CBL & ASSOCIATES PROPERTIES, INC. 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.
Executive Overview
We are a self-managed, self-administered, fully integrated REIT that is engaged in the ownership, development, acquisition, leasing, management and operation of regional shopping malls, open-air and mixed-use centers, outlet centers, associated centers, community centers and office properties. Our shopping centers are located in 26 states, but are primarily in the southeastern and midwesternUnited States . We have elected to be taxed as a REIT for federal income tax purposes. We conduct substantially all of our business through theOperating Partnership .The Operating Partnership consolidates the financial statements of all entities in which it has a controlling financial interest or where it is the primary beneficiary of a VIE. See Item 1. Business for a description of our Properties owned and under development as ofDecember 31, 2019 . We had a net loss for the year endedDecember 31, 2019 of$131.7 million as compared to a net loss of$99.2 million in the prior-year period. The operating results of our Properties declined further in 2019 due to the ongoing challenges in the retail environment that have resulted in tenant bankruptcies, store closures and rental reductions for tenants with high occupancy costs. We recognized non-cash impairment losses of$239.5 million related to six malls and one community center and$61.8 million of expense related to a litigation settlement entered into in 2019, which were partially offset by gain on investments/deconsolidation of$67.2 million related to the sale of a portion of our interests in two joint ventures and a gain on extinguishment of debt of$71.7 million related to two Malls. Same-center NOI (see below) decreased 6.5% as compared to the prior-year period. Stabilized mall same-center sales per square foot increased to$386 for the current year from$379 for the prior-year period. Diluted earnings per share ("EPS") attributable to common shareholders was ($0.89 ) per diluted share for the year endedDecember 31, 2019 as compared to$(0.72) per diluted share for the prior-year period. FFO, as adjusted, per diluted share (see below) decreased 21.4% for the year endedDecember 31, 2019 to$1.36 per diluted share as compared to$1.73 per diluted share in the prior-year period. As our results for 2019 and guidance for 2020 indicate, we are facing ongoing challenges, including heightened bankruptcy and store closure activity from retailers as they struggle to succeed in an increasingly competitive and fast-changing industry. Revenues and occupancy were significantly impacted by retailer bankruptcies, store closings, including the liquidation or reorganization of several major retailers, and rent reductions for tenants with high occupancy costs. Average leasing spreads for comparable space under 10,000 square feet in our stabilized malls were down 8.6% for leases signed in 2019, including a 11.5% decrease in renewal lease rates and a 9.1% increase for new leases. Average annual base rents for our same-center malls also decreased to$31.85 per square foot as ofDecember 31, 2019 compared to$32.64 per square foot for the prior-year period. In 2019 we continued to execute our strategy to transform our properties into suburban town centers, primarily through the re-tenanting of former anchor locations as well as diversification of in-line tenancy. We also significantly extended our debt maturity schedule by replacing our unsecured credit facilities and unsecured term loans with a new$1.185 billion secured facility with 16 banks that closed inJanuary 2019 , which provides us the flexibility to execute on our operational and redevelopment goals. See Liquidity and Capital Resources section for more information. While the industry and our Company continue to face challenges, some of which may not be in our control, we believe that the strategies in place to redevelop our Properties and diversify our tenant mix will contribute to stabilization of our portfolio and revenues in future years. Same-center NOI and FFO are non-GAAP measures. For a description of same-center NOI, a reconciliation from net income to same-center NOI, and an explanation of why we believe this is a useful performance measure, see Non-GAAP Measure -Same-center Net Operating Income in "Results of Operations." For a description of FFO and FFO, as adjusted, a reconciliation from net income attributable to common shareholders to FFO allocable to Operating 50 -------------------------------------------------------------------------------- Partnership common unitholders, and an explanation of why we believe this is a useful performance measure, see Non-GAAP Measure - Funds from Operations within the "Liquidity and Capital Resources" section.
Results of Operations
Comparison of the Year Ended
Properties that were in operation for the entire year during both 2019 and 2018 are referred to as the "2019Comparable Properties ." SinceJanuary 1, 2018 , we have opened two self-storage facilities and one community center as follows: Property Location Date Opened
Cookeville, TN November
2018
Mid
(1) A 50/50 joint venture that is accounted for using the equity method of
accounting and is included in equity in earnings of unconsolidated affiliates
in the accompanying consolidated statements of operations.
Revenues
Total for the Year Comparable
Ended December 31, Properties
2019 2018 Change Core Non-core New Dispositions Change
Rental revenues $ 736,878 $ 829,113 $ (92,235 ) $ (52,041 ) $ (1,817 ) $ - $ (38,377 ) $ (92,235 )
Management, development and 9,350 10,542 (1,192 ) (1,192 ) - - - (1,192 )
leasing fees
Other 22,468 18,902 3,566 3,743 50 - (227 ) 3,566
Total revenues $ 768,696 $ 858,557 $ (89,861 ) $ (49,490 ) $ (1,767 ) $ - $ (38,604 ) $ (89,861 ) Rental revenues from the
The decrease in management, development and leasing fees of$1.2 million was primarily due to terminated contracts for properties that we were managing for third-party owners. The increase in other revenues of$3.6 million was primarily due to one-time payments from third parties to waive certain restrictions related to prior transactions. Operating Expenses Total for the Year Comparable Ended December 31, Properties 2019 2018 Change Core Non-core New Dispositions Change Property operating 108,905$ 122,017 $ (13,112 ) $ (5,783 ) $ (87 ) $ -$ (7,242 ) $ (13,112 ) Real estate taxes 75,465 82,291 (6,826 ) (4,301 ) (144 ) - (2,381 ) (6,826 ) Maintenance and repairs 46,282 48,304 (2,022 ) 1,222 (206 ) - (3,038 ) (2,022 )
Property operating expenses 230,652 252,612 (21,960 )
(8,862 ) (437 ) - (12,661 ) (21,960 )
Depreciation and amortization 257,746 285,401 (27,655 ) (12,252 ) (2,705 ) -
(12,698 ) (27,655 )
General and administrative 64,181 61,506 2,675
2,675 - - - 2,675 Loss on impairment 239,521 174,529 64,992 152,810 25,221 - (113,039 ) 64,992 Litigation settlement 61,754 - 61,754 61,754 - - - 61,754 Other 91 787 (696 ) (696 ) - - - (696 ) Total operating expenses$ 853,945 $ 774,835 $ 79,110 $ 195,429 $ 22,079 $ -$ (138,398 ) $ 79,110 Property operating expenses at theComparable Properties decreased primarily due to a change in the classification of bad debt expense as a result of the adoption of ASC 842 effectiveJanuary 1, 2019 . Bad debt expense of$4.8 million was included in property operating expenses for the year endedDecember 31, 2018 ; however, beginningJanuary 1, 2019 , rental revenues that are estimated to be uncollectable are reflected as a decrease in rental revenues. For the year endedDecember 31, 2019 , we recognized$3.5 million as a reduction to rental revenues for amounts that are 51
-------------------------------------------------------------------------------- estimated to be uncollectable, substantially all of which was related to theComparable Properties . The remaining decrease in property operating expenses of theComparable Properties was primarily due to maintenance and repairs, marketing and payroll expenses. Real estate tax expense declined as a number of theComparable Properties experienced reductions in real estate taxes in their respective markets. The$15.0 million decrease in depreciation and amortization expense of theComparable Properties is primarily due to write-offs of tenant improvements and intangible lease assets related to store closings in the prior year period, as well as a lower basis in depreciable assets resulting from impairments recorded in 2018 and 2019.
General and administrative expenses increased
During 2019, we recognized$239.5 million of loss on impairment of real estate to write down the book value of six malls and one community center. During 2018, we recognized$174.5 million of loss on impairment of real estate to write down the book value of five malls and undeveloped land. See Note 16 to the consolidated financial statements for additional information on these impairments.
During 2019, we recognized
Other Income and Expenses
Interest and other income increased
Interest expense decreased$13.8 million in 2019 compared to the prior-year period. The decrease was primarily due to a$13.5 million decrease in property-level interest expense, including default interest expense, due to dispositions of encumbered properties during 2019 and a paydown inMay 2019 of a portion of the loan that is secured by The Outlet Shoppes atLaredo . This decrease was partially offset by an increase of$3.2 million in corporate-level interest expense due to higher variable rates on our corporate-level debt as compared to the prior-year, partially related to the higher interest rate on our new secured credit facility as compared with the previous credit facility, as well as increases in LIBOR. During 2019, we recorded$71.7 million of gain on extinguishment of debt related to two malls. We transferredAcadiana Mall to the lender in satisfaction of the non-recourse debt secured by the property. We sold Cary Towne Center and used the net proceeds from the sale to satisfy a portion of the non-recourse loan that secured the property. The remaining principal balance was forgiven. During 2019, we recorded$67.2 million of gain on deconsolidation related to The Outlet Shoppes at El Paso and The Outlet Shoppes at Atlanta. See Note 7 for more information.
The income tax provision of
Equity in earnings of unconsolidated affiliates decreased by$9.7 million during 2019 compared to the prior-year period. The decrease was primarily due to an increase in depreciation and amortization expense related to the retirement of certain real estate assets and decreases in rental revenues at several malls primarily due to store closures and rent concessions for tenants with high occupancy cost levels, including tenants in bankruptcy. In 2019, we recognized$16.3 million of gain on sales of real estate assets primarily related to the sale of two centers, a hotel, an office building and seven outparcels. In 2018, we recognized a$19.0 million gain on sales of real estate assets, which included$7.5 million for the sale of four operating properties and$11.5 million related to the sale of 12 outparcels. 52 --------------------------------------------------------------------------------
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations in our annual report on Form 10-K for the year ended
Non-GAAP Measure
Same-center Net Operating Income
NOI is a supplemental non-GAAP measure of the operating performance of our shopping centers and other Properties. We define NOI as property operating revenues (rental revenues, tenant reimbursements and other income) less property operating expenses (property operating, real estate taxes and maintenance and repairs). We compute NOI based on theOperating Partnership's pro rata share of both consolidated and unconsolidated Properties. We believe that presenting NOI and same-center NOI (described below) based on ourOperating Partnership's pro rata share of both consolidated and unconsolidated Properties is useful since we conduct substantially all of our business through ourOperating Partnership and, therefore, it reflects the performance of the Properties in absolute terms regardless of the ratio of ownership interests of our common shareholders and the noncontrolling interest in theOperating Partnership . Our definition of NOI may be different than that used by other companies, and accordingly, our calculation of NOI may not be comparable to that of other companies. Since NOI includes only those revenues and expenses related to the operations of our shopping center Properties, we believe that same-center NOI provides a measure that reflects trends in occupancy rates, rental rates, sales at the malls and operating costs and the impact of those trends on our results of operations. Our calculation of same-center NOI excludes lease termination income, straight-line rent adjustments, and amortization of above and below market lease intangibles in order to enhance the comparability of results from one period to another. We include a Property in our same-center pool when we have owned all or a portion of the Property sinceJanuary 1 of the preceding calendar year and it has been in operation for both the entire preceding calendar year endedDecember 31, 2018 and the current year endedDecember 31, 2019 .New Properties are excluded from same-center NOI, until they meet these criteria. Properties excluded from the same-center pool, which would otherwise meet these criteria, are Properties that are being repositioned or Properties where we are considering alternatives for repositioning, where we intend to renegotiate the terms of the debt secured by the related Property or return the Property to the lender.Greenbrier Mall andHickory Point Mall were classified as Lender Malls as ofDecember 31, 2019 . 53
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Due to the exclusions noted above, same-center NOI should only be used as a
supplemental measure of our performance and not as an alternative to GAAP
operating income (loss) or net income (loss). A reconciliation of our
same-center NOI to net income (loss) for the years ended
Year Ended December 31,
2019 2018
Net loss $ (131,720 ) $ (99,229 )
Adjustments: (1)
Depreciation and amortization 298,989 318,658
Interest expense 227,151 237,892
Abandoned projects expense 91 787
Gain on sales of real estate assets (16,901 ) (20,608 )
Gain on extinguishment of debt (71,722 ) -
Gain on investments/deconsolidation (67,242 ) -
Loss on impairment 239,521 174,529
Litigation settlement 61,754 -
Income tax provision (benefit) 3,153 (1,551 )
Lease termination fees (3,794 ) (10,105 )
Straight-line rent and above- and below-market rent (6,781 ) 3,387
Net (income) loss attributable to noncontrolling interests (739 ) 973
in other consolidated subsidiaries
General and administrative expenses 64,181 61,506
Management fees and non-property level revenues (12,203 ) (14,143 ) Operating Partnership's share of property NOI 583,738 652,096 Non-comparable NOI (21,648 ) (51,131 ) Total same-center NOI$ 562,090 $ 600,965
(1) Adjustments are based on our
share, including our share of unconsolidated affiliates and excluding
noncontrolling interests' share of consolidated Properties.
Same-center NOI decreased$38.9 million for the year endedDecember 31, 2019 compared to 2018. The NOI decline of 6.5% for 2019 was driven by a decline in total revenue of$48.8 million offset by a$9.9 million decline in total operating expenses. Rental revenues declined$58.0 million during 2019 primarily due to the impact of store closures and rent concessions for tenants with high occupancy cost levels, including tenants that declared bankruptcy. The decrease in rental revenues includes the impact of$4.8 million of uncollectable revenues, which was formerly categorized as bad debt expense included in property operating expense in the prior-year period. The$9.9 million decrease in total operating expenses was primarily driven by bad debt expense of$5.0 million in the prior-year period and a decrease in real estate tax expense of$4.2 million . Operational Review The shopping center business is, to some extent, seasonal in nature with tenants typically achieving the highest levels of sales during the fourth quarter due to the holiday season, which generally results in higher percentage rents in the fourth quarter. Additionally, the malls earn most of their 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 derive the majority of our revenues from the
Year Ended December 31,
2019 2018
Malls 91.0 % 91.2 %
Other Properties 9.0 % 8.8 %
54
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Mall Store Sales
Mall store sales include reporting mall tenants of 10,000 square feet or less
for Stabilized Malls and exclude license agreements, which are retail contracts
that are temporary or short-term in nature and generally last more than three
months but less than twelve months. The following is a comparison of our
same-center sales per square foot for Mall tenants of 10,000 square feet or
less:
Year Ended December 31,
2019 2018 % Change
Stabilized mall same-center sales per square foot
379 2 %
Stabilized mall sales per square foot $ 386 $ 377 2 %
Occupancy
Our portfolio occupancy is summarized in the following table (1):
As of December 31,
2019 2018
Total portfolio 91.2 % 93.1 %
Malls:
Total Mall portfolio 89.8 % 91.8 %
Same-center Malls 89.8 % 91.9 %
Stabilized Malls 90.0 % 92.1 %
Non-stabilized Malls (2) 83.8 % 76.7 %
Other Properties: 96.0 % 97.4 %
Associated centers 95.6 % 97.4 %
Community centers 96.0 % 97.2 %
(1) As noted in Item 2. Properties , excluded Properties are not included in
occupancy metrics.
(2) Represents occupancy for The Outlet Shoppes at
and
Bankruptcy-related store closures impacted 2019 occupancy by approximately 398 basis points or 702,000 square feet.
Leasing
The following is a summary of the total square feet of leases signed in the year
ended
Year Ended December 31,
2019 2018
Operating portfolio:
New leases 1,054,336 1,131,057
Renewal leases 2,502,001 2,627,560
Development portfolio:
New leases 306,688 441,594
Total leased 3,863,025 4,200,211
55
-------------------------------------------------------------------------------- Average annual base rents per square foot are computed based on contractual rents in effect as ofDecember 31, 2019 and 2018, including the impact of any rent concessions. Average annual base rents per square foot for comparable small shop space of less than 10,000 square feet were as follows for each Property type (1): December 31, 2019 2018 Malls: Same-center Stabilized Malls$ 31.85 $ 32.64 Stabilized Malls 31.95 32.59 Non-stabilized Malls (2) 24.25 25.02 Other Properties: 15.51 15.29 Associated centers 13.84 13.82 Community centers 17.04 16.72 Office buildings 19.04 17.22
(1) As noted in Item 2. Properties , excluded Properties are not included in
base rent. Average base rents for associated centers, community centers and
office buildings include all leased space, regardless of size.
(2) Represents average annual base rents for The Outlet Shoppes at
Results from new and renewal leasing of comparable small shop space of less than 10,000 square feet during the year endedDecember 31, 2019 for spaces that were previously occupied, based on the contractual terms of the related leases inclusive of the impact of any rent concessions, are as follows: New Initial New Average Square Prior Gross Gross Rent % Change Gross Rent % Change Property Type Feet Rent PSF PSF Initial PSF (2) Average All Property Types (1) 2,075,440$ 36.75 $ 33.30 (9.4 )%$ 33.81 (8.0 )% Stabilized Malls 1,922,548 37.45 33.76 (9.9 )% 34.25 (8.6 )% New leases 295,391 35.02 36.28 3.6 % 38.21 9.1 % Renewal leases 1,627,157 37.90 33.30 (12.1 )% 33.53 (11.5 )%
(1) Includes Stabilized Malls, associated centers, community centers and other.
(2) Average gross rent does not incorporate allowable future increases for
recoverable CAM expenses.
New and renewal leasing activity of comparable small shop space of less than 10,000 square feet for the year endedDecember 31, 2019 based on commencement date is as follows: Number Term Initial Average Expiring of Square (in Rent Rent Rent Initial Rent Average Rent Leases Feet years) PSF PSF PSF Spread Spread Commencement 2019: New 106 222,063 7.22$ 42.86 $ 45.21 $ 44.07 $ (1.21 ) (2.7 )%$ 1.14 2.6 % Renewal 539 1,656,150 2.72 31.43 31.65 35.98 (4.55 ) (12.6 )% (4.33 ) (12.0 )% Commencement 2019 Total 645 1,878,213 3.46 32.78 33.26 36.94 (4.16 ) (11.3 )% (3.68 ) (10.0 )% Commencement 2020: New 48 173,023 7.55 28.88 30.41 24.92 3.96 15.9 % 5.49 22.0 % Renewal 217 667,644 2.73 30.06 30.37 34.50 (4.44 ) (12.9 )% (4.13 ) (12.0 )% Commencement 2020 Total 265 840,667 3.60 29.81 30.38 32.53 (2.72 ) (8.4 )% (2.15 ) (6.6 )% Total 2019/2020 910 2,718,880 3.50$ 31.86 $ 32.37 $ 35.57 $ (3.71 ) (10.4 )%$ (3.20 ) (9.0 )% We are working to diversify and stabilize revenues. In recent months, we have opened 15 new tenants in former anchor locations, adding more productive, higher traffic-driving uses. Also, we have another dozen committed replacements either under construction or with planning underway. We are proactively reducing our exposure to apparel retailers with more than 76% of 2019 mall leasing completed with non-apparel tenants. 56
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Liquidity and Capital Resources
InJanuary 2019 , we entered into a new$1.185 billion senior secured credit facility, which included a fully-funded$500 million term loan and a revolving line of credit with a borrowing capacity of$685 million . The facility replaced all of the Company's prior unsecured bank facilities, which included three unsecured term loans with an aggregate balance of$695 million and three unsecured revolving lines of credit with an aggregate capacity of$1.1 billion . At closing, we utilized the line of credit to reduce the principal balance of the unsecured term loans from$695 million to$500 million . The facility matures inJuly 2023 and bears interest at a variable rate of LIBOR plus 2.25%.The Operating Partnership is required to pay an annual facility fee on the line of credit balance, to be paid quarterly, which ranges from 0.25% to 0.35%, based on the unused capacity of the line of credit. The principal balance on the term loan will be reduced by$35 million per year in quarterly installments. The senior secured credit facility is secured by a portfolio of theCompany's Properties consisting of seventeen malls and three associated centers. The facility contains customary provisions upon which the Properties may be released from the collateral securing the Facility. The senior secured credit facility contains, among other restrictions, various restrictive covenants that are defined and computed on the same basis as the covenants required under the Notes. Such covenants relate to theOperating Partnership's and the Company's aggregate unsecured debt, aggregate secured debt, maintenance of unencumbered assets and debt service coverage. The Credit Agreement for the senior secured credit facility contains default and cross-default provisions customary for transactions of this nature (with applicable customary grace periods). Any default (i) in the payment of any recourse indebtedness greater than or equal to$50.0 million (for the Company's ownership share), or any non-recourse indebtedness greater than or equal to$150.0 million (for the Company's ownership share) or (ii) that results in the acceleration of the maturity of recourse indebtedness greater than or equal to$50.0 million (for the Company's ownership share), or any non-recourse indebtedness greater than or equal to$150.0 million (for the Company's ownership share) of the Company or theOperating Partnership will constitute an event of default under the Credit Agreement. At all times during the term of the Credit Agreement, there shall be no fewer than tenBorrowing Base Properties (as defined in the Credit Agreement) which have an aggregate occupancy rate of not less than 80% on a quarterly basis. In addition, at all times the Company shall be required to maintain a minimum debt yield of 10% for theBorrowing Base Properties based on the outstanding balance of the facility. The Credit Agreement provides that, upon the occurrence and continuation of an event of default, payment of all amounts outstanding under the facility may be accelerated and the lenders' commitments may be terminated. The Company is a limited guarantor of theOperating Partnership's obligations under the terms of the new Credit Agreement. During 2019, we reduced our total pro rata share of debt by$409.0 million excluding debt issuance costs. In addition to scheduled amortization, we sold Cary Towne Center and transferredAcadiana Mall to the lender, which resulted in a reduction of$163.5 million . We closed on$185.7 million in gross asset sales, which consisted of$137.1 million related to the sale of properties and outparcels and$48.6 million related to the sale of a portion of our interests in two joint ventures. In conjunction with the sale of our interests in these joint ventures, our partner assumed$30.0 million of related debt. Excess proceeds from the sales were used to retire debt. See Note 6 and Note 7 for additional information on dispositions. In 2019, we entered into four unconsolidated construction loans totaling$38.3 million . We refinanced the loan secured by one of our consolidated malls to increase the principal balance to$50.0 million and used the net proceeds from the new loan to retire the existing$41.0 million loan. Also, we exercised an option to extend the loan secured by a consolidated mall toMay 2021 . In conjunction with the extension, a payment of$10.8 million was made to reduce the outstanding balance of the loan to$43.0 million , of which our joint venture partner funded its 35% share. See Note 7 and Note 8 to the consolidated financial statements for more information on 2019 loan activity. InApril 2019 , we entered into a settlement agreement and release with respect to a class action lawsuit. Under the terms of the settlement agreement, we did not pay any dividends to holders of our common stock payable in the third and fourth quarters of 2019. Unrelated to the settlement agreement, the board of directors decided to suspend dividends in 2020, subject to quarterly review. See
Note 15 to the consolidated financial statements for more information related to the settlement.
As ofDecember 31, 2019 , we had$310.9 million outstanding on our secured line of credit leaving$374.1 million of availability, after considering outstanding letters of credit of$4.8 million , as well as unrestricted cash and cash equivalents of$32.8 million . Our total pro rata share of debt atDecember 31, 2019 was$4.3 billion . Our consolidated unencumbered properties generated approximately 27.4% of total consolidated NOI for the year endedDecember 31, 2019 (excluding dispositions and Excluded Malls). We derive the majority of our revenues from leases with retail tenants, which have historically been the primary source for funding short-term liquidity and capital needs such as operating expenses, debt service, tenant construction allowances, recurring capital expenditures, dividends and distributions. We believe that the cash flows generated from our operations, combined with our debt and equity sources, including but not limited to, the availability under our secured line 57
-------------------------------------------------------------------------------- of credit, the suspension of dividends on our preferred stock and common stock and proceeds from dispositions will, for the foreseeable future, provide adequate liquidity to meet our cash needs. In addition to these factors, subject to market conditions, we have options available to us to generate additional liquidity, including but not limited to, debt and equity offerings, joint venture investments, issuances of noncontrolling interests in ourOperating Partnership , and decreasing expenditures related to tenant construction allowances and other capital expenditures. We also generate revenues from sales of peripheral land at our properties and from sales of real estate assets when it is determined that we can realize an optimal value for the assets.
Cash Flows - Operating, Investing and Financing Activities
There was$59.1 million of cash, cash equivalents and restricted cash as ofDecember 31, 2019 , an increase of$1.6 million fromDecember 31, 2018 . Of this amount,$32.8 million was unrestricted cash as ofDecember 31, 2019 . Our net cash flows are summarized as follows (in thousands): Year Ended December 31, 2019 2018 Change Net cash provided by operating activities$ 273,408 $ 377,242 $ (103,834 ) Net cash provided by (used in) investing activities 24,586 (27,469 ) 52,055 Net cash used in financing activities (296,448 ) (360,433 ) 63,985 Net cash flows$ 1,546 $ (10,660 ) $ 12,206
Cash Provided by Operating Activities
• Cash provided by operating activities during 2019 decreased
million to
in operating cash flows was primarily due to a decline in rental revenues
related to store closures and rent concessions for tenants with high
occupancy cost levels, including tenants in bankruptcy, properties thatwere disposed of and payment of amounts under the class action litigation
settlement.
Cash Provided by (Used in) Investing Activities
• Cash provided by investing activities during 2019 was
representing a
investing activities of
inflow for 2019 was primarily related to a greater amount of proceeds
from sales in the current year combined with lower cash paid for capital
expenditures as we continue to focus on controlling such expenditures.
These increases were partially offset by a lower amount of distributions
from unconsolidated affiliates in 2019 as we received a distribution from
an unconsolidated affiliate in 2018 related to excess proceeds from the
refinancing of a mortgage loan.
Cash Used in Financing Activities
• Cash flows used in financing activities during 2019 was
compared to
common and preferred stock dividend resulted in savings in dividends and
distributions paid to common and preferred shareholders and the
noncontrolling interest holders in the Operating Partnership . This was
partially offset by the additional principal payments on debt and thepayment of deferred financing costs, which were mostly related to our new
secured credit facility.
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations in our annual report on Form 10-K for the year ended
Debt of the Company
CBL has no indebtedness. Either the
CBL is a limited guarantor of the Notes, as described in Note 8 to the consolidated financial statements, for losses suffered solely by reason of fraud or willful misrepresentation by theOperating Partnership or its affiliates. We also provide a similar limited guarantee of theOperating Partnership's obligations with respect to our secured credit facility as ofDecember 31, 2019 . 58 --------------------------------------------------------------------------------
Debt of the
The following tables summarize debt based on our pro rata ownership share,
including our pro rata share of unconsolidated affiliates and excluding
noncontrolling investors' share of consolidated Properties, because we believe
this provides investors and lenders a clearer understanding of our total debt
obligations and liquidity (in thousands):
Weighted-
Average
Noncontrolling Unconsolidated Interest
December 31, 2019: Consolidated Interests Affiliates Total Rate (1)
Fixed-rate debt:
Non-recourse loans on operating
Properties (2) $ 1,330,561 $ (30,658 ) $ 623,193 $ 1,923,096 4.88 %
Recourse loans on operating Properties
(3) - - 10,050 10,050 3.74 %
Senior unsecured notes due 2023 (4) 447,894 - - 447,894 5.25 %
Senior unsecured notes due 2024 (5) 299,960 - - 299,960 4.60 %
Senior unsecured notes due 2026 (6) 617,473 - - 617,473 5.95 %
Total fixed-rate debt 2,695,888 (30,658 ) 633,243 3,298,473 5.10 %
Variable-rate debt:
Recourse loans on operating Properties 41,950 - 69,046 110,996 4.13 %
Construction loans 29,400 - 35,362 64,762 4.45 %
Secured line of credit (7) 310,925 - - 310,925 3.94 %
Secured term loan (7) 465,000 - - 465,000 3.94 %
Total variable-rate debt 847,275 - 104,408 951,683 4.00 %
Total fixed-rate and variable-rate
debt 3,543,163 (30,658 ) 737,651 4,250,156 4.86 %
Unamortized deferred financing costs (16,148 ) 318 (2,851 ) (18,681 )
Total mortgage and other indebtedness,
net $ 3,527,015 $ (30,340 ) $ 734,800 $ 4,231,475
Weighted-
Average
Noncontrolling Unconsolidated Interest
December 31, 2018: Consolidated Interests Affiliates Total Rate (1)
Fixed-rate debt:
Non-recourse loans on operating
Properties (2) $ 1,783,097 $ (94,361 ) $ 540,068 $ 2,228,804 5.01 %
Recourse loans on operating Properties
(3) - - 10,605 10,605 3.74 %
Senior unsecured notes due 2023 (4) 447,423 - - 447,423 5.25 %
Senior unsecured notes due 2024 (5) 299,953 - - 299,953 4.60 %
Senior unsecured notes due 2026 (6) 616,635 - - 616,635 5.95 %
Total fixed-rate debt 3,147,108 (94,361 ) 550,673 3,603,420 5.16 %
Variable-rate debt:
Recourse loans on operating Properties 68,607 - 96,012 164,619 4.91 %
Construction loans 8,172 - 3,892 12,064 5.20 %
Unsecured lines of credit (7) 183,972 - - 183,972 3.90 %
Unsecured term loans (7) 695,000 - - 695,000 4.21 %
Total variable-rate debt 955,751 - 99,904 1,055,655 4.28 %
Total fixed-rate and variable-rate
debt 4,102,859 (94,361 ) 650,577 4,659,075 4.96 %
Unamortized deferred financing costs (15,963 ) 804 (2,687 ) (17,846 )
Liabilities related to assets held for
sale (8) (43,716 ) - - (43,716 )
Total mortgage and other indebtedness,
net $ 4,043,180 $ (93,557 ) $ 647,890 $ 4,597,513 (1) Weighted-average interest rate includes the effect of debt premiums and
discounts, but excludes amortization of deferred financing costs.
(2) An unconsolidated affiliate has an interest rate swap on a notional amount of
to a variable-rate loan on
interest rate on this loan to a fixed-rate of 3.22%.
(3) An unconsolidated affiliate has an interest rate swap on a notional amount of
to a variable-rate loan on Ambassador Town Center - Infrastructure
Improvements to effectively fix the interest rate on this loan to a
fixed-rate of 3.74%.
(4) The balance is net of an unamortized discount of
(5) The balance is net of an unamortized discount of
(6) The balance is net of an unamortized discount of
(7) We replaced our unsecured lines of credit and unsecured terms loans in
(8) Represents a
that was classified on the consolidated balance sheet as liabilities related
to assets held for sale.
59
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The following table presents our pro rata share of consolidated and
unconsolidated debt as of
Balance
Consolidated Properties :
Burnsville Center $ 64,867
Parkway Place 33,290 (1)
Valley View Mall 51,514 (1)
149,671
Unconsolidated Properties :
The Outlet Shoppes at Atlanta - Phase II 4,443
The Outlet Shoppes at the Bluegrass - Phase II 9,242
17,594 (2)
41,329
Total 2020 Maturities at pro rata share $ 191,000 (1) Subsequent to
facility to retire this loan. See Note 20 to the
consolidated financial statements for more information.
(2) This loan has one two-year extension option.
In addition,$92.2 million of our pro rata share of consolidated and unconsolidated debt is related to two operating property loans,Greenbrier Mall andHickory Point Mall , which matured in 2019. We are in discussions with the lenders regarding both loans.
The weighted-average remaining term of our total share of consolidated and
unconsolidated debt was 3.9 years and 4.0 years at
As of
See Note 7 and Note 8 to the consolidated financial statements for
additional information concerning the amount and terms of our outstanding
indebtedness as of
Credit Ratings
We had the following credit ratings as of
Rating Agency Rating (1) Outlook
Fitch CCC+ Negative
Moody's B2 Negative
S&P B Negative
(1) Based on the
Senior Unsecured Notes
The table below presents the Company's compliance with key covenant ratios, as
defined, of the Notes as of
Debt Covenant Compliance Ratios (1) Required Actual Total debt to total assets < 60% 51 % Secured debt to total assets < 40% (2) 32 % Total unencumbered assets to unsecured debt > 150% 172 %
Consolidated income available for debt service to
annual debt service charge > 1.5x 2.3 x
(1) The debt covenant compliance ratios for the secured line of credit, the
secured term loan and the senior unsecured notes are defined and computed on
the same basis.
(2) Secured debt to total assets is required to be less than 40% for the 2026
Notes. Secured debt to total assets must be less than 45% for the 2023 Notes
and the 2024 Notes until
reduced to 40%.
60
-------------------------------------------------------------------------------- Subject to the need to maintain compliance with all applicable debt covenants, theOperating Partnership , or any affiliate of theOperating Partnership , may at any time, or from time to time, repurchase outstanding Notes in the open market or otherwise. Such Notes may, at the option of theOperating Partnership or the relevant affiliate of theOperating Partnership , be held, resold or surrendered to the Trustee for cancellation.
Unencumbered Consolidated Portfolio Statistics
% of Consolidated
Sales Per Square Unencumbered
Foot for the Year NOI for
Ended (1) (2) Occupancy (2) the Year Ended
12/31/19 12/31/18 12/31/19 12/31/18 12/31/19 (3 )
Unencumbered consolidated
Properties:
Tier 1 Malls $ 382 $ 368 88.6 % 88.4 % 16.3 % (4 )
Tier 2 Malls 330 329 84.9 % 87.5 % 32.4 %
Tier 3 Malls 278 280 86.9 % 92.2 % 30.5 %
Total Malls 312 311 86.4 % 90.0 % 79.2 %
Total Associated Centers N/A N/A 96.0 % 97.2 % 15.6 %
Total Community Centers N/A N/A 96.8 % 99.0 % 5.0 %
Total Office Buildings & Other N/A N/A 100.0 % 93.6 % 0.2 %
Total Unencumbered Consolidated
Portfolio $ 312 $ 311 90.1 % 92.8 % 100.0 %
(1) Represents same-center sales per square foot for mall tenants 10,000 square
feet or less for stabilized malls.
(2) Operating metrics are included for unencumbered consolidated operating
properties and do not include sales or occupancy of unencumbered parcels.
(3) Our consolidated unencumbered properties generated approximately 27.4% of
total consolidated NOI of
dispositions) for the year ended
(4) NOI is derived from unencumbered Tier One Malls, as well as unencumbered
portions of Tier One Malls that are otherwise secured by a loan. The
unencumbered portions include outparcels, Anchors and former Anchors that
have been redeveloped.
Mortgages on
2019 Loan Activity
In 2019, we entered into four unconsolidated construction loans totaling$38.3 million . We refinanced the loan secured by one of our consolidated malls to increase the principal balance to$50.0 million and used the net proceeds from the new loan to retire the existing$41.0 million loan. We repaid two fixed-rate consolidated loans totaling$35.5 million . In conjunction with our deconsolidation of two properties, our joint venture partner assumed$30.0 million of related debt. Lastly, we recognized a$71.7 million gain on extinguishment of debt related to two consolidated malls. See Note 7 and
Note 8 to the consolidated financial statements for more information on 2019 loan activity.
Equity At-The-Market Equity Program
We have not sold any shares under the ATM program since 2013. See Note 9
to
the consolidated financial statements for a description of our ATM program.
Preferred Stock / Preferred Units
Our authorized preferred stock consists of 15,000,000 shares at$0.01 par value per share.The Operating Partnership issues an equivalent number of preferred units to CBL in exchange for the contribution of the proceeds from CBL to theOperating Partnership when CBL issues preferred stock. The preferred units generally have the same terms and economic characteristics as the corresponding series of preferred stock. See Note 9 to the consolidated financial statements for a description of our cumulative redeemable preferred stock. 61 -------------------------------------------------------------------------------- InDecember 2019 , we announced the suspension of all future dividends on our 7.375% Series D Cumulative Redeemable Preferred Stock and 6.625% Series E Cumulative Redeemable Preferred Stock, subject to review each quarter by our Board of Directors. Unpaid dividends on the preferred stock will accrue without interest. Dividends - CBL CBL paid a first quarter 2019 cash dividend on its common stock of$0.075 per share onApril 16th . Under the terms of the settlement agreement in a class action lawsuit discussed in Item 3 of this report, we did not pay any dividends to holders of our common stock payable in the third and fourth quarters of 2019. As noted above, we suspended all future dividends on our common stock and preferred stock, as well as distributions to all noncontrolling interest investors in ourOperating Partnership (as noted below). No dividends may be paid on shares of our common stock unless (i) all accrued but unpaid dividends on our preferred stock, and any current dividend then due, have been paid in cash, or a cash sum sufficient for such payment has been set apart for payment and (ii) the SCU Distribution Shortfall created by our related suspension of distributions to noncontrolling interest investors in ourOperating Partnership has likewise been remedied through the payment of distributions sufficient to satisfy such shortfall for all prior periods and the then-current period (thereby allowing the resumption of distributions on the common units in theOperating Partnership that are held by the CBL, which fund our common stock dividends). We will review taxable income on a regular basis and take measures, if necessary, to ensure that we meet the minimum distribution requirements to maintain our status as a REIT. During the year endedDecember 31, 2019 , we paid dividends of$59.6 million to holders of our common stock and our preferred stock, as well as$18.8 million in distributions to the noncontrolling interest investors in ourOperating Partnership and other consolidated subsidiaries.
Distributions -
The Operating Partnership paid first, second and third quarter 2019 cash distributions on its redeemable common units of$0.7322 per share onApril 16th ,July 16th andOctober 16th . The Operating partnership paid first quarter cash distributions on its common units of$0.075 per share onApril 16th .The Operating Partnership has suspended all future distributions until further notice. As a publicly traded company and, as a subsidiary of a publicly traded company, we have access to capital through both the public equity and debt markets. We currently have a shelf registration statement on file with theSEC authorizing us to publicly issue senior and/or subordinated debt securities, shares of preferred stock (or depositary shares representing fractional interests therein), shares of common stock, warrants or rights to purchase any of the foregoing securities, and units consisting of two or more of these classes or series of securities and limited guarantees of debt securities issued by theOperating Partnership . This shelf registration statement also authorized theOperating Partnership to publicly issue unsubordinated debt securities. This shelf registration statement was due to expire inJuly 2021 . However, the Company no longer qualifies as a well-known seasoned issuer underSEC rules, and we therefore are unable to use this shelf registration.
Our common and preferred stock outstanding at
Shares Stock
Outstanding Price (1)
Common stock and operating partnership units 200,189 $ 1.05
7.375% Series D Cumulative Redeemable Preferred Stock 1,815
250.00
6.625% Series E Cumulative Redeemable Preferred Stock 690 250.00
(1) Stock price for common stock and
closing price of our common stock on
the preferred stock represent the liquidation preference of each respective
series of preferred stock.
62
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Contractual Obligations
The following table summarizes our significant contractual obligations as of
Payments Due By Period
Less Than 1 1-3 3-5 More Than 5
Total Year Years Years Years
Long-term debt:
Total consolidated debt service (1) $ 4,218,231 $ 484,522 $ 1,281,893 $ 1,622,653 $ 829,163
Noncontrolling interests' share in
other consolidated
subsidiaries (38,439 ) (2,049 ) (5,759 ) (3,702 ) (26,929 )
Our share of unconsolidated
affiliates debt service (2) 871,233 85,125 239,011 267,514 279,583
Our share of total debt service
obligations 5,051,025 567,598 1,515,145 1,886,465 1,081,817
Operating leases: (3)
Ground leases on consolidated
Properties 14,047 558 923 547 12,019
Purchase obligations: (4)
Construction contracts on
consolidated Properties 31,502 31,502 - - -
Our share of construction contracts
on
unconsolidated Properties 8,097 8,097 - - -
Our share of total purchase
obligations 39,599 39,599 - - -
Other Contractual Obligations: (5)
Master Services Agreements 104,869 38,134 66,735 - -
Total contractual obligations
(1) Represents principal and interest payments due under the terms of mortgage
and other indebtedness, net and includes
service on one operating Property, one construction loan, the secured line of
credit and the secured term loan. The secured line of credit does not require
scheduled principal payments. The future interest payments are projected
based on the interest rates that were in effect at
See Note 8 to the consolidated financial statements for additional
information regarding the terms of long-term debt. The total consolidated
debt service includes two loans, with an aggregate principal balance of
Mall, which were in default. The Company is in discussion with the lenders.
(2) Includes
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 2021 to 2089 and generally provide for renewal options.
(4) Represents the remaining balance to be incurred under construction contracts
that had been entered into as of
The contracts are primarily for development of Properties.
(5) Represents the remainder of a five year agreement for maintenance, security,
and janitorial services at our Properties. We have the right to cancel the
contract after
Capital Expenditures
Deferred maintenance expenditures are generally billed to tenants as CAM expense, and most are recovered over a 5 to 15-year period. Renovation expenditures are primarily for remodeling and upgrades of Malls, of which a portion is recovered from tenants over a 5 to 15-year period. We recover these costs through fixed amounts with annual increases or pro rata cost reimbursements based on the tenant's occupied space.
63
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The following table, which excludes expenditures for developments and
expansions, summarizes these capital expenditures, including our share of
unconsolidated affiliates' capital expenditures, for the year ended
Year Ended December 31,
2019 2018
Tenant allowances (1) $ 36,325 $ 40,362
Renovations - 963
Deferred maintenance:
Parking area and parking area lighting 4,223 1,480
Roof repairs and replacements 5,787 4,341
Other capital expenditures 20,722 22,757
Total deferred maintenance 30,732 28,578
Capitalized overhead 2,294 4,792
Capitalized interest 2,661 3,655
Total capital expenditures $ 72,012 $ 78,350 (1) Tenant allowances primarily relate to new leases.
Tenant allowances related to renewal leases were not
material for the periods presented.
Annual capital expenditures budgets are prepared for each of our Properties that are 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 Redevelopments
Properties Opened During the Year Ended
(Dollars in thousands)
CBL's Share of
CBL Total Initial
Ownership Project Total Cost to 2019 Opening Unleveraged
Property Location Interest Square Feet Cost (1) Date (2) Cost Date Yield
Outparcel
Development:
Mid Rivers Mall - St.
CubeSmart Peters, 50 % 93,540 $ 4,122 $ 3,646 $ 973 Jan-19 9.0 %
Self-storage (3) MO
(1) Total Cost is presented net of reimbursements to be received.
(2) Cost to Date does not reflect reimbursements until they are received.
(3) Yield is based on the expected yield upon stabilization.
64
--------------------------------------------------------------------------------
Redevelopments Completed During the Year Ended
(Dollars in thousands)
CBL's Share of
CBL Total Initial
Ownership Project Total Cost to 2019 Opening Unleveraged
Property Location Interest Square Feet Cost (1) Date (2) Cost Date Yield
Mall Redevelopments:
Brookfield Square Sears
Redevelopment - Brookfield, WI 100 % 130,075 $ 25,233 $ 21,946 $ 11,112 Jul/Oct-19 10.1 %
(Whirlyball, Movie Tavern
by Marcus Theaters ) (3)
Dakota Square Mall - Minot, ND 100 % 28,406 2,478 2,293 1,315 Apr-19 14.4 %
HomeGoods
East Towne Mall - Madison, WI 100 % 9,000 2,956 2,487 71 Feb-19 8.0 %
Portillo's
Friendly Center - O2 Greensboro, NC 50 % 27,048 2,285 1,843 436 Apr-19 10.3 %
Fitness
Hanes Mall - Dave & Winston-Salem, NC 100 % 44,922 5,932 4,559 2,413 May-19 11.0 %
Buster's
Laurel Park Place Carsons Livonia, MI 100 % 45,000 3,886 3,643 3,621 Nov-19 5.9 %
Redevelopment - Dunhams
Northgate Mall - Sears
Auto Center Redevelopment Chattanooga, TN 100 % 10,000 1,797 530 17 Feb-19 7.6 %
(Aubrey's/Panda Express )
Parkdale Mall - Macy's
Redevelopment (Dick's Beaumont, TX 100 % 86,136 20,899 16,819 10,815 May-19 6.4 %
Sporting Goods/Five
Below/HomeGoods) (3)
Volusia Mall - Sears Auto
Center Redevelopment Daytona Beach, FL 100 % 23,341 9,795 5,678 264 Apr-19 8.0 %
(Bonefish Grill /Metro
Diner)
Total Redevelopment 403,928 $ 75,261 $ 59,798 $ 30,064
Completed
(1) Total Cost is presented net of reimbursements to be received.
(2) Cost to Date does not reflect reimbursements until they are received.
(3) The return reflected represents a pro forma incremental return as Total Cost
excludes the cost related to the acquisition of the Sears (
Macy's (Parkdale ) buildings in 2017.
65
-------------------------------------------------------------------------------- We completed several Anchor redevelopments during 2019, adding in a variety of non-traditional tenants, as we continue to reinvent our Properties into suburban town centers.
Properties under Development at
(Dollars in thousands)
CBL's Share of
CBL Total Expected Initial
Ownership Project Total Cost to 2019 Opening Unleveraged
Property Location Interest Square Feet Cost (1) Date (2) Cost Date Yield
Outparcel Development :
Fremaux Town Center - Old Slidell, LA 90 % 12,467 $ 1,919 $ 1,454 $ 1,454 Q2 '20 9.2 %
Navy
Hamilton Place - Self Chattanooga, TN 60 % 68,875 5,824 1,119 1,119 Q2 '20 8.7 %
Storage (3)
Mayfaire Town Center - Wilmington, NC 100 % 6,300 2,267 366 366 Q3 '20 10.1 %
First Watch
Parkdale Mall - Self Beaumont, TX 50 % 69,341 4,435 2,504 2,504 Q1 '20 10.2 %
Storage (3)
Pearland Town Center - HCA Pearland, TX 100 % 48,416 14,134 857 857 Q1 '21 9.5 %
Offices
205,399 28,579 6,300 6,300
Mall Redevelopments:
CherryVale Mall - Sears Rockford, IL 100 % 114,118 3,508 2,902 2,902 Q1 '20 8.3 %
Redevelopment (Tilt)
Coastal Grand - DSG/Golf Myrtle Beach, SC 50 % 132,727 6,820 1,066 1,066 Q3 '20 11.6 %
Galaxy & Flip N' Fly
Dakota Square Mall -
Herberger's Redevelopment Minot, ND 100 % 30,096 6,410 4,349 4,206 Q1 '20 7.2 %
(Ross/shops)
Hamilton Place - Sears
Redevelopment (Cheesecake
Factory/Dick's Sporting Chattanooga, TN 100 % 195,166 38,715 25,856 16,249 Q2/Q3 '20 7.8 %
Goods/Dave &
Buster's/Hotel/Office) (4)
Mall del Norte - Forever
21 Redevelopment (Main Laredo, TX 100 % 81,242 10,514 5,659 5,614 Q3 '19/Q2 '20 9.3 %
Event)
553,349 65,967 39,832 30,037
Total Properties Under 758,748 $ 94,546 $ 46,132 $ 36,337
Development
(1) Total Cost is presented net of reimbursements to be received.
(2) Cost to Date does not reflect reimbursements until they are received.
(3) Yield is based on the expected yield upon stabilization.
(4) The return reflected represents a pro forma incremental return as Total Cost
excludes the cost related to the acquisition of the Sears (
building in 2017.
Shadow Development Pipeline at
(Dollars in thousands)
CBL's
Share of
CBL Total Estimated Expected Initial
Ownership Project Total Opening Unleveraged
Property Location Interest Square Feet Cost (1) Date Yield
Mall Development :
Cross Creek Sears
Redevelopment - Dave & Fayetteville, NC 100 % 65,000 -66,000$17,000 - 2021 10.0% - 11.0% Buster's, Restaurants$18,000 (2)(3)
(1) Total Cost is presented net of reimbursements to be received.
(2) Yield is based on expected yield upon stabilization.
(3) The return reflected represents a pro forma incremental return as Total Cost
excludes the cost related to the acquisition of the Sears (Cross Creek )
building in 2017
66
-------------------------------------------------------------------------------- We are continually pursuing new redevelopment opportunities and have projects in various stages of pre-development. Our shadow pipeline consists of projects for Properties on which we have completed initial project analysis and design but which have not commenced construction as ofDecember 31, 2019 . Except for the projects presented above, we did not have any other material capital commitments as ofDecember 31, 2019 .
Off-Balance Sheet Arrangements
Unconsolidated Affiliates
We have ownership interests in 28 unconsolidated affiliates as of December 31, 2019. See Note 7 to the consolidated financial statements for more information. The unconsolidated affiliates are accounted for using the equity method of accounting and are reflected in the accompanying consolidated balance sheets as investments in unconsolidated affiliates.
Guarantees
We may guarantee the debt of a joint venture primarily because it allows the joint venture 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 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 issue a guaranty, the terms of the joint venture agreement typically provide that we may receive indemnification from the joint venture partner or have the ability to increase our ownership interest. See Note 15 to the consolidated financial statements for information related to our guarantees of unconsolidated affiliates' debt as ofDecember 31, 2019 and 2018.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. In preparing our financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenues, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made and if different estimates that are reasonably likely to occur could materially impact the financial statements. Management believes that the following critical accounting policies discussed in this section reflect its more significant estimates and assumptions used in preparation of the consolidated financial statements. We have reviewed these critical accounting estimates and related disclosures with the Audit Committee of our board of directors. See Note 2 of the Notes to Consolidated Financial Statements, included in Item 8 of this Annual Report on Form 10-K for a discussion of our significant accounting policies.
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, CAM,
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 in accordance with underlying lease terms.
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
67
--------------------------------------------------------------------------------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
All acquired real estate assets are accounted for using the acquisition 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, as if vacant, and tenant improvements and (ii) identifiable intangible assets and liabilities 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. Following our adoption of Accounting Standards Update 2017-01, Clarifying the Definition of a Business, on a prospective basis inJanuary 2017 , we expect our future acquisitions will be accounted for as acquisitions of assets in which related transaction costs will be capitalized.
Carrying Value of Long-Lived Assets
We monitor events or changes in circumstances that could indicate the carrying value of a long-lived asset may not be recoverable. When indicators of potential impairment are present that suggest that the carrying amounts of a long-lived asset may not be recoverable, we assess the recoverability of the asset by determining whether the asset's carrying value will be recovered through the estimated undiscounted future cash flows expected from our probability weighted use of the asset and its eventual disposition. In the event that such undiscounted future cash flows do not exceed the carrying value, we adjust the carrying value of the long-lived asset to its estimated fair value and recognize an impairment loss. The estimated fair value is calculated based on the following information, in order of preference, depending upon availability: (Level 1) recently quoted market prices, (Level 2) market prices for comparable properties, or (Level 3) the present value of future cash flows, including estimated salvage value. Certain of our long-lived assets may be carried at more than an amount that could be realized in a current disposition transaction. The Company estimates future operating cash flows, the terminal capitalization rate and the discount rate, among other factors. As these assumptions are subject to economic and market uncertainties, they are difficult to predict and are subject to future events that may alter the assumptions used or management's estimates of future possible outcomes. Therefore, the future cash flows estimated in our impairment analyses may not be achieved. During the year endedDecember 31, 2019 , we recorded a loss on impairment totaling$239.5 million , which primarily consists of six malls and one community center. During 2018, we recorded a loss on impairment totaling$174.5 million , which primarily consists of$158.4 million attributable to five malls and$16.1 million related to vacant land. During 2017, we recorded a loss on impairment totaling$71.4 million , which was primarily attributable to two malls. See
Note 6 and Note 16 to the consolidated financial statements for additional information about these impairment losses.
Investments in Unconsolidated Affiliates
On a periodic basis, we assess whether there are any indicators that the fair
value of our investments in unconsolidated affiliates may be impaired. An
investment is impaired only if our estimate of the fair value of the investment
is less than the carrying value of the investment, and such decline in value is
deemed to be other than temporary. To the extent impairment has occurred, the
loss is measured as the excess of the carrying amount of the investment over the
fair value of the investment. Our estimates of fair value for each investment
are based on a number of assumptions such as future leasing expectations,
operating forecasts, discount rates and capitalization rates, among
others. These assumptions are subject to economic and market uncertainties
including, but not limited to, demand for space, competition for tenants,
changes in market rental rates, and operating costs. As these factors are
difficult to predict and are subject to future events that may alter our
assumptions, the fair values estimated in the impairment analyses may not be
realized.
68
-------------------------------------------------------------------------------- In 2018, an unconsolidated affiliate recognized an impairment of$89.8 million related to a mall. We recorded$1.0 million as our share of the loss on impairment, which reduced the carrying value of our investment in the joint venture to zero. See Note 7 to the consolidated financial statements for additional information about this impairment loss. No impairments of investments in unconsolidated affiliates were incurred during 2019 and 2017.
Recent Accounting Pronouncements
See Note 2 to the consolidated financial statements for information on recently issued accounting pronouncements.
Impact of Inflation and Deflation
Deflation can result in a decline in general price levels, often caused by a decrease in the supply of money or credit. The predominant effects of deflation are high unemployment, credit contraction and weakened consumer demand. Restricted lending practices could impact our ability to obtain financings or refinancings for our Properties and our tenants' ability to obtain credit. Decreases in consumer demand can have a direct impact on our tenants and the rents we receive. During inflationary periods, substantially all of our tenant leases contain provisions designed to mitigate 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 ten 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 a fixed amount subject to annual increases for their share of operating expenses, including CAM, real estate taxes, insurance and certain capital expenditures, which reduces our exposure to increases in costs and operating expenses resulting from inflation. Non-GAAP Measure Funds from Operations FFO is a widely used non-GAAP measure of the operating performance of real estate companies that supplements net income (loss) determined in accordance with GAAP.The National Association of Real Estate Investment Trusts ("NAREIT") defines FFO as net income (loss) (computed in accordance with GAAP) excluding gains or losses on sales of depreciable operating properties and impairment losses of depreciable properties, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures and noncontrolling interests. Adjustments for unconsolidated partnerships and joint ventures and noncontrolling interests are calculated on the same basis. We define FFO as defined above by NAREIT less dividends on preferred stock of the Company or distributions on preferred units of theOperating Partnership , as applicable. 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 real estate assets have historically risen or fallen 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. We present both FFO allocable toOperating Partnership common unitholders and FFO allocable to common shareholders, as we believe that both are useful performance measures. We believe FFO allocable toOperating Partnership common unitholders is a useful performance measure since we conduct substantially all of our business through ourOperating Partnership and, therefore, it reflects the performance of the Properties in absolute terms regardless of the ratio of ownership interests of our common shareholders and the noncontrolling interest in ourOperating Partnership . We believe FFO allocable to common shareholders is a useful performance measure because it is the performance measure that is most directly comparable to net income (loss) attributable to common shareholders. In our reconciliation of net income (loss) attributable to common shareholders to FFO allocable toOperating Partnership common unitholders that is presented below, we make an adjustment to add back noncontrolling interest in income (loss) of ourOperating Partnership in order to arrive at FFO of theOperating Partnership common unitholders. We then apply a percentage to FFO of ourOperating Partnership common unitholders to arrive at FFO allocable to common shareholders. The percentage is computed by taking the weighted-average number of common shares outstanding for the period and dividing it by the sum of the weighted-average number of common shares and the weighted-average number ofOperating Partnership units held by noncontrolling interests during the period. 69 -------------------------------------------------------------------------------- FFO does not represent cash flows from operations as defined by GAAP, is not necessarily indicative of cash available to fund all cash flow needs and should not be considered as an alternative to net income (loss) for purposes of evaluating our operating performance or to cash flow as a measure of liquidity. We believe that it is important to identify the impact of certain significant items on our FFO measures for a reader to have a complete understanding of our results of operations. Therefore, we have also presented adjusted FFO measures excluding these significant items from the applicable periods. Please refer to the reconciliation of net income (loss) attributable to common shareholders to FFO allocable toOperating Partnership common unitholders below for a description of these adjustments. FFO allocable toOperating Partnership common unitholders decreased 17.5% to$280.2 million for the year endedDecember 31, 2019 compared to$339.8 million for the prior year. After making the adjustments noted below, FFO of theOperating Partnership , as adjusted, decreased 21.3% for the year endingDecember 31, 2019 to$271.5 million compared to$345.1 million in 2018. The decline in FFO was primarily a result of dilution from asset sales, lower gains on outparcel sales and declines in Property NOI primarily related to retailer and anchor bankruptcies. The reconciliation of net income (loss) attributable to common shareholders to FFO allocable toOperating Partnership common unitholders is as follows (in thousands): Year Ended December 31, 2019 2018 2017 Net income (loss) attributable to common$ (153,669 ) $ (123,460 ) $ 76,048 shareholders Noncontrolling interest in income (loss) of (23,683 ) (19,688 ) 12,652Operating Partnership Depreciation and amortization expense of: Consolidated Properties 257,746 285,401 299,090 Unconsolidated affiliates 49,434 41,858 38,124 Non-real estate assets (3,650 ) (3,661 ) (3,526 ) Noncontrolling interests' share of (8,191 ) (8,601 ) (8,977 ) depreciation and amortization Loss on impairment, net of taxes 239,521 174,416
70,185
Loss on impairment of unconsolidated - 1,022 -
affiliates
Gain on depreciable property, net of taxes and (77,250 ) (7,484 ) (48,983 ) noncontrolling interests' share FFO allocable to Operating Partnership common 280,258 339,803
434,613
unitholders
Litigation settlement, net of taxes (1) 61,271 -
103
Nonrecurring professional fees expense - - (919 ) (reimbursement) (1) Loss on investments (2) - -
6,197
Non-cash default interest expense (3) 1,688 5,285
5,319
Impact of new tax law on income tax expense - -
2,309
Gain on extinguishment of debt, net of (71,722 ) - (33,902 ) noncontrolling interests' share (4) FFO allocable to Operating Partnership common$ 271,495 $ 345,088 $ 413,720 unitholders, as adjusted FFO per diluted share$ 1.40 $ 1.70 $ 2.18 FFO, as adjusted, per diluted share$ 1.36 $ 1.73 $ 2.08
(1) The year ended
of
subsequent reductions of
agreement related to past tenants that did not submit a claim pursuant to the
terms of the settlement agreement, tenants that opted out of the lawsuit and
other permissible reductions. Litigation expense and nonrecurring
professional fees expense, including settlements paid, are included in
general and administrative expense in the consolidated statements of
operations. Nonrecurring professional fees reimbursement is included in
interest and other income in the consolidated statements of operations.
(2) The year ended
sale of our 25% interest in
partner.
(3) The year ended
related to
interest expense related to
Town Center. The year ended
interest expense related to
and Wausau Center.
(4) The year ended
related to the non-recourse loan secured by
to the lender in the first quarter of 2019, and a gain on extinguishment of
debt related to the non-recourse loan secured by Cary Towne Center, which was
sold in the first quarter of 2019. The year ended
a gain on extinguishment of debt of
secured by Chesterfield Mall , Midland Mall and Wausau Center which were
conveyed to their respective lenders in 2017.
70
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This gain was partially offset by a loss on extinguishment of debt from prepayment fees on the early retirement of mortgage loans, net of the noncontrolling interests' share.
The reconciliation of diluted EPS attributable to common shareholders to FFO per diluted share is as follows:
Year Ended December 31,
2019 2018 2017
Diluted EPS attributable to common shareholders $ (0.89 ) $ (0.72 ) $ 0.44
Eliminate amounts per share excluded from FFO:
Depreciation and amortization expense, including
amounts from consolidated Properties,
unconsolidated affiliates, non-real estate 1.48 1.58 1.64
assets and excluding amounts allocated to
noncontrolling interests
Loss on impairment, net of taxes 1.19 0.88 0.35
Gain on depreciable Property, net of taxes and (0.38 ) (0.04 )
(0.25 )
noncontrolling interests' share FFO per diluted share$ 1.40 $ 1.70 $ 2.18 The reconciliations of FFO allocable toOperating Partnership common unitholders to FFO allocable to common shareholders, including and excluding the adjustments noted above are as follows (in thousands): Year Ended December 31, 2019 2018 2017 FFO of the Operating Partnership$ 280,258 $ 339,803 $ 434,613 Percentage allocable to common shareholders (1) 86.65 % 86.42 % 85.83 % FFO allocable to common shareholders$ 242,844 $ 293,658
FFO allocable to
unitholders, as adjusted Percentage allocable to common shareholders (1) 86.65 % 86.42 % 85.83 % FFO allocable to common shareholders, as adjusted$ 235,250 $ 298,225 $ 355,096
(1) Represents the weighted-average number of common shares
outstanding for the period divided by the sum of the
weighted-average number of common shares and the
weighted-average number of
by noncontrolling interests during the period.
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