fair value based on estimated market
interest rates at the date of acquisition.
Depreciation is computed on a straight-line basis over estimated lives of
40 years for buildings, 10 to 20 years for certain improvements and 7 to 10
years for equipment and fixtures. Tenant improvements are capitalized and
depreciated on a straight-line basis over the term of the related lease.
Lease-related intangibles from acquisitions of real estate assets are amortized
over the remaining terms of the related leases. Any difference between the face
value of the debt assumed and its fair value is amortized to interest expense
over the remaining term of the debt using the effective interest method.
Carrying Value of Long-Lived Assets
We periodically evaluate long-lived assets to determine if there has been
any impairment in their carrying values and record impairment losses if the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amounts or if there are other indicators of impairment. If
it is determined that an impairment has occurred, the excess of the asset's
carrying value over its estimated fair value will be charged to operations.
There were no impairment charges in 2003, 20002 and 2001.
Recent Accounting Pronouncements
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," which rescinds SFAS No. 4. As a result, gains and losses from
extinguishments of debt should be classified as extraordinary items only if they
meet the criteria of Accounting Principles Board Opinion No. 30 ("APB 30"). We
adopted SFAS No. 145 on January 1, 2003 and have presented losses from
extinguishments of debt as an ordinary expense in all periods presented.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of SFAS No. 5, 57, and
107, and rescission of FASB Interpretation No. 34." The interpretation
elaborates on the disclosures to be made by a guarantor in its financial
statements. It also requires a guarantor to recognize a liability for the fair
value of the obligation undertaken in issuing the guarantee at the inception of
a guarantee. We adopted the disclosure provisions of FASB Interpretation No. 45
in the fourth quarter 2002 and adopted the remaining provisions effective
January 1, 2003. See Note 17 for disclosures related to our guarantees.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51." The
interpretation requires the consolidation of entities in which an enterprise
absorbs a majority of the entity's expected losses, receives a majority of the
entity's expected residual returns, or both, as a result of ownership,
contractual or other financial interests in the entity. Currently, entities are
generally consolidated by an enterprise when it has a controlling financial
21
interest through ownership of a majority voting interest in the entity. FASB
Interpretation No. 46 was revised in December 2003 and the adoption date was
postponed until the first interim or annual period ending after March 15, 2004.
Although we are still evaluating the impact of the revised interpretation, we
believe it is reasonably possible that one unconsolidated affiliate that is
currently accounted for using the equity method may be a variable interest
entity under the provisions of the interpretation. We own a 10% interest and
have a total investment of $18,690 in this unconsolidated affiliate, which owns
one associated center and two community centers.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. In particular, SFAS No. 149 clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
as discussed in SFAS No. 133 and it clarifies when a derivative contains a
financing component that warrants special reporting in the statement of cash
flows. SFAS No. 149 is effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated after June 30, 2003 and
is to be applied prospectively. We did not engage in any activities after June
30, 2003 to which SFAS No. 149 applied. We do not believe that the
implementation of SFAS No. 149 will materially change our accounting for the
kinds of derivatives that we have typically obtained in the course of our
regular financing activities.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity",
which specifies that instruments within its scope are obligations of the issuer
and, therefore, the issuer must classify them as liabilities. Financial
instruments within the scope of the pronouncement include mandatorily redeemable
financial instruments, obligations to repurchase the issuer's equity shares by
transferring assets, and certain obligations to issue a variable number of
shares. SFAS No. 150 is effective for all financial instruments entered into or
modified after May 31, 2003. However, on October 29, 2003, the FASB indefinitely
deferred the provisions of paragraphs 9 and 10 of SFAS No. 150 related to
noncontrolling interests in limited-life subsidiaries. If we were required to
comply with the provisions of paragraphs 9 and 10 of SFAS 150 as currently
drafted, we would reclassify amounts currently included in minority interests of
$2,730 and record the minority partners' interest as a liability at its
estimated current liquidation amount, which would result in a charge to earnings
of $12,941. This liability would be reviewed each quarter and changes in its
current liquidation amount recorded through interest expense.
Impact of Inflation
In the last three years, inflation has not had a significant impact on our
operations because of the relatively low inflation rate. Substantially all
tenant leases do, however, contain provisions designed to protect us from the
impact of inflation. These provisions include clauses enabling us to receive
percentage rent based on tenants' gross sales, which generally increase as
prices rise, and/or escalation clauses, which generally increase rental rates
during the terms of the leases. In addition, many of the leases are for terms of
less than 10 years which may provide us the opportunity to replace existing
leases with new leases at higher base and/or percentage rent if rents of the
existing leases are below the then existing market rate. Most of the leases
require the tenants to pay their share of operating expenses, including common
area maintenance, real estate taxes and insurance, which reduces our exposure to
increases in costs and operating expenses resulting from inflation.
Funds From Operations
Funds From Operations ("FFO") is a widely used measure of the operating
performance of real estate companies that supplements net income determined in
accordance with generally accepted accounting principles ("GAAP"). The National
Association of Real Estate Investment Trusts ("NAREIT") defines FFO as net
income (computed in accordance with GAAP) excluding gains or losses on sales of
operating properties, plus depreciation and amortization, and after adjustments
for unconsolidated partnerships and joint ventures. Adjustments for
22
unconsolidated partnerships and joint ventures are calculated on the same basis.
We define FFO available for distribution as defined above by NAREIT less
dividends on preferred stock. During the first quarter of 2003, we began to
include gains and losses on sales of outparcels in FFO to comply with the
Securities and Exchange Commission's rules related to disclosure of non-GAAP
financial measures. FFO for prior periods has been restated to include gains and
losses on sales of outparcels. Our method of calculating FFO may be different
from methods used by other REITs and, accordingly, may not be comparable to such
other REITs.
We believe that FFO provides an additional indicator of the operating
performance of our properties without giving effect to real estate depreciation
and amortization, which assumes the value of real estate assets declines
predictably over time. Since values of well-maintained real estate assets have
historically risen with market conditions, we believe that FFO enhances
investors' understanding of our operating performance. The use of FFO as an
indicator of financial performance is influenced not only by the operations of
our properties and interest rates, but also by our capital structure.
Accordingly, FFO will be one of the significant factors considered by the board
of directors in determining the amount of cash distributions the Operating
Partnership will make to its partners, including the REIT.
FFO does not represent cash flows from operations as defined by accounting
principles generally accepted in the United States, is not necessarily
indicative of cash available to fund all cash flow needs and should not be
considered as an alternative to net income for purposes of evaluating our
operating performance or to cash flow as a measure of liquidity.
FFO increased 15.3% in 2003 to $271.6 million compared to $235.5 million in
2002. The New Properties and the Newly Consolidated Properties generated 62.7%
of the growth in FFO. Consistently high portfolio occupancy, increases in rental
rates from renewal and replacement leasing and increased recoveries of operating
expenses accounted for the remaining 37.3% growth in FFO.
The calculation of FFO is as follows (in thousands):
Year Ended December 31,
--------------------------------------------
2003 2002 2001
----------- ----------- -----------
Net income available to common shareholders $ 124,506 $ 73,987 $ 54,440
Add:
Depreciation and amortization from consolidated properties 113,437 93,979 83,483
Depreciation and amortization from unconsolidated affiliates 4,307 4,490 3,765
Depreciation and amortization from discontinued operations 353 980 1,460
Minority interest in earnings of operating partnership 106,532 64,251 49,643
Less:
Gains on disposal of operating real estate assets (71,886) - (8,405)
Minority investors' share of depreciation and amortization (1,111) (1,348) (1,096)
Gain on discontinued operations (4,042) (372) -
Depreciation and amortization of non-real estate assets (508) (493) (603)
----------- ----------- -----------
Funds from operations $ 271,588 $ 235,474 $ 182,687
=========== =========== ===========
FFO applicable to Company shareholders $ 146,552 $ 126,127 $ 94,945
=========== =========== ===========
SUPPLEMENTAL FFO INFORMATION:
Straight-line rental income $ 3,703 $ 4,339 $ 4,331
Gains on outparcel sales $ 6,058 $ 2,483 $ 2,216
Rental revenue recognized under SFAS Nos. 141 and 142 $ 333 $ - $ -
Amortization of debt premiums $ 678 $ - $ -
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the Index to Financial statements contained in
Item 15 on page 25.
23
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(1) Financial Statements Page Number
Report of Independent Registered Public Accounting Firm 26
CBL & Associates Properties, Inc. Consolidated Balance Sheets as of
December 31, 2003 and 2002 27
CBL & Associates Properties, Inc. Consolidated Statements of
Operations for the Years Ended December 31, 2003, 2002 and 2001 28
CBL & Associates Properties, Inc. Consolidated Statements of
Shareholders' Equity for the Years Ended December 31, 2003,
2002 and 2001 29
CBL & Associates Properties, Inc. Consolidated Statements of
Cash Flows for the Years Ended December 31, 2003, 2002 and 2001 30
Notes to Financial Statements 31
24
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm 26
CBL & Associates Properties, Inc. Consolidated Balance Sheets as of
December 31, 2003 and 2002 27
CBL & Associates Properties, Inc. Consolidated Statements of Operations
for the Years Ended December 31, 2003, 2002 and 2001 28
CBL & Associates Properties, Inc. Consolidated Statements of Cash Flows
for the Years Ended December 31, 2003, 2002 and 2001 29
CBL & Associates Properties, Inc. Consolidated Statements of Shareholders'
Equity for the Years Ended December 31, 2003, 2002 and 2001 30
Notes to Financial Statements 31
25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To CBL & Associates Properties, Inc.:
We have audited the accompanying consolidated balance sheets of CBL & Associates
Properties, Inc. (a Delaware corporation) and subsidiaries as of December 31,
2003 and 2002, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2003. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CBL & Associates Properties,
Inc. and subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
As discussed in Note 4 to the financial statements, in 2002, the Company changed
its method of accounting for discontinued operations to conform to Statement of
Financial Accounting Standards No. 144.
/s/ DELOITTE & TOUCHE LLP
Atlanta, Georgia
February 27, 2004, except for Notes 3, 4, 9, 12 and 13,
as to which the date is August 20, 2004
26
CBL & Associates Properties, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
December 31,
---------------------------------
ASSETS 2003 2002
---------------- ---------------
Real estate assets:
Land $ 578,310 $ 570,818
Buildings and improvements 3,678,074 3,394,787
---------------- ---------------
4,256,384 3,965,605
Less: accumulated depreciation (467,614) (434,840)
---------------- ---------------
3,788,770 3,530,765
Real estate assets held for sale 64,354 -
Developments in progress 59,096 80,720
---------------- ---------------
Net investment in real estate assets 3,912,220 3,611,485
Cash and cash equivalents 20,332 13,355
Cash in escrow 78,476 -
Receivables:
Tenant, net of allowance for doubtful accounts of $3,237 in
2003 and $2,861 in 2002 42,165 37,994
Other 3,033 3,692
Mortgage notes receivable 36,169 23,074
Investments in unconsolidated affiliates 96,450 68,232
Other assets 75,465 37,282
---------------- ---------------
$ 4,264,310 $ 3,795,114
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage and other notes payable $ 2,709,348 $ 2,402,079
Mortgage notes payable on real estate assets held for sale 28,754 -
Accounts payable and accrued liabilities 161,477 151,332
---------------- ---------------
Total liabilities 2,899,579 2,553,411
---------------- ---------------
Commitments and contingencies (Notes 3, 5 and 17)
Minority interests 527,431 500,513
---------------- ---------------
Shareholders' equity:
Preferred Stock, $.01 par value, 15,000,000 shares authorized:
9.0% Series A Cumulative Redeemable Preferred Stock,
2,675,000 shares outstanding in 2002 - 27
8.75% Series B Cumulative Redeemable Preferred Stock,
2,000,000 shares outstanding in 2003 and 2002 20 20
7.75% Series C Cumulative Redeemable Preferred Stock,
460,000 shares outstanding in 2003 5 -
Common Stock, $.01 par value, 95,000,000 shares authorized,
30,323,476 and 29,797,469 shares issued and
outstanding in 2003 and 2002, respectively 303 298
Additional paid-in capital 817,613 765,686
Accumulated other comprehensive loss - (2,397)
Deferred compensation (1,607) -
Retained earnings (accumulated deficit) 20,966 (22,444)
---------------- ---------------
Total shareholders' equity 837,300 741,190
---------------- ---------------
$ 4,264,310 $ 3,795,114
================ ===============
The accompanying notes are an integral part of these balance sheets.
27
CBL & Associates Properties, Inc.
Consolidated Statements of Operations
(In thousands, except per share amounts)
Year Ended December 31,
------------------------------------------------
2003 2002 2001
------------- ------------- -------------
REVENUES:
Minimum rents $ 428,412 $ 381,157 $ 346,479
Percentage rents 12,907 13,335 9,646
Other rents 12,635 11,013 10,603
Tenant reimbursements 193,538 160,026 152,726
Management, development and leasing fees 5,525 7,146 5,147
Other 14,176 14,005 12,371
------------- ------------- -------------
Total revenues 667,193 586,682 536,972
------------- ------------- -------------
EXPENSES:
Property operating 103,522 92,760 89,352
Depreciation and amortization 113,437 93,979 83,483
Real estate taxes 51,679 47,157 43,677
Maintenance and repairs 39,815 35,119 31,333
General and administrative 30,395 23,332 18,807
Other 11,489 10,307 11,489
------------- ------------- -------------
Total expenses 350,337 302,654 278,141
------------- ------------- -------------
Income from operations 316,856 284,028 258,831
Interest income 2,485 1,853 1,891
Interest expense (153,322) (143,041) (156,558)
Loss on extinguishment of debt (167) (3,910) (13,558)
Gain on sales of real estate assets 77,765 2,804 10,649
Equity in earnings of unconsolidated affiliates 4,941 8,215 7,155
Minority interest in earnings:
Operating partnership (106,532) (64,251) (49,643)
Shopping center properties (2,758) (3,280) (1,654)
------------- ------------- -------------
Income before discontinued operations 139,268 82,418 57,113
Operating income of discontinued operations 829 2,116 3,795
Gain on discontinued operations 4,042 372 -
------------- ------------- -------------
Net income 144,139 84,906 60,908
Preferred dividends (19,633) (10,919) (6,468)
------------- ------------- -------------
Net income available to common shareholders $ 124,506 $ 73,987 $ 54,440
============= ============= =============
Basic per share data:
Income before discontinued operations, net of preferred
dividends $ 4.00 $ 2.49 $ 2.00
Discontinued operations 0.16 0.09 0.15
------------- ------------- -------------
Net income available to common shareholders $ 4.16 $ 2.58 $ 2.15
============= ============= =============
Weighted average common shares outstanding 29,936 28,690 25,358
Diluted per share data:
Income before discontinued operations, net of preferred
dividends $ 3.84 $ 2.41 $ 1.96
Discontinued operations 0.15 0.08 0.14
------------- ------------- -------------
Net income available to common shareholders $ 3.99 $ 2.49 $ 2.10
============= ============= =============
Weighted average common and potential dilutive
common shares outstanding 31,193 29,668 25,833
The accompanying notes are an integral part of these statements.
28
CBL & Associates Properties, Inc.
Consolidated Statement Of Shareholders' Equity
(In thousands, except share data)
Accumulated Retained
Additional Other Earnings
Preferred Common Paid-in Comprehensive Deferred (Accumulated
Stock Stock Capital Loss Compensation Deficit) Total
---------- ---------- ---------- ------------- ------------ ------------ ---------
Balance December 31, 2000 $ 29 $ 251 $462,480 $ - $ - $ (27,935) $434,825
Net income - - - - - 60,908 60,908
Loss on current period cash flow hedges - - - (6,784) - - (6,784)
---------
Total comprehensive income - - - - - - 54,124
Dividends declared - common shares - - - - - (54,301) (54,301)
Dividends declared - preferred shares - - - - - (6,468) (6,468)
Issuance of 174,280 shares of common stock - 2 4,756 - - - 4,758
Adjustment for minority interest in Operating
Partnership - - 80,827 - - - 80,827
Exercise of stock options - 3 8,320 - - - 8,323
---------- ---------- ---------- ------------- ------------ ------------ ---------
Balance December 31, 2001 29 256 556,383 (6,784) - (27,796) 522,088
Net income - - - - - 84,906 84,906
Gain on current period cash flow hedges - - - 4,387 - - 4,387
---------
Total comprehensive income - - - - - - 89,293
Dividends declared - common shares - - - - - (68,635) (68,635)
Dividends declared - preferred shares - - - - - (10,919) (10,919)
Issuance of 2,000,000 shares of Series B -
preferred stock 20 - 96,350 - - - 96,370
Purchase of 200,000 shares of Series A
preferred stock (2) - (5,091) - - - (5,093)
Issuance of 3,524,299 shares of common stock - 36 120,589 - - - 120,625
Exercise of stock options - 2 5,005 - - - 5,007
Accrual under deferred compensation
arrangements - - 2,194 - - - 2,194
Conversion of Operating Partnership units into
446,652 shares of common stock - 4 7,159 - - - 7,163
Adjustment for minority interest in Operating
Partnership - - (16,903) - - - (16,903)
---------- ---------- ---------- ------------- ------------ ------------ ---------
Balance December 31, 2002 47 298 765,686 (2,397) - (22,444) 741,190
Net income - - - - - 144,139 144,139
Gain on current period cash flow hedges - - - 2,397 - - 2,397
---------
Total comprehensive income - - - - - - 146,536
Dividends declared - common shares - - - - - (81,096) (81,096)
Dividends declared - preferred shares - - - - - (17,453) (17,453)
Issuance of 460,000 shares of Series C
preferred stock 5 - 111,222 - - - 111,227
Redemption of 2,675,000 shares of Series A
preferred stock (27) - (64,668) - - (2,180) (66,875)
Issuance of 202,838 shares of common stock - 2 8,755 - (1,855) - 6,902
Exercise of stock options - 3 7,759 - - - 7,762
Accrual under deferred compensation
arrangements - - 618 - - - 618
Amortization of deferred compensation - - - - 248 - 248
Adjustment for minority interest in Operating
Partnership - - (11,759) - - - (11,759)
---------- ---------- ---------- ------------- ------------ ------------ ---------
Balance December 31, 2003 $ 25 $ 303 $817,613 $ - $ (1,607) $ 20,966 $837,300
========== ========== ========== ============= ============ ============ =========
The accompanying notes are an integral part of theses statements.
29
CBL & Associates Properties, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
----------------------------------------
2003 2002 2001
------------ ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $144,139 $84,906 $60,908
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest in earnings 109,331 67,554 51,341
Depreciation 85,584 74,501 75,905
Amortization 34,301 25,242 13,539
Amortization of debt premiums (646) -- --
Loss on extinguishment of debt 167 3,930 13,558
Gain on sales of real estate assets (77,775) (2,804) (10,649)
Gain on discontinued operations (4,042) (372) --
Issuance of stock under incentive plan 1,876 2,578 1,926
Accrual of deferred compensation 618 2,194 --
Amortization of deferred compensation 248 -- --
Write-off of development projects 2,056 236 2,032
Amortization of above and below market leases (311) -- --
Changes in assets and liabilities:
Tenant and other receivables (9,773) (1,110) (8,586)
Other assets (12,770) (6,089) (5,107)
Accounts payable and accrued liabilities 1,346 23,157 18,208
------------ ----------- -----------
Net cash provided by operating activities 274,349 273,923 213,075
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate assets (227,362) (176,799) (142,791)
Acquisitions of real estate assets and other assets (273,265) (166,489) (115,755)
Proceeds from sales of real estate assets 284,322 84,885 79,572
Additions to cash in escrow (78,476) -- --
Additions to mortgage notes receivable (10,000) (5,965) (1,604)
Payments received on mortgage notes receivable 1,840 2,135 996
Distributions in excess of equity in earnings of
unconsolidated affiliates 9,740 5,751 5,855
Additional investments in and advances to
unconsolidated affiliates (15,855) (15,394) (23,506)
Purchase of minority interest in the Operating (21,013) -- --
Partnership
Additions to other assets (3,310) (2,731) (4,012)
------------ ----------- -----------
Net cash used in investing activities (333,379) (274,607) (201,245)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage and other notes payable 572,080 751,881 763,235
Principal payments on mortgage and other notes
payable (390,115) (815,444) (650,584)
Additions to deferred financing costs (4,830) (5,589) (7,904)
Proceeds from issuance of common stock 5,026 118,047 2,832
Proceeds from exercise of stock options 7,762 5,007 8,323
Proceeds from issuance of preferred stock 111,227 96,370 --
Redemption of preferred stock (64,695) -- --
Purchase of preferred stock -- (5,093) --
Prepayment penalties on extinguishment of debt -- (2,290) (13,038)
Distributions to minority interests (72,186) (65,310) (49,827)
Dividends paid (98,262) (73,677) (59,914)
------------ ----------- -----------
Net cash provided by (used in) financing
activities 66,007 3,902 (6,877)
------------ ----------- -----------
Net change in cash and cash equivalents 6,977 3,218 4,953
Cash and cash equivalents, beginning of period 13,355 10,137 5,184
------------ ----------- -----------
Cash and cash equivalents, end of period $20,332 $13,335 $10,137
============ =========== ===========
The accompanying notes are an integral part of these statements.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
NOTE 1. ORGANIZATION
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 and community centers. CBL's
shopping center properties are located primarily in the Southeast and Midwest,
as well as in select markets in other regions of the United States.
CBL conducts substantially all of its business through CBL & Associates
Limited Partnership (the "Operating Partnership"). At December 31, 2003, the
Operating Partnership owned controlling interests in 56 regional malls, 21
associated centers (each adjacent to a regional shopping mall), 17 community
centers and CBL's corporate office building. The Operating Partnership
consolidates the financial statements of all entities in which it has a
controlling financial interest. The Operating Partnership owned non-controlling
interests in four regional malls, two associated centers and 42 community
centers. Because major decisions such as the acquisition, sale or refinancing of
principal partnership or joint venture assets must be approved by one or more of
the other partners, 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 two malls, both owned in
joint ventures, three mall expansions, one associated center, two community
centers and one community center expansion under construction at December 31,
2003. 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 December 31, 2003, CBL Holdings I, Inc., the
sole general partner of the Operating Partnership, owned a 1.7% general
partnership interest in the Operating Partnership and CBL Holdings II, Inc.
owned a 52.9% limited partnership interest for a combined interest held by CBL
of 54.6%.
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 partnership 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 a limited partnership interest when the Operating
Partnership acquired Jacobs' interests in 23 properties in January 2001. At
December 31, 2003, CBL's Predecessor owned a 15.8% limited partnership interest,
Jacobs owned a 21.5% limited partnership interest and third parties owned an
8.1% limited partnership interest in the Operating Partnership. CBL's
Predecessor also owned 2.3 million shares of CBL's common stock at December 31,
2003, for a combined total interest of 20.0% 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 has a
controlling financial interest in the Management Company based on the following
factors:
|X| The Operating Partnership holds 100% of the preferred stock and owns 6% of
the common stock of the Management Company. Through its ownership of the
preferred stock, the Operating Partnership has the right to perpetually
receive 95% of the economic benefits of the Management Company's
operations.
|X| The Operating Partnership provides all of the operating capital of the
Management Company.
|X| The Management Company does not perform any material services for entities
in which the Operating Partnership is not a significant investor.
31
|X| The remaining 94% of the Management Company's common stock is owned by
individuals who are directors and/or officers of CBL (with the exception of
one individual who is a member of the immediate family of a director of
CBL) and whose interests are aligned with those of CBL. These individuals
contributed nominal amounts of equity in exchange for their interests in
the Management Company's common stock.
|X| All of the members of the Management Company's Board of Directors are
members of CBL's Board of Directors.
All of these factors result in the Operating Partnership having a
controlling financial interest in the Management Company and, accordingly, the
Management Company is treated as a consolidated subsidiary.
CBL, the Operating Partnership and the Management Company are collectively
referred to herein as "the Company." All significant intercompany balances and
transactions have been eliminated in the consolidated presentation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Real Estate Assets
------------------
The Company capitalizes predevelopment project costs paid to third parties.
All previously capitalized predevelopment costs are expensed when it is no
longer probable that the project will be completed. Once development of a
project commences, all direct costs incurred to construct the project, including
interest and real estate taxes, are capitalized. Additionally, certain general
and administrative expenses are allocated to the projects and capitalized based
on the amount of time applicable personnel work on the development project.
Ordinary repairs and maintenance are expensed as incurred. Major replacements
and improvements are capitalized and depreciated over their estimated useful
lives.
All acquired real estate assets have been accounted for using the purchase
method of accounting and accordingly, the results of operations are included in
the consolidated statements of operations from the respective dates of
acquisition. The Company allocates the purchase price to (i) tangible assets,
consisting of land, buildings and improvements, and tenant improvements, and
(ii) identifiable intangible, assets generally consisting of above- and
below-market leases and in-place leases, which are included in other assets in
the consolidated balance sheet. The Company uses estimates of fair value based
on estimated cash flows, using appropriate discount rates, and other valuation
techniques to allocate the purchase price to the acquired tangible and
intangible assets. Liabilities assumed generally consist of mortgage debt on the
real estate assets acquired. Assumed debt with a stated interest rate that is
significantly different from market interest rates for similar debt instruments
is recorded at its fair value based on estimated market interest rates at the
date of acquisition.
Depreciation is computed on a straight-line basis over estimated lives of
40 years for buildings, 10 to 20 years for certain improvements and 7 to 10
years for equipment and fixtures. Tenant improvements are capitalized and
depreciated on a straight-line basis over the term of the related lease.
Lease-related intangibles from acquisitions of real estate assets are amortized
over the remaining terms of the related leases. Any difference between the face
value of the debt assumed and its fair value is amortized to interest expense
over the remaining term of the debt using the effective interest method.
32
The Company's acquired intangibles and their balance sheet classifications
as of December 31, 2003, are summarized as follows:
Accumulated
Cost Amortization
------------- ----------------
Other assets:
Above-market leases $ 5,635 $ (270)
In-place leases 19,945 (686)
Accounts payable and accrued liabilities:
Below-market leases 12,975 (539)
The total net amortization expense of acquired intangibles for the next
five succeeding years will be $1,833 in 2004, $1,833 in 2005, $1,812 in 2006,
$1,938 in 2007 and $2,214 in 2008.
Total interest expense capitalized was $5,974, $5,109 and $5,860 in 2003,
2002 and 2001, respectively.
Carrying Value of Long-Lived Assets
-----------------------------------
The Company evaluates the carrying value of long-lived assets to be held
and used when events or changes in circumstances warrant such a review. The
carrying value of a long-lived asset is considered impaired when its estimated
future undiscounted cash flows are less than its carrying value. If it is
determined that an impairment has occurred, the excess of the asset's carrying
value over its estimated fair value will be charged to operations. There were no
impairment charges in 2003, 2002 and 2001.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with original
maturities of three months or less as cash equivalents.
Deferred Financing Costs
------------------------
Net deferred financing costs of $10,808 and $9,767 were included in other
assets at December 31, 2003 and 2002, respectively. Deferred financing costs
include fees and costs incurred to obtain financing and are amortized to
interest expense over the terms of the related notes payable. Amortization
expense was $3,268, $4,114, and $4,766 in 2003, 2002 and 2001, respectively.
Accumulated amortization was $5,030 and $6,559 as of December 2003 and 2002,
respectively.
Revenue Recognition
-------------------
Minimum rental revenue from operating leases is recognized on a
straight-line basis over the initial terms of the related leases. Certain
tenants are required to pay percentage rent if their sales volumes exceed
thresholds specified in their lease agreements. Percentage rent is recognized as
revenue when the thresholds are achieved and the amounts become determinable.
The Company receives reimbursements from tenants for real estate taxes,
insurance, common area maintenance, and other recoverable operating expenses as
provided in the lease agreements. Tenant reimbursements are recognized as
revenue in the period the related operating expenses are incurred. Tenant
reimbursements related to certain capital expenditures are billed to tenants
over periods of 5 to 15 years and are recognized as revenue when billed.
The Company receives management, leasing and development fees from third
parties and unconsolidated affiliates. Management fees are charged as a
percentage of revenues (as defined in the management agreement) and are
recognized as revenue when earned. Development fees are recognized as revenue on
a pro rata basis over the development period. Leasing fees are charged for newly
executed leases and lease renewals and are recognized as revenue when earned.
Development and leasing fees received from unconsolidated affiliates during the
development period are recognized as revenue only to the extent of the
third-party partners' ownership interest. Development and leasing fees during
the development period to the extent of the Company's ownership interest are
recorded as a reduction to the Company's investment in the unconsolidated
affiliate.
33
Gain on Sales of Real Estate Assets
-----------------------------------
Gains on sales of real estate assets are recognized when it is determined
that the sale has been consummated, the buyer's initial and continuing
investment is adequate, the Company's receivable, if any, is not subject to
future subordination, and the buyer has assumed the usual risks and rewards of
ownership of the asset. When the Company has an ownership interest in the buyer,
gain is recognized to the extent of the third party partner's ownership interest
and the portion of the gain attributable to the Company's ownership interest is
deferred.
Income Taxes
------------
The Company is qualified as a REIT under the provisions of the Code. To
maintain qualification as a REIT, the Company is required to distribute at least
90% of its taxable income to shareholders and meet certain other requirements.
As a REIT, the Company is generally not liable for federal corporate income
taxes. If the Company fails to qualify as a REIT in any taxable year, the
Company will be subject to federal and state income taxes on its taxable income
at regular corporate tax rates. Even if the Company maintains its qualification
as a REIT, the Company may be subject to certain state and local taxes on its
income and property, and to federal income and excise taxes on its undistributed
income. State income taxes were not material in 2003, 2002 and 2001.
The Company had a net deferred tax asset at December 31, 2003 and 2002,
which consisted primarily of net operating loss carryforwards, that was reduced
to zero by a valuation allowance because of uncertainty about the realization of
the net deferred tax asset considering all available evidence.
Derivative Financial Instruments
--------------------------------
The Company records derivative financial instruments as either an asset or
liability measured at the instrument's fair value. Any fair value adjustments
affect either shareholders' equity or net income depending on whether the
derivative instrument qualifies as a hedge for accounting purposes and, if so,
the nature of the hedging activity. See Note 15 for more information.
Concentration of Credit Risk
----------------------------
The Company's tenants include national, regional and local retailers.
Financial instruments that subject the Company to concentrations of credit risk
consist primarily of tenant receivables. The Company generally does not obtain
collateral or other security to support financial instruments subject to credit
risk, but monitors the credit standing of tenants.
The Company derives a substantial portion of its rental income from various
national and regional retail companies; however, no single tenant collectively
accounts for more than 5.4% of the Company's total revenues.
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 (Note 9). The following summarizes
the impact of potential dilutive common shares on the denominator used to
compute earnings per share:
34
Year Ended December 31,
--------------------------------------------------
2003 2002 2001
---------------- ----------------- ---------------
Weighted average shares 30,054 28,793 25,436
Effect of nonvested stock awards (118) (103) (78)
---------------- ----------------- ---------------
Denominator - basic earnings per share 29,936 28,690 25,358
Dilutive effect of stock options, nonvested stock awards
and deemed shares related to deferred compensation
arrangements 1,257 978 475
---------------- ----------------- ---------------
Denominator - diluted earnings per share 31,193 29,668 25,833
================ ================= ===============
Stock-Based Compensation
------------------------
Historically, the Company accounted for its stock-based compensation plans,
which are described in Note 19, under the recognition and measurement principles
of Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" (APB No. 25) and related Interpretations. Effective January 1, 2003,
the Company elected to begin recording the expense associated with stock options
granted after January 1, 2003, on a prospective basis in accordance with the
fair value and transition provisions of SFAS No. 123, "Accounting for Stock
Based Compensation", as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - An Amendment of FASB Statement No.
123." There were no stock options granted during the year ended December 31,
2003.
No stock-based compensation expense related to stock options granted prior
to January 1, 2003, has been reflected in net income since all options granted
had an exercise price equal to the fair value of the Company's common stock on
the date of grant. Therefore, stock-based compensation expense included in net
income available to common shareholders in 2003, 2002 and 2001 is less than that
which would have been recognized if the fair value method had been applied to
all stock-based awards since the effective date of SFAS No. 123. The following
table illustrates the effect on net income and earnings per share if the Company
had applied the fair value recognition provisions of SFAS No. 123 to all
outstanding and unvested awards in each period:
Year Ended December 31,
-------------------------------------------------
2003 2002 2001
---------------- ---------------- ---------------
Net income available to common shareholders, as reported $124,506 $73,987 $54,440
Add: Stock-based employee compensation expense included
in reported net income available to common
shareholders 2,742 4,772 1,926
Less: Total stock-based compensation expense determined
under fair value method (3,344) (5,423) (2,541)
---------------- ---------------- ---------------
Pro forma net income available to common shareholders $123,904 $73,336 $53,825
================ ================ ===============
Earnings per share:
Basic, as reported $4.16 $2.58 $2.15
================ ================ ===============
Basic, pro forma $4.14 $2.56 $2.12
================ ================ ===============
Diluted, as reported $3.99 $2.49 $2.10
================ ================ ===============
Diluted, pro forma $3.98 $2.34 $2.08
================ ================ ===============
The fair value of each employee stock option grant during 2002 and 2001 was
estimated as of the date of grant using the Black-Scholes option pricing model
and the following weighted average assumptions:
Year Ended December 31,
----------------------------
2002 2001
------------- ------------
Risk-free interest rate 4.84% 5.07%
Dividend yield 6.83% 8.34%
Expected volatility 19.7% 18.0%
Expected life 7.0 years 5.9 years
The per share weighted average fair value of stock options granted during
2002 and 2001 was $3.50 and $1.75, respectively.
35
Comprehensive Income
--------------------
Comprehensive income includes all changes in shareholders' equity during
the period, except those resulting from investments by shareholders and
distributions to shareholders.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from those
estimates.
Recent Accounting Pronouncements
--------------------------------
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," which rescinds SFAS No. 4. As a result, gains and losses from
extinguishments of debt should be classified as extraordinary items only if they
meet the criteria of Accounting Principles Board Opinion No. 30 ("APB 30"). The
Company adopted SFAS No. 145 on January 1, 2003 and has presented losses from
extinguishments of debt as an ordinary expense in all periods presented.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of SFAS No. 5, 57, and
107, and rescission of FASB Interpretation No. 34." The interpretation
elaborates on the disclosures to be made by a guarantor in its financial
statements. It also requires a guarantor to recognize a liability for the fair
value of the obligation undertaken in issuing the guarantee at the inception of
a guarantee. The Company adopted the disclosure provisions of FASB
Interpretation No. 45 in the fourth quarter 2002 and adopted the remaining
provisions effective January 1, 2003. See Note 17 for disclosures related to the
Company's guarantees.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51." The
interpretation requires the consolidation of entities in which an enterprise
absorbs a majority of the entity's expected losses, receives a majority of the
entity's expected residual returns, or both, as a result of ownership,
contractual or other financial interests in the entity. Currently, entities are
generally consolidated by an enterprise when it has a controlling financial
interest through ownership of a majority voting interest in the entity. FASB
Interpretation No. 46 was revised in December 2003 and the adoption date was
postponed until the first interim or annual period ending after March 15, 2004.
Although the Company is still evaluating the impact of the revised
interpretation, the Company believes it is reasonably possible that one
unconsolidated affiliate that is currently accounted for using the equity method
may be a variable interest entity under the provisions of the interpretation.
The Company owns a 10% interest and has a total investment of $18,690 in this
unconsolidated affiliate, which owns one associated center and two community
centers. The Company consolidates the results of operations of the Management
Company based on the criteria described in Note 1 and will continue to
consolidate the Management Company under the provisions of the revised FASB
Interpretation No. 46.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. In particular, SFAS No. 149 clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
as discussed in SFAS No. 133 and it clarifies when a derivative contains a
financing component that warrants special reporting in the statement of cash
flows. SFAS No. 149 is effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated after June 30, 2003 and
is to be applied prospectively. The Company did not engage in any activities
after June 30, 2003 to which SFAS No. 149 applied. The Company does not believe
that the implementation of SFAS No. 149 will materially change the Company's
accounting for the kinds of derivatives that the Company has typically obtained
in the course of its regular financing activities.
36
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity",
which specifies that instruments within its scope are obligations of the issuer
and, therefore, the issuer must classify them as liabilities. Financial
instruments within the scope of the pronouncement include mandatorily redeemable
financial instruments, obligations to repurchase the issuer's equity shares by
transferring assets, and certain obligations to issue a variable number of
shares. SFAS No. 150 is effective for all financial instruments entered into or
modified after May 31, 2003. However, on October 29, 2003, the FASB indefinitely
deferred the provisions of paragraphs 9 and 10 of SFAS No. 150 related to
noncontrolling interests in limited-life subsidiaries. If the Company were to be
required to comply with the provisions of paragraphs 9 and 10 of SFAS 150 as
currently drafted, the Company would be required to reclassify amounts currently
included in minority interests of $2,730 and record the minority partners'
interest as a liability at its estimated current liquidation amount, which would
result in a charge to earnings of $12,941. This liability would be required to
be reviewed each quarter and changes in its current liquidation amount recorded
through interest expense.
Reclassifications
-----------------
Certain amounts in the 2002 and 2001 consolidated financial statements have
been reclassified to conform with the current year presentation. In 2003, the
Company recorded a reclassification related to tenant reimbursements. The
reclassification resulted in a decrease in tenant reimbursements revenues and an
equal decrease in property operating expenses. The 2002 and 2001 consolidated
financial statements reflect decreases of $8,179 and $7,268, respectively, in
tenant reimbursements revenues and property operating expenses to conform to the
current year presentation.
NOTE 3. ACQUISITIONS
The Company includes the results of operations of real estate assets
acquired in the consolidated statement of operations from the date of the
related acquisition.
2003 Acquisitions
-----------------
On April 30, 2003, the Company acquired Sunrise Mall and its associated
center, Sunrise Commons, which are located in Brownsville, TX. The total
purchase price, including transaction costs, of $80,686 consisted of $40,686 in
cash and the assumption of $40,000 of variable-rate debt that matures in May
2004.
On September 10, the Company acquired Cross Creek Mall in Fayetteville, NC
for a purchase price, including transaction costs, of $116,729, which consisted
of $52,484 in cash and the assumption of $64,245 of non-recourse debt that bears
interest at a stated rate of 7.4% and matures in April 2012. The Company
recorded a debt premium of $10,209, computed using an estimated market interest
rate of 5.00%, since the debt assumed was at an above-market interest rate
compared to similar debt instruments at the date of acquisition.
On October 1, the Company acquired River Ridge Mall in Lynchburg, VA for a
purchase price, including transaction costs, of $61,933, which consisted of
$38,622 in cash, a short-term note payable of $793 and the assumption of $22,518
of non-recourse debt that bears interest at a stated rate of 8.05% and matures
in January 2007. The Company also recorded a debt premium of $2,724, computed
using an estimated market interest rate of 4.00%, since the debt assumed was at
an above-market interest rate compared to similar debt instruments at the date
of acquisition.
On October 1, the Company acquired Valley View Mall in Roanoke, VA for a
purchase price, including transaction costs, of $86,094, which consisted of
$35,351 in cash, a short-term note payable of $5,708 and the assumption of
$45,035 of non-recourse debt that bears interest at a weighted-average stated
rate of 8.61% and matures in September 2010. The Company also recorded a debt
premium of $8,813, computed using an estimated market interest rate of 5.10%,
since the debt assumed was at an above-market interest rate compared to similar
debt instruments at the date of acquisition.
37
On December 15, the Company acquired Southpark Mall in Colonial Heights, VA
for a purchase price, including transaction costs, of $78,031, which consisted
of $34,879 in cash, a short-term note payable of $5,116 and the assumption of
$38,036 of non-recourse debt that bears interest at a stated rate of 7.00% and
matures in May 2012. The Company also recorded a debt premium of $4,544,
computed using an estimated market interest rate of 5.10%, since the debt
assumed was at an above-market interest rate compared to similar debt
instruments at the date of acquisition.
On December 30, the Company acquired Harford Mall Business Trust, a
Maryland business trust that owns Harford Mall and its associated center,
Harford Annex, in Bel Air, MD for a cash purchase price, including transaction
costs, of $71,110.
The following summarizes the allocation of the purchase prices to the
assets acquired and liabilities assumed for the 2003 acquisitions:
Land $ 72,620
Buildings and improvements 434,318
Above-market leases 5,709
In-place leases 19,542
--------------
Total assets 532,189
Mortgage note payables assumed (209,834)
Short-term notes payable (11,617)
Premiums on mortgage note payables assumed (26,290)
Below-market leases (11,384)
--------------
Net assets acquired $ 273,064
==============
The following unaudited pro forma financial information is for the years
ended December 31, 2003 and 2002. It presents the results of the Company as if
each of the 2003 acquisitions had occurred on January 1, 2002. However, the
unaudited pro forma financial information does not represent what the
consolidated results of operations or financial condition actually would have
been if the acquisitions had occurred on January 1, 2002. The pro forma
financial information also does not project the consolidated results of
operations for any future period. The pro forma results for 2003 and 2002 are as
follows:
2003 2002
-------------- -------------
Total revenues $ 715,086 $ 653,041
Total expenses (384,324) (347,767)
-------------- -------------
Income from operations $ 330,762 $ 305,274
============== =============
Income before discontinued operations $ 140,330 $ 84,183
============== =============
Net income available to common shareholders $ 125,568 $ 75,752
============== =============
Basic per share data:
Income before discontinued operations, net of preferred dividends $ 4.03 $ 2.55
Net income available to common shareholders $ 4.16 $ 2.64
Diluted per share data:
Income before discontinued operations, net of preferred dividends $ 3.87 $ 2.47
Net income available to common shareholders $ 4.02 $ 2.55
38
2002 Acquisitions
-----------------
The Company closed on the second and final stage of the Jacobs' acquisition
(see 2001 Acquisitions below) in March 2002, by acquiring additional interests
in the joint ventures that own the following properties:
[X] West Towne Mall, East Towne Mall and West Towne Crossing in Madison, WI
(17% interest)
[X] Columbia Place in Columbia, SC (31% interest)
[X] Kentucky Oaks Mall in Paducah, KY (2% interest)
The purchase price of $42,519 for the additional interests consisted of
$422 in cash, the assumption of $24,487 of debt and the issuance of 499,730
special common units with a fair value of $17,610 (weighted average of $35.24
per unit).
The Company acquired Richland Mall, located in Waco, TX, in May 2002, for a
cash purchase price of $43,250. The Company acquired Panama City Mall, located
in Panama City, FL, for a purchase price of $45,645 in May 2002. The purchase
price of Panama City Mall consisted of (i) the assumption of $40,700 of
non-recourse mortgage debt with an interest rate of 7.30%, (ii) the issuance of
118,695 common units of the Operating Partnership with a fair value of $4,487
($37.80 per unit) and (iii) $458 in cash closing costs.
The Company also entered into a ground lease in May 2002, for land adjacent
to Panama City Mall. The terms of the ground lease provided that the lessor
could require the Company to purchase the land for $4,148 between August 1,
2003, and February 1, 2004. The Company purchased the land in August 2003.
The Company acquired the remaining 21% ownership interest in Columbia Place
in Columbia, SC in August 2002. The total consideration of $9,875 consisted of
the issuance of 61,662 common units with a fair value of $2,280 ($36.97 per
unit) and the assumption of $7,595 of debt.
In December 2002, the Company acquired the remaining 35% interest in East
Towne Mall, West Towne Mall and West Towne Crossing, which are all located in
Madison, WI. The purchase price consisted of the issuance of 932,669 common
units with a fair value of $36,411 ($39.04 per unit) and the assumption of
$25,618 of debt.
In December 2002, the Company acquired Westmoreland Mall and its associated
center, Westmoreland Crossing, located in Greensburg, PA, for a cash purchase
price of $112,416.
2001 Acquisitions
-----------------
On January 31, 2001, the Company completed the first stage of its
acquisition of Jacobs' interests in 21 malls and two associated centers for
total consideration of approximately $1,204,249, including the acquisition of
minority interests in certain properties. The purchase price consisted of (i)
$125,460 in cash, including closing costs of approximately $12,872, (ii) the
assumption of $750,244 in non-recourse mortgage debt, and (iii) the issuance of
12,056,692 special common units of the Operating Partnership with a fair value
of $328,545 ($27.25 per unit).
The following unaudited pro forma financial information is for the year
ended December 31, 2001. It presents results for the Company as if the
acquisition of the interests acquired on January 31, 2001, had occurred on
January 1, 2000. However, the unaudited pro forma financial information does not
represent what the consolidated results of operations or financial condition
actually would have been if the acquisition and related transactions had
occurred on January 1, 2000. The pro forma financial information also does not
project the consolidated results of operations for any future period. The pro
forma results for 2001 are as follows:
39
Total revenues $ 550,509
Total expenses (290,476)
-----------------
Income from operations $ 260,033
=================
Income before discontinued operations $ 56,099
=================
Net income available to common shareholders $ 53,465
=================
Basic per share data:
Income before discontinued operations, net of preferred
dividends $ 1.96
=================
Net income available to common shareholders $ 2.11
=================
Diluted per share data:
Income before discontinued operations, net of preferred
dividends $ 1.92
=================
Net income available to common shareholders $ 2.07
=================
The pro forma adjustments include additional (i) depreciation expense of
$1,871, (ii) interest expense of $835, (iii) management fees from unconsolidated
affiliates of $129 and (iv) minority interest in earnings in the Operating
Partnership of $1,965 for the year ended December 31, 2001.
In separate transactions during 2001, the Company issued an additional
602,980 special common units of the Operating Partnership valued at $16,431 and
31,008 common units of the Operating Partnership valued at $949 to purchase the
remaining 50% and 25% interests in Madison Square Mall and Madison Plaza in
Huntsville, AL, respectively.
NOTE 4. DISCONTINUED OPERATIONS
On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No.
121 and requires that long-lived assets that are to be disposed of by sale be
measured at the lower of book value or fair value less costs to sell. SFAS No.
144 retains the fundamental provisions of SFAS No. 121 for (i) recognition and
measurement of the impairment of long-lived assets to be held and used and (ii)
measurement of long-lived assets to be disposed by sale. SFAS No. 144 broadens
the definition of what constitutes a discontinued operation and how the results
of a discontinued operation are to be measured and presented.
The provisions of SFAS No. 144 have been applied prospectively to
dispositions that occurred after January 1, 2002. Additionally, the disposed
assets' results of operations for 2002 and 2001 have been reclassified to
discontinued operations to conform to the current year presentation.
During June 2004, the Company sold one community center for a sales price
of $1,800 and recognized a gain on discontinued operations of $552. Total
revenues from this community center were $338, $288 and $308 in 2003, 2002 and
2001, respectively.
During 2003, the Company sold six community centers for a total sales price
$17,280 and recognized a net gain on discontinued operations of $4,042. . Total
revenues from these community centers were $1,528, $2,093 and $2,549 in 2003,
2002 and 2001, respectively.
During 2002, the Company sold five community centers and an office building
for a total sales price of $36,800 and recognized a net gain on discontinued
operations of $372. Total revenues for these properties were $2,331 and $4,844
in 2002 and 2001, respectively.
40
NOTE 5. UNCONSOLIDATED AFFILIATES
At December 31, 2003, the Company has investments in the following 10
partnerships and joint ventures, which are accounted for using the equity method
of accounting:
Company's
Joint Venture Property Name Interest
-------------------------------------------------------------------------------------------
Governor's Square IB Governor's Plaza 50.0%
Governor's Square Company Governor's Square 47.5%
Imperial Valley Mall L.P. Imperial Valley Mall 60.0%
Kentucky Oaks Mall Company Kentucky Oaks Mall 50.0%
Mall of South Carolina L.P. Coastal Grand 50.0%
Mall of South Outparcel L.P. Coastal Grand 50.0%
Mall Shopping Center Company Plaza del Sol 50.6%
Parkway Place L.P. Parkway Place 45.0%
PPG Venture I L.P. Willowbrook Plaza, Pemberton Plaza 10.0%
and Massard Crossing
Galileo America LLC Portfolio of 40 community centers 10.0%
Condensed combined financial statement information of the unconsolidated
affiliates is presented as follows:
December 31,
---------------------------
2003 2002
----------- -----------
ASSETS:
Net investment in real estate assets $759,073 $280,610
Other assets 65,253 10,593
----------- -----------
Total assets 824,326 $291,203
=========== ===========
LIABILITIES:
Mortgage notes payable $465,602 $191,512
Other liabilities 36,167 5,491
----------- -----------
Total liabilities 501,769 197,003
----------- -----------
OWNERS' EQUITY:
The Company 96,961 68,313
Other investors 225,596 25,887
----------- -----------
Total owners' equity 322,557 94,200
----------- -----------
Total liabilities and owners' equity $824,326 $291,203
=========== ===========
Year Ended December 31,
--------------------------------------------
2003 2002 2001
----------- ----------- -----------
Revenues $50,279 $57,084 $55,779
Depreciation and amortization (9,402) (7,603) (7,633)
Other operating expenses (14,193) (17,634) (18,326)
----------- ----------- -----------
Income from operations 26,684 31,847 29,820
Interest expense (14,008) (14,827) (14,693)
Gain on sales of real estate assets 892 -- 213
----------- ----------- -----------
Net income $13,568 $17,020 $15,340
----------- ----------- -----------
Company's share of net income $4,941 $8,215 $7,155
=========== =========== ===========
In general, contributions and distributions of capital or cash flows and
allocations of income and expense are made on a pro rata basis in proportion to
the equity interest held by each general or limited partner. All debt on these
properties is non-recourse. See Note 17 for a description of guarantees the
Company has issued related to certain unconsolidated affiliates.
2003 Activity
-------------
On September 24, 2003, the Company formed Galileo America LLC ("Galileo
America"), a joint venture with Galileo America REIT, the U.S. affiliate of
Australia-based Galileo America Shopping Trust, to invest in community centers
throughout the United States. The arrangement provides for the Company to sell,
in three phases, its interests in 51 community centers for a total price of
$516,000 plus a 10% interest in Galileo America.
41
The first phase of the transaction closed on October 23, 2003, when the
Company sold its interests in 41 community centers to Galileo America for
$393,925, which consisted of $250,705 in cash, the retirement of $24,922 of debt
on one of the community centers, a note receivable of $4,813, Galileo America's
assumption of $93,037 in debt and $20,448 representing the Company's 10%
interest in Galileo America. The Company used the net proceeds to fund escrow
amounts to be used in like-kind exchanges and to reduce outstanding borrowings
under the Company's credit facilities. The Company recognized a gain of $71,886
from the first phase and deferred gain of $7,987, representing the gain
attributable to the Company's 10% interest in Galileo America. The note
receivable was paid subsequent to December 31, 2003.
The Company, as tenant, has entered, or will enter into, separate master
lease agreements with Galileo America, as landlord, covering certain spaces in
certain of the properties sold or, to be sold, to the joint venture. Under each
master lease agreement, the Company is obligated to pay Galileo America an
agreed-upon minimum annual rent, plus a pro rata share of common area
maintenance expenses and real estate taxes, for each designated space for a term
of five years from the applicable property's closing date. If the Company is
able to lease a designated space to a third party, then the amounts owed by the
Company under the master lease will be reduced by the amounts received under the
third party lease. If the amounts under the third party lease are equal to or
greater than the Company's obligation for the full term of the master lease
agreement, then the Company's obligation is zero. When a third party lease is
executed that releases the Company from its obligation, Galileo America assumes
the credit risk related to the third party lease. This arrangement is in effect
until the end of the five-year term of the master lease. Therefore, if a third
party lease expires before the expiration of the master lease term, then the
Company is obligated under the original terms of the master lease. Two
properties in the first phase are subject to master lease agreements. The
Company has recorded a liability of $2,184 at December 31, 2003, for the total
amounts to be paid over the remaining terms of the master lease obligations. The
Company will reduce the liability for the master lease obligation and will
recognize gain to the extent it obtains third party leases that are sufficient
to satisfy the master lease obligation.
The Company may also receive up to $8,000 of additional contingent
consideration if, as the exclusive manager of the properties, it achieves
certain leasing objectives related to spaces that were vacant, or projected to
soon be vacant, at the time the first phase closed. As of December 31, 2003, the
Company had earned $3,833 for leasing objectives that were met as of December
31, 2003, of which $3,450 was recognized as gain on sales of real estate assets
and $383, representing the portion attributable to the Company's 10% ownership
interest, was recorded as a reduction of the Company's investment in Galileo
America.
The second phase of the transaction closed on January 5, 2004, when the
Company sold its interest in six community centers for $92,375, which consisted
of $62,687 in cash, the retirement of $25,953 of debt on one of the community
centers, the joint venture's assumption of $2,816 of debt and closing cost of
$919. The real estate assets and related mortgage notes payable of the
properties in the second phase have been reflected as held for sale as of
December 31, 2003. The Company ceased recording depreciation expense on these
assets on October 23, 2003, the date that it was determined these assets met the
criteria to be reflected as held for sale.
The Company also entered into a master lease agreement on one of the second
phase properties that totals $7,305. As of December 31, 2003, the Company has
executed leases with tenants for certain spaces that will reduce this amount by
$4,855. These tenants are scheduled to open at various dates between January
2004 and May 2004.
The third phase is scheduled to close in January 2005 and will include five
community centers. The total purchase price for these community centers will be
$86,800.
Pursuant to a long-term agreement, the Company will be the exclusive
manager for all of the joint venture's properties in the United States, and will
be entitled to management, leasing, acquisition, disposition, asset management
and financing fees.
42
2002 Activity
-------------
In February 2002, the Company contributed its interests in two community
centers and one associated center to PPG Venture I Limited Partnership, a joint
venture with a third party, and retained a 10% interest. The total consideration
of $63,030 consisted of cash of $46,000 and the Company's retained interest. The
Company deferred the gain of $10,983 from the transaction since certain
restrictions included in the joint venture agreement related to the subsequent
sale of the properties demonstrate the Company's continuing involvement. The
deferred gain is included in accounts payable and accrued liabilities.
In March 2002, the Company acquired an additional 2% interest in Kentucky
Oaks Mall Company, an additional 17% interest in Madison Joint Venture and an
additional 31% interest in Columbia Mall Company as discussed in Note 3. Since
the additional interest in Columbia Mall Company resulted in the Company having
a 79% controlling interest in that joint venture, the Company discontinued
accounting for it using the equity method and began consolidating it as of the
date the additional 31% interest was acquired.
During 2002, the Company entered into three joint ventures with third
parties to develop two malls, Imperial Valley Mall and Coastal Grand.
2001 Activity
-------------
In January 2001, the Company acquired a 48% interest in Kentucky Oaks Mall
Company, Columbia Joint Venture and Madison Joint Venture in connection with the
first stage of the Jacobs' transaction discussed in Note 3.
As discussed in Note 3, the Company discontinued the equity method of
accounting for the partnership that owns Madison Square Mall after the Company
acquired the remaining ownership interest in that partnership on January 31,
2001.
NOTE 6. MORTGAGE AND OTHER NOTES PAYABLE
Mortgage and other notes payable consisted of the following:
December 31, 2003 December 31, 2002
------------------------------- --------------------------------
Weighted Average Weighted Average
Amount Interest Rate(1) Amount Interest Rate(1)
------------- ----------------- ------------- -----------------
Fixed-rate debt:
Non-recourse loans on operating properties $2,256,544 6.63% $1,867,915 7.16%
------------- -------------
Variable-rate debt:
Recourse term loans on operating properties 105,558 2.67% 290,954 3.98%
Lines of credit 376,000 2.23% 221,275 2.69%
Construction loans -- -- 21,935 3.08%
------------- -------------
Total variable-rate debt 481,558 2.33% 534,164 3.41%
------------- -------------
Total $2,738,102 5.87% $2,402,079 6.32%
============= =============
(1) Weighted average interest rate before amortization of deferred financing
costs.
Non-recourse and recourse loans include loans that are secured by
properties owned by the Company that have a net carrying value of $3,302,703 at
December 31, 2003. At December 31, 2003, the Company had $3,967 available and
unfunded under recourse term loan commitments on two properties.
Fixed-Rate Debt
---------------
At December 31, 2003, fixed-rate loans bear interest at fixed rates ranging
from 4.52% to 10.63%. Fixed-rate loans generally provide for monthly payments of
principal and/or interest and mature at various dates from May 2004 through
April 2016.
43
Variable-Rate Debt
------------------
Recourse term loans bear interest at variable interest rates indexed to the
prime lending rate or London Interbank Offered Rate ("LIBOR"). At December 31,
2003, interest rates on recourse loans varied from 2.62% to 2.77%. These loans
mature at various dates from February 2004 to December 2004.
Unsecured Line of Credit
------------------------
The Company has a short-term, unsecured line of credit that is used for
acquisition purposes and bears interest at LIBOR plus 1.30%. The total available
under this line of credit is $130,000, of which $72,000 was outstanding at
December 31, 2003. The unsecured line of credit's original maturity date of
January 31, 2004 was extended to May 31, 2004 subsequent to December 31, 2003.
The Company has one additional option to extend the maturity another four months
to September 30, 2004. Borrowings under the unsecured line of credit had a
weighted average interest rate of 2.49% at December 31, 2003.
Secured Lines of Credit
-----------------------
The Company has four secured lines of credit that are used for
construction, acquisition, and working capital purposes. Each of these lines is
secured by mortgages on certain of the Company's operating properties. The
following summarizes certain information about the secured lines of credit as of
December 31, 2003:
Total Total Maturity
Available Outstanding Date
----------------------------------------------------
$ 255,000 $ 228,000 February 2006
80,000 46,000 June 2005
10,000 10,000 April 2005
20,000 20,000 March 2007
-------------------------------------
$ 365,000 $ 304,000
=====================================
The secured lines of credit are secured by 19 of the Company's properties,
which had an aggregate net carrying value of $375,198 at December 31, 2003.
Borrowings under the secured lines of credit had a weighted average interest
rate of 2.17% at December 31, 2003.
Letters of Credit
-----------------
The Company had $17,343 outstanding for letters of credit under the above
secured lines of credit at December 31, 2003.
At December 31, 2003, the Company had additional secured lines of credit
with a total commitment of $21,602 that can only be used for issuing letters of
credit. The total outstanding under these lines of credit was $16,612 at
December 31, 2003.
Covenants and Restrictions
--------------------------
The secured and unsecured line of credit agreements contain, among other
restrictions, certain financial covenants including the maintenance of certain
financial coverage ratios, minimum net worth requirements, and limitations on
cash flow distributions. The Company was in compliance with all covenants and
restrictions on its lines of credit at December 31, 2003.
Seventeen malls, six associated centers and the 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
44
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.
Debt Maturities
---------------
As of December 31, 2003, the scheduled principal payments on all mortgage
and other notes payable, including construction loans and lines of credit, are
as follows:
2004 $ 268,058
2005 143,315
2006 440,973
2007 182,216
2008 414,749
Thereafter 1,263,147
------------
2,712,458
Net unamortized premiums 25,644
------------
$ 2,738,102
============
Of the $268,058 of scheduled principal payments in 2004, $223,649 is
related to loans that are scheduled to mature in 2004. The Company has extension
options in place for $79,675 of these loans that will extend their scheduled
maturities to 2005. The Company repaid loans of $31,974 subsequent to December
31, 2003, and the remaining $112,000 will either be repaid or refinanced.
NOTE 7. LOSS ON EXTINGUISHMENT OF DEBT
The losses on extinguishment of debt resulted from prepayment penalties and
the write-off of unamortized deferred financing costs when notes payable were
retired before their scheduled maturity dates as follows:
Year Ended December 31,
------------------------------------
2003 2002 2001
------------------------------------
Prepayment penalties $ -- $ 2,270 $ 13,038
Prepayment penalties on discontinued operations -- 20 --
Unamortized deferred financing costs 167 1,640 520
--------------------------------------
$ 167 $ 3,930 $ 13,558
======================================
NOTE 8. SHAREHOLDERS' EQUITY
Common Stock
------------
In March 2002, the Company completed an offering of 3,352,770 shares of its
$0.01 par value common stock at $34.55 per share. The net proceeds of $114,705
were used to repay outstanding borrowings under the Company's lines of credit
and to retire debt on certain operating properties.
Preferred Stock
---------------
In June 1998, the Company issued 2,875,000 shares of 9.0% Series A
Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock") with a
face value of $25.00 per share in a public offering. In June 2002, the Company
purchased 200,000 shares of the Series A Preferred Stock for $5,093. On November
28, 2003, the Company redeemed the remaining 2,675,000 outstanding shares of the
Series A Preferred Stock at its face value of $25.00 per share plus accrued and
unpaid dividends. In connection with the redemption of the Series A Preferred
Stock, the Company recorded a charge of $2,181 to write-off direct issuance
costs that were recorded as a reduction of additional paid-in capital when the
Series A Preferred Stock was issued. The charge is included in preferred
dividends in the accompanying consolidated statement of operations.
45
In June 2002, the Company completed an offering of 2,000,000 shares of
8.75% Series B Cumulative Redeemable Preferred Stock (the "Series B Preferred
Stock"), having a par value of $.01 per share, at $50.00 per share. The net
proceeds of $96,370 were used to reduce outstanding balances under the Company's
lines of credit and to retire term loans on several properties.
The dividends on the Series B Preferred Stock are cumulative and accrue
from the date of issue and are payable quarterly in arrears at a rate of $4.375
per share per annum. The Series B Preferred Stock has no stated maturity, is not
subject to any sinking fund or mandatory redemption, and is not convertible into
any other securities of the Company. The Series B Preferred Stock cannot be
redeemed by the Company prior to June 14, 2007. After that date, the Company may
redeem shares, in whole or in part, at any time for a cash redemption price of
$50.00 per share plus accrued and unpaid dividends.
On August 22, 2003, the Company issued 4,600,000 depositary shares in a
public offering, each representing one-tenth of a share of 7.75% Series C
Cumulative Redeemable Preferred Stock (the "Series C Preferred Stock") with a
par value of $0.01 per share. The Series C Preferred Stock has a liquidation
preference of $250.00 per share ($25.00 per depositary share).
The dividends on the Series C Preferred Stock are cumulative, accrue from
the date of issuance and are payable quarterly in arrears at a rate of $19.375
per share ($1.9375 per depositary share) per annum. The Series C Preferred Stock
has no stated maturity, is not subject to any sinking fund or mandatory
redemption and is not redeemable before August 22, 2008. The net proceeds of
$111,227 were used to partially fund certain acquisitions discussed in Note 3
and to reduce outstanding borrowings under the Company's lines of credit.
NOTE 9. MINORITY INTERESTS
Minority interests represent (i) the aggregate partnership interest in the
Operating Partnership that is not owned by the Company and (ii) the aggregate
ownership interest in 11 of the Company's shopping center properties that is
held by third parties.
Minority Interest in Operating Partnership
------------------------------------------
The minority interest in the Operating Partnership is represented by common
units and special common units of limited partnership interest in the Operating
Partnership (the "Operating Partnership Units") that the Company does not own.
The assets and liabilities allocated to the Operating Partnership's
minority interest are based on their ownership percentage of the Operating
Partnership at December 31, 2003 and 2002. The ownership percentage is
determined by dividing the number of Operating Partnership Units held by the
minority interest at December 31, 2003 and 2002 by the total Operating
Partnership Units outstanding at December 31, 2003 and 2002. The minority
interest ownership percentage in assets and liabilities of the Operating
Partnership was 45.4% and 46.3% at December 31, 2003 and 2002, respectively.
Income is allocated to the Operating Partnership's minority interest based
on their weighted average ownership during the year. The ownership percentage is
determined by dividing the weighted average number of Operating Partnership
Units held by the minority interest by the total weighted average number of
Operating Partnership Units outstanding during the year.
A change in the number of shares of common stock or Operating Partnership
Units changes the percentage ownership of all partners of the Operating
Partnership. An Operating Partnership Unit is considered to be equivalent to a
share of common stock since it generally is redeemable for cash or shares of the
Company's common stock. As a result, an allocation is made between shareholders'
equity and minority interest in the Operating Partnership in the accompanying
46
balance sheet to reflect the change in ownership of the Operating Partnership's
underlying equity when there is a change in the number of shares and/or
Operating Partnership Units outstanding.
The total minority interest in the Operating Partnership was $523,779 and
$497,832 at December 31, 2003 and 2002, respectively.
Minority Interest in Operating Partnership-Conversion Rights
------------------------------------------------------------
Under the terms of the Operating Partnership's limited partnership
agreement, each of the limited partners has the right to exchange all or a
portion of its partnership interests for shares of CBL's common stock or, at
CBL's election, their cash equivalent. When an exchange occurs, CBL assumes the
limited partner's ownership interests in the Operating Partnership. The number
of shares of common stock received by a limited partner of the Operating
Partnership upon exercise of its exchange rights will be equal on a one-for-one
basis to the number of partnership units exchanged by the limited partner. The
amount of cash received by the limited partner, if CBL elects to pay cash, will
be based on the five-day trailing average of the trading price at the time of
exercise of the shares of common stock that would otherwise have been received
by the limited partner in the exchange. Neither the limited partnership
interests in the Operating Partnership nor the shares of common stock of CBL are
subject to any right of mandatory redemption.
The Operating Partnership issued 13,159,402 special common units in
connection with acquisitions discussed in Notes 3 and 5. After January 31, 2004,
holders of the special common units may exchange them for shares of common stock
or cash. The Company has the right to elect the form of payment. The special
common units receive a minimum distribution of $2.9025 per unit per year. When
the distribution on the common units exceeds $2.9025 per unit per year, the
special common units will receive a distribution equal to that paid on the
common units.
The Operating Partnership issued 1,144,034 common units in connection with
acquisitions discussed in Notes 3 and 5. The 118,695 common units issued in
connection with the acquisition of Panama City Mall, which is discussed in Note
3, receive a minimum annual dividend of $3.375 per unit until May 2012. When the
distribution on the common units exceeds $3.375 per unit, these common units
will receive a distribution equal to that paid on the common units.
Additionally, if the annual distribution on the common units should ever be less
than $2.22 per unit, the $3.375 per unit dividend will be reduced by the amount
the per unit distribution is less than $2.22 per unit.
The Company purchased 460,083 common units from a former executive of the
Company who retired in 1997 for $21,013 during 2003. During 2002, third parties
converted 446,652 common units to shares of the Company's common stock.
Outstanding rights to convert minority interests in the Operating
Partnership to common stock were held by the following parties at December 31,
2003 and 2002:
December 31,
--------------------------------
2003 2002
--------------- ----------------
Common shares outstanding 30,323,476 29,797,469
Outstanding rights:
Jacobs 11,953,903 11,953,903
CBL's Predecessor 8,755,612 8,883,928
Third parties 4,513,397 4,845,164
--------------- ----------------
Total Operating Partnership Units 55,546,388 55,480,464
=============== ================
Minority Interest in Shopping Center Properties
-----------------------------------------------
The Company's consolidated financial statements include the assets,
liabilities and results of operations of 11 properties that the Company does not
wholly own. The minority interest in shopping center properties represents the
aggregate ownership interest of third parties in these properties. The total
47
minority interests in shopping center properties was $3,652 and $2,681 at
December 31, 2003 and 2002, respectively. In June 2004, the Company sold one of
the community centers in which there was a minority interest.
The assets and liabilities allocated to the minority interest in shopping
center properties are based on the third parties' ownership percentages in each
shopping center property at December 31, 2003 and 2002. Income is allocated to
the minority interest in shopping center properties based on the third parties'
weighted average ownership in each shopping center property during the year.
NOTE 10. MINIMUM RENTS
The Company receives rental income by leasing retail shopping center space
under operating leases. Future minimum rents are scheduled to be received under
noncancellable tenant leases at December 31, 2003, as follows:
2004 $384,603
2005 330,681
2006 288,881
2007 246,537
2008 205,595
Thereafter 671,286
Future minimum rents do not include percentage rents or tenant
reimbursements that may become due.
NOTE 11. MORTGAGE NOTES RECEIVABLE
Mortgage notes receivable are collateralized by first mortgages,
wrap-around mortgages on the underlying real estate and related improvements or
by assignment of 100% of the partnership interests that own the real estate
assets. Interest rates on notes receivable range from 2.30% to 9.50% at December
31, 2003. Maturities of notes receivable range from 2004 to 2019.
NOTE 12. SEGMENT INFORMATION
The Company measures performance and allocates resources according to
property type, which is determined based on differences such as nature of
tenants, capital requirements, economic risks and leasing terms. Rental income
and tenant reimbursements from tenant leases provide the majority of revenues
from all segments. The accounting policies of the reportable segments are the
same as those described in Note 2. Information on the Company's reportable
segments is presented as follows:
Associated Community
Year Ended December 31, 2003 Malls Centers Centers All Other Total
----------------------------------------------- -------------- ------------ ----------- ----------- ------------
Revenues $ 571,744 $ 23,961 $ 51,513 $ 19,975 $ 667,193
Property operating expenses (1) (185,836) (5,614) (12,081) 8,515 (195,016)
Interest expense (139,900) (5,157) (6,746) (1,519) (153,322)
Other expense -- -- -- (11,489) (11,489)
Gain on sales of real estate assets 2,216 -- 75,549 -- 77,765
-------------- ------------ ----------- ----------- ------------
Segment profit and loss $ 248,224 $ 13,190 $108,235 $ 15,482 385,131
============== ============ =========== ===========
Depreciation and amortization expense (113,437)
General and administrative expense (30,395)
Interest income 2,485
Loss on extinguishment of debt (167)
Equity in earnings and minority interest (104,349)
------------
Income before discontinued operations $ 139,268
============
Total assets (2) $3,682,158 $199,356 $265,467 $117,329 $4,264,310
Capital expenditures (2) $ 651,567 $ 28,901 $ 32,063 $ 31,274 $ 743,805
48
Associated Community
Year Ended December 31, 2002 Malls Centers Centers All Other Total
----------------------------------------------- -------------- ------------ ----------- ----------- ------------
Revenues $ 490,743 $ 18,811 $ 59,081 $ 18,047 $ 586,682
Property operating expenses (1) (163,730) (4,231) (15,257) 8,182 (175,036)
Interest expense (123,977) (3,817) (9,270) (5,977) (143,041)
Other expense - - - (10,307) (10,307)
Gain(loss) on sales of real estate assets (251) 94 1,016 1,945 2,804
-------------- ------------ ----------- ----------- ------------
Segment profit and loss $ 202,785 $ 10,857 $ 35,570 $ 11,890 261,102
============== ============ =========== ===========
Depreciation and amortization expense (93,979)
General and administrative expense (23,332)
Interest income 1,853
Loss on extinguishment of debt (3,910)
Equity in earnings and minority interest (59,316)
------------
Income before discontinued operations $ 82,418
============
Total assets (2) $3,067,611 $151,606 $418,856 $157,041 $3,795,114
Capital expenditures (2) $ 454,721 $ 29,164 $ 25,930 $ 49,903 $ 559,718
Associated Community
Year Ended December 31, 2001 Malls Centers Centers All Other Total
----------------------------------------------- -------------- ------------ ----------- ----------- ------------
Revenues $ 434,003 $ 16,548 $ 66,083 $ 20,338 $ 536,972
Property operating expenses (1) (141,714) (3,813) (15,679) (3,156) (164,362)
Interest expense (125,198) (4,599) (14,951) (11,810) (156,558)
Other expense - - - (11,489) (11,489)
Gain on sales of real estate assets 1,441 350 8,858 -- 10,649
-------------- ------------ ----------- ----------- ------------
Segment profit and loss $ 168,532 $ 8,486 $ 44,311 $ (6,117) 215,212
============== ============ =========== ===========
Depreciation and amortization expense (83,483)
General and administrative expense (18,807)
Interest income 1,891
Loss on extinguishment of debt (13,558)
Equity in earnings and minority interest (44,142)
------------
Income before discontinued operations $ 57,113
============
Total assets (2) $2,678,666 $128,660 $493,198 $ 72,327 $3,372,851
Capital expenditures (2) $1,288,699 $ 8,375 $ 58,670 $ 12,476 $1,368,220
(1) Property operating expenses include property operating, real estate taxes
and maintenance and repairs.
(2) Developments in progress are included in the All Other category.
NOTE 13. OPERATING PARTNERSHIP
Condensed consolidated financial statement information for the Operating
Partnership is presented as follows:
December 31,
-------------------------------
2003 2002
------------ ------------
ASSETS:
Net investment in real estate assets $ 3,912,220 $ 3,611,485
Investment in unconsolidated affiliates 96,989 68,770
Other assets 253,985 115,022
------------ ------------
Total assets $ 4,263,194 $ 3,795,277
============ ============
LIABILITIES:
Mortgage and other notes payable $ 2,738,102 $ 2,402,079
Other liabilities 138,210 131,815
------------ ------------
Total liabilities 2,876,312 2,533,894
Minority interests 3,652 2,681
OWNERS' EQUITY 1,383,230 1,258,702
------------ ------------
Total liabilities and owner's equity $ 4,263,194 $ 3,795,277
============ ============
49
Year Ended December 31,
---------------------------------------------------------
2003 2002 2001
---------------------------------------------------------
Total revenues $ 667,193 $ 586,682 $ 536,974
Depreciation and amortization (113,437) (93,978) (83,483)
Other operating expenses (235,412) (208,229) (194,231)
---------------------------------------------------------
Income from operations 318,344 284,475 259,260
Interest income 2,480 1,849 1,887
Interest expense (153,315) (142,274) (156,557)
Loss on extinguishment of debt (167) (3,930) (13,558)
Gain on sales of real estate assets 77,765 2,804 10,649
Equity in earnings of unconsolidated
affiliates 4,941 8,215 7,155
Minority interest in shopping center
properties (2,758) (3,280) (1,654)
---------------------------------------------------------
Income before discontinued operations 247,290 147,859 107,182
Operating income of discontinued operations 829 2,116 3,795
Gain on discontinued operations 4,042 372 -
---------------------------------------------------------
Net income $ 252,161 $ 150,347 $ 110,977
=========================================================
NOTE 14. NONCASH INVESTING AND FINANCING ACTIVITIES
The Company's noncash investing and financing activities were as follows
for 2003, 2002 and 2001:
2003 2002 2001
------------ ------------ ------------
Cash paid during the year for interest, net of
amounts capitalized $ 151,012 $ 141,425 $ 151,397
Debt assumed to acquire property interests 209,834 149,687 875,425
Premiums related to debt assumed to acquire property
interests 26,290 -- --
Short-term notes payable issued to acquire property
interests 11,617 -- --
Note receivable from sale of real estate assets 4,813 -- --
Issuance of minority interest to acquire property
interests -- 60,788 339,976
NOTE 15. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to manage its exposure to
changes in interest rates. The Company does not use derivative financial
instruments for speculative purposes. The Company's interest rate risk
management policy requires that derivative instruments be used for hedging
purposes only and that they be entered into only with major financial
institutions based upon their credit ratings and other factors.
The Company's objective in using derivatives is to manage its exposure to
changes in interest rates. To accomplish this objective, the Company primarily
uses interest rate swap and cap agreements as part of its cash flow hedging
strategy.
At December 31, 2003, the Company had one interest rate cap agreement that
was already in place on $40,000 of variable-rate debt that was assumed in
connection with the acquisition of Sunrise Mall (see Note 3). The interest rate
cap agreement limits the maximum interest rate at 5.50% and matures in May 2004.
The interest rate cap's fair value was $0 at both the acquisition date and
December 31, 2003.
Interest rate swap agreements designated as cash flow hedges involve the
receipt of variable-rate amounts in exchange for fixed-rate payments over the
life of the agreements without the exchange of the underlying principal amount.
During 2002, such derivatives were used to hedge the variable cash flows
associated with variable-rate debt. Under an interest rate swap in place at
December 31, 2002, the Company received interest payments at a rate equal to
LIBOR (1.44% at December 31, 2002) and paid interest at a fixed rate of 5.83%.
The interest rate swap had a notional amount of $80,000 and expired August 30,
2003.
Effective January 1, 2001, the Company determined that, with the exception
of two swap agreements that expired during the first quarter of 2001, the
Company's derivative instruments were effective and qualified for hedge
accounting in accordance with SFAS No. 133. At December 31, 2002, the interest
rate swap's fair value of $2,412 was recorded in accounts payable and accrued
liabilities.
50
The unrealized gains/losses recorded in accumulated other comprehensive
loss are reclassified to earnings as interest expense when interest payments are
made. This reclassification correlates with the timing of when hedged items are
recognized in earnings. The change in net unrealized gains on cash flow hedges
in 2003 and 2002 reflects a reclassification of net unrealized gains from
accumulated other comprehensive loss to interest expense in the amounts of
$2,397 and $4,387, respectively.
The Company is exposed to credit losses if the counterparty is unable to
perform under the interest rate swap agreement. However, the Company anticipates
that the counterparty will be able to fully satisfy its obligations under the
contract. The Company does not obtain collateral or other security to support
financial instruments subject to credit risk but monitors the credit standing of
counterparties.
NOTE 16. RELATED PARTY TRANSACTIONS
CBL's Predecessor and certain officers of the Company have a significant
minority interest in the construction company that the Company engaged to build
substantially all of the Company's development properties. The Company paid
approximately $163,617, $96,185 and $94,300 to the construction company in 2003,
2002, and 2001, respectively, for construction and development activities. The
Company had accounts payable to the construction company of $8,082 and $16,963
at December 31, 2003 and 2002, respectively.
The Management Company provides management and leasing services to the
Company's unconsolidated affiliates and other affiliated partnerships. Revenues
recognized for these services amounted to $1,077, $2,502 and $1,450 in 2003,
2002 and 2001, respectively.
NOTE 17. 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. Additionally, management believes that, based on
environmental studies completed to date, any exposure to environmental cleanup
will not materially affect the financial position and results of operations of
the Company.
The Company has guaranteed 50% of the debt of Parkway Place L.P., an
unconsolidated affiliate in which the Company owns a 45% interest. The total
amount outstanding at December 31, 2003, was $58,470, of which the Company has
guaranteed $29,235. The Company did not receive a fee for this guaranty.
Under the terms of the partnership agreement of Mall of South Carolina
L.P., an unconsolidated affiliate in which the Company owns a 50% interest, the
Company has guaranteed 100% of the construction debt to be incurred to develop
Coastal Grand. The total amount outstanding at December 31, 2003 was $46,384.
The Company received a fee of $1,572 for this guaranty during 2003 and will
recognize $786 of this fee as revenue pro rata over the term of the guaranty
until it expires in May 2006, which represents the portion of the fee
attributable to the third-party partner's ownership interest. The remaining $786
attributable to the Company's ownership interest is recorded as a reduction in
the Company's investment in the partnership. The Company recognized $218 of
revenue related to this guaranty during 2003.
The Company has guaranteed 100% of the debt of Imperial Valley Mall L.P.,
an unconsolidated affiliate in which the Company owns a 60% interest. The total
amount outstanding at December 31, 2003, was $418, of which the Company has
guaranteed $209.
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, receivables, accounts
payable and accrued liabilities are reasonable estimates of their fair values
because of the short maturity of these financial instruments. Based on the
interest rates for similar financial instruments, the carrying value of mortgage
notes receivable is a reasonable estimation of fair value. The fair value of
51
mortgage and other notes payable was $3,094,285 and $2,637,219 at December 31,
2003 and 2002, respectively. The fair value was calculated by discounting future
cash flows for the notes payable using estimated rates at which similar loans
would be made currently.
NOTE 19. STOCK INCENTIVE PLAN
The Company maintains the CBL & Associates Properties, Inc. 1993 Stock
Incentive Plan, as amended, which permits the Company to issue stock options and
common stock to selected officers, employees and directors of the Company. The
shares available under the plan were increased from 4,000,000 to 5,200,000
during 2002. The Compensation Committee of the Board of Directors (the
"Committee") administers the plan.
Stock Options
-------------
Stock options issued under the plan allow for the purchase of common stock
at the fair market value of the stock on the date of grant. Stock options
granted to officers and employees vest and become exercisable in installments on
each of the first five anniversaries of the date of grant and expire 10 years
after the date of grant. Stock options granted to independent directors are
fully vested upon grant. However, the independent directors may not sell, pledge
or otherwise transfer their stock options during their board term or for one
year thereafter.
The Company's stock option activity for 2003, 2002 and 2001 is summarized
as follows:
2003 2002 2001
--------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------------------------------------ -------------------------------------------
Outstanding, beginning of year 2,533,417 25.51 2,351,967 23.39 2,364,817 $22.51
Granted - - 429,750 36.56 378,500 27.70
Exercised (323,259) 24.00 (209,600) 23.90 (375,350) 22.18
Canceled (26,050) 30.92 (38,700) 28.28 (16,000) 24.57
--------------- -------------- ---------------
Outstanding, end of year 2,184,108 25.67 2,533,417 25.51 2,351,967 23.39
=============== ============== ===============
Options exercisable at end of
year 1,461,658 23.20 1,425,817 22.26 1,284,917 21.82
=============== ============== ===============
Weighted average fair value of
options granted during the
year $ - $ 3.50 $ 1.75
=============== ============== ===============
The following is a summary of the stock options outstanding at December
31, 2003:
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Price Exercise Price
Options Contractual of Options Options of Options
Exercise Price Range Outstanding Life in Years Outstanding Exercisable Exercisable
------------------------ -------------- ----------------- ----------------- --------------- -----------------
$19.5625 - $21.6250 573,958 1.5 $19.99 573,958 $19.99
$23.6250 - $25.6250 924,010 4.9 23.98 730,860 23.99
$27.6750 - $39.8000 686,140 7.9 32.68 156,840 31.52
-------------- ----------------- ----------------- --------------- -----------------
Totals 2,184,108 5.0 $25.67 1,461,658 $23.20
============== ================= ================= =============== =================
Stock Awards
------------
Under the plan, common stock may be awarded either alone, in addition to,
or in tandem with other stock awards granted under the plan. The Committee has
the authority to determine eligible persons to whom common stock will be
awarded, the number of shares to be awarded, and the duration of the vesting
period, as defined. The Committee may also provide for the issuance of common
stock under the plan on a deferred basis pursuant to deferred compensation
arrangements, as described in Note 20.
In May 2003, the Company granted awards for 43,225 shares of the Company's
common stock to employees. The terms of the awards allow for a recipient to vest
and receive shares of common stock in equal installments on each of the first
52
five anniversaries of the date of grant. Under the terms of the awards, the
Company pays the recipient additional compensation, in an amount equal to the
dividends paid on the Company's common stock, on the unvested portion of the
award as if the recipient owned the unvested shares.
The Company recorded deferred compensation of $1,870 when the awards were
granted, based on the market value of the Company's common stock on the grant
date, which was $43.06 per share. The deferred compensation is being amortized
on a straight-line basis as compensation expense over the five-year vesting
period. The Company recognized $248 of compensation expense in 2003 related to
the amortization of deferred compensation. The Company also recorded a reduction
to deferred compensation of $15 for grants that were canceled during 2003.
During 2003, the Company issued an additional 43,606 shares of common stock
to employees with a weighted-average grant date fair value of $43.01. The shares
vested immediately.
During 2002, the Company issued 73,228 shares of common stock with a
weighted average grant-date fair value of $35.21 per share. There were 41,516
shares that vested immediately. The remaining 31,712 shares vest at various
dates from 2003 to 2007.
During 2001, the Company issued 69,735 shares of common stock with a
weighted average grant-date fair value of $27.62 per share. There were 44,537
shares of common stock that vested immediately. The remaining 25,198 shares of
common stock vest at various dates from 2002 to 2006.
NOTE 20. EMPLOYEE BENEFIT PLANS
401 (k) Plan
------------
The Management Company maintains a 401(k) profit sharing plan, which is
qualified under Section 401(a) and Section 401(k) of the Code to cover employees
of the Management Company. All employees who have attained the age of 21 and
have completed at least one year of service are eligible to participate in the
plan. The plan provides for employer matching contributions on behalf of each
participant equal to 50% of the portion of such participant's contribution that
does not exceed 2.5% of such participant's compensation for the plan year.
Additionally, the Management Company has the discretion to make additional
profit-sharing-type contributions not related to participant elective
contributions. Total contributions by the Management Company were $518, $439 and
$391 in 2003, 2002 and 2001, respectively.
Employee Stock Purchase Plan
----------------------------
The Company maintains an employee stock purchase plan that allows eligible
employees to acquire shares of the Company's common stock in the open market
without incurring brokerage or transaction fees. Under the plan, eligible
employees make payroll deductions that are used to purchase shares of the
Company's common stock. The shares are purchased by the fifth business day of
the month following the month when the deductions were withheld. The shares are
purchased at the prevailing market price of the stock at the time of purchase.
Deferred Compensation Arrangements
----------------------------------
The Company has entered into agreements with certain of its officers that
allow the officers to defer receipt of selected salary increases and/or bonus
compensation for periods ranging from 5 to 10 years.
For certain officers, the deferred compensation arrangements provide that
when the salary increase or bonus compensation is earned and deferred, shares of
the Company's common stock issuable under the 1993 Stock Incentive Plan are
deemed set aside for the amount deferred. The number of shares deemed set aside
is determined by dividing the amount of compensation deferred by the fair value
of the Company's common stock on the deferral date, as defined in the
arrangements. The shares set aside are deemed to receive dividends equivalent to
those paid on the Company's common stock, which are then deemed to be reinvested
53
in the Company's common stock in accordance with the Company's dividend
reinvestment plan. When an arrangement terminates, the Company will issue shares
of the Company's common stock to the officer equivalent to the number of shares
deemed to have accumulated under the officer's arrangement. At December 31, 2003
and 2002, respectively, there were 93,796 and 80,532 shares that were deemed set
aside in accordance with these arrangements.
For other officers, the deferred compensation arrangements provide that
their bonus compensation is deferred in the form of a note payable to the
officer. Interest accumulates on these notes at 7.0%. When an arrangement
terminates, the note payable plus accrued interest is paid to the officer in
cash. At December 31, 2003 and 2002, respectively, the Company had notes
payable, including accrued interest, of $296 and $319 related to these
arrangements.
NOTE 21. DIVIDENDS
On October 29, 2003, the Company declared a cash dividend of $0.725 per
share of common stock for the quarter ended December 31, 2003. The dividend was
paid on January 16, 2004, to shareholders of record as of December 31, 2003. The
total dividend of $21,985 is included in accounts payable and accrued
liabilities at December 31, 2003.
On October 29, 2003, the Operating Partnership declared a distribution of
$18,309 to the Operating Partnership's limited partners. This distribution
represented a distribution of $0.725 per unit for each common unit and $0.726 to
$0.844 per unit for the special common units in the Operating Partnership. The
total distribution is included in accounts payable and accrued liabilities at
December 31, 2003.
The allocations of dividends declared and paid for income tax purposes are
as follows:
Year Ended December 31,
-------------------------------------------------------
2003 2002 2001
------------------ ----------------- ----------------
Dividends declared:
Common stock $ 2.69 $ 2.32 $ 2.04
Series A preferred stock $ 2.05 $ 2.25 $ 2.25
Series B preferred stock $ 4.3752 $ 2.3942 $ -
Series C preferred stock $ 6.99653(1) $ - $ -
Allocations: (2)
Ordinary income 98.83% 95.63% 92.16%
Capital gains 20% rate 0.00% 0.13% 3.80%
Capital gains 25% rate 1.17%(3) 4.24% 4.04%
Return of capital 0.00% 0.00% 0.00%
------------------ ----------------- ----------------
Total 100.00% 100.00% 100.00%
================== ================= ================
(1) Represents a dividend of $0.699653 per depositary share.
(2) The allocations for income tax purposes are the same for the common stock
and each series of preferred stock for each period presented.
(3) All of the 2003 capital gains represent pre-May 6, 2003 capital gains.
54
NOTE 22. QUARTERLY INFORMATION (UNAUDITED)
The following quarterly information differs from previously reported
results since the results of operations of long-lived assets disposed of
subsequent to each quarter end in 2003 have been reclassified to discontinued
operations for all periods presented. Additionally, total revenues differs from
previously reported amounts due to a reclassification made to conform to the
fourth quarter and year-end presentations.
2003 First Second Third Fourth
Quarter Quarter Quarter Quarter Total (1)
---------- ---------- ---------- ---------- ----------
Total revenues $163,600 $162,489 $163,036 $178,068 $667,193
Income from operations 77,950 77,683 77,634 83,589 316,856
Income before discontinued operations 23,272 24,620 24,163 67,213 139,268
Discontinued operations 3,202 87 746 836 4,871
Net income available to common
shareholders 22,776 21,022 20,225 60,483 124,506
Basic per share data:
Income before discontinued
operations, net of preferred
dividends $ 0.66 $ 0.70 $ 0.65 $ 1.98 $ 3.99
Net income available to common
shareholders $ 0.76 $ 0.70 $ 0.67 $ 2.01 $ 4.15
Diluted per share data:
Income before discontinued
operations, net of preferred
dividends $ 0.64 $ 0.67 $ 0.62 $ 1.89 $ 3.82
Net income available to common
shareholders $ 0.74 $ 0.68 $ 0.65 $ 1.92 $ 3.99
First Second Third Fourth
2002 Quarter Quarter Quarter Quarter Total (1)
---------- ---------- ---------- ---------- ----------
Total revenues $141,888 $145,281 $143,982 $155,531 $586,682
Income from operations 69,625 68,994 68,550 76,859 284,028
Income before discontinued operations 17,070 20,227 20,468 24,653 82,418
Discontinued operations 1,929 694 691 (826) 2,488
Net income available to common
shareholders 17,384 18,911 17,465 20,227 73,987
Basic per share data:
Income before discontinued
operations, net of preferred
dividends $ 0.59 $ 0.63 $ 0.57 $ 0.71 $ 2.50
Net income available to common
shareholders $ 0.66 $ 0.65 $ 0.59 $ 0.68 $ 2.58
Diluted per share data:
Income before discontinued
operations, net of preferred
dividends $ 0.57 $ 0.61 $ 0.55 $ 0.69 $ 2.42
Net income available to common
shareholders $ 0.64 $ 0.63 $ 0.57 $ 0.66 $ 2.50
(1) The sum of quarterly earnings per share may differ from annual earnings per
share due to rounding.