UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K/A

 

(AMENDMENT NO.1)

 

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES

EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2007

 

Or

 

 

o

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

 

                 For the transition period from ______________ to  _________________                            

 

Commission File Number 1-12494

 

CBL & ASSOCIATES PROPERTIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

(State or other jurisdiction of incorporate or organization)

 

62-1545718

(I.R.S. Employer Identification No.)

 

2030 Hamilton Place Blvd, Suite 500

Chattanooga, TN

(Address of principal executive office)

 

 

37421

(Zip Code)

 

Registrant’s telephone number, including area code: 423.855.0001

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each Class

 

Name of each exchange on which registered

Common Stock, $0.01 par value 

New York Stock Exchange

7.75% Series C Cumulative Redeemable Preferred Stock, $0.01 par value 

New York Stock Exchange

7.375% Series D Cumulative Redeemable Preferred Stock, $0.01 par value 

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ X]    No  o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  o    No x

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

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

 

Large accelerated filer x

Accelerated filero

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

Smaller reporting company o

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes  o  

No  x

 

The aggregate market value of the 60,200,515 shares of common stock held by non-affiliates of the registrant as of June 30, 2007 was $2,170,228,569, based on the closing price of $36.05 per share on the New York Stock Exchange on June 29, 2007. (For this computation, the registrant has excluded the market value of all shares of its common stock reported as beneficially owned by executive officers and directors of the registrant; such exclusion shall not be deemed to constitute an admission that any such person is an “affiliate” of the registrant.)

 

As of February 25, 2008, 66,340,515 shares of common stock were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Registrant’s Proxy Statement for the 2008 Annual Shareholder’s Meeting are incorporated by reference in Part III.

 

EXPLANATORY NOTE

 

This Amendment No. 1 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, initially filed on February 29, 2007, is being filed for the sole purpose of correcting an inadvertent typographical error that resulted in the omission of the conformed signatures of Deloitte & Touche LLP on the Report of Independent Registered Public Accounting Firm contained in Item 8, Financial Statements and Supplementary Data (through incorporation by reference to the consolidated financial statements included in Item 15, Exhibits, Financial Statement Schedules) and the Report of Independent Registered Public Accounting Firm contained in Item 9A, Controls and Procedures.

 

Except as described above, no other amendments are being made to the Annual Report. This Form 10-K/A does not reflect events occurring after the February 29, 2007 filing of our Annual Report or modify or update the disclosure contained in the Annual Report in any way other than as required to reflect the amendments discussed above and reflected below.  In order to comply with certain technical requirements of the Securities and Exchange Commission's rules in connection with the filing of this amendment on Form 10-K/A, we are including in this amendment the complete text of Part II, Item 8, Financial Statements and Supplementary Data, Item 9A, Controls and Procedures, and Part IV, Item 15, Exhibits, Financial Statements, as well as a consent of our independent registered public accountants with respect to this filing (Exhibit 23).  We are also including in this amendment updated certifications of our principal executive and principal financial officers (Exhibits 31.1, 31.2, 32.1 and 32.2).

 

 

 

 

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Reference is made to the Index to Financial statements contained in Item 15 on page 72.

 

 

ITEM 9A.

CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based on that evaluation, these officers concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. We assessed the effectiveness of our internal control over financial reporting, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and concluded that, as of December 31, 2007, we maintained effective internal control over financial reporting, as stated in our report which is included herein.

The effectiveness of our internal control over financial reporting as of December 31, 2007 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein.

 

Report of Management On Internal Control Over Financial Reporting

 

Management of CBL & Associates Properties, Inc. and its consolidated subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s chief executive officer and chief financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

 

Management recognizes that there are inherent limitations in the effectiveness of internal control over financial reporting, including the potential for human error or the circumvention or overriding of internal controls. Accordingly, even effective internal control over financial reporting cannot provide absolute assurance with respect to financial statement preparation. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. In addition, any projection of the evaluation of effectiveness to future periods

is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the polices or procedures may deteriorate.

 

Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and concluded that, as of December 31, 2007, the Company maintained effective internal control over financial reporting.

 

Deloitte & Touche LLP, the Company’s independent registered public accounting firm, has issued their attestation report, which is included below, on our internal control over financial reporting as of December 31, 2007.

1

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders of

CBL & Associates Properties, Inc.:

 

We have audited the internal control over financial reporting of CBL & Associates Properties, Inc. (the "Company") as of December 31, 2007, based oncriteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Controls over Financial Reporting.  Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the 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 effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.

 

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

 

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.  Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedulesas of and for the year ended December 31, 2007 of the Company and our report dated February 28, 2008 expressed an unqualified opinion on those financial statements and financial statement schedules and includes explanatory paragraphs regarding the adoption of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, on January 1, 2006 and the adoption of SEC Staff Accounting Bulleting No. 108, Considering the Effects of Prior-Years Misstatements when Quantifying Misstatements in the Current Year Financial Statements, on December 31, 2006.

 

/s/ DELOITTE & TOUCHE LLP

 

Atlanta, Georgia

February 28, 2008

 

 

2

 

 

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

 

(1)

Consolidated Financial Statements

Page Number

 

 

Report of Independent Registered Public Accounting Firm

6

 

 

Consolidated Balance Sheets as of December 31, 2007 and 2006

7

 

 

Consolidated Statements of Operations for the Years Ended

 

December 31, 2007, 2006 and 2005

8

 

 

Consolidated Statements of Shareholders’ Equity for the Years

 

Ended December 31, 2007, 2006 and 2005

9

 

 

Consolidated Statements of Cash Flows for the Years Ended

 

December 31, 2007, 2006 and 2005

11

 

 

Notes to Consolidated Financial Statements

13

 

 

(2)

Consolidated Financial Statement Schedules

 

 

Schedule II Valuation and Qualifying Accounts

49

 

Schedule III Real Estate and Accumulated Depreciation

50

 

Schedule IV Mortgage Loans on Real Estate

58

 

Financial statement schedules not listed herein are either not required or are not present in amounts sufficient to require submission of the schedule or the information required to be included therein is included in our consolidated financial statements in Item 15 or are reported elsewhere.

 

 

(3)

Exhibits

 

The Exhibit Index filed with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2007, which was filed on February 29, 2008, is incorporated by reference into this Item 15(a)(3).  Also incorporated by reference into this Item 15(a)(3) is the Exhibit Index attached to this Amendment No. 1 on Form 10-K/A for those exhibits filed with this report.

 

3

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

(Registrant)

 

 

By: __/s/ John N. Foy_________

 

John N. Foy

 

Vice Chairman of the Board, Chief Financial Officer

 

and Treasurer

Dated: March 3, 2008

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Signature

 

Title

 

Date

/s/ Charles B. Lebovitz

Chairman of the Board, and Chief Executive Officer (Principal Executive Officer)

March 3, 2008    

Charles B. Lebovitz

 

 

 

 

 

/s/ John N. Foy

Vice Chairman of the Board, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer)

March 3, 2008    

John N. Foy

 

 

 

 

 

/s/ Stephen D. Lebovitz*

Director, President and Secretary

 

March 3, 2008    

Stephen D. Lebovitz

 

 

 

 

 

/s/ Claude M. Ballard*

Director

 

March 3, 2008    

Claude M. Ballard

 

 

 

 

 

/s/ Leo Fields*

Director

 

March 3, 2008    

Leo Fields

 

 

 

 

 

/s/ Matthew S. Dominski*

Director

 

March 3, 2008    

Matthew S. Dominski

 

 

 

 

 

/s/ Winston W. Walker*

Director

 

March 3, 2008    

Winston W. Walker

 

 

 

 

 

/s/ Gary L. Bryenton*

Director

 

March 3, 2008    

Gary L. Bryenton

 

 

 

 

 

/s/ Martin J. Cleary*

Director

 

March 3, 2008    

Martin J. Cleary

 

 

 

 

 

*By:/s/ John N. Foy

Attorney-in-Fact

 

March 3, 2008    

John N. Foy

 

 

4

 

INDEX TO FINANCIAL STATEMENTS

 

 

 

Report of Independent Registered Public Accounting Firm

6

 

 

Consolidated Balance Sheets as of December 31, 2007 and 2006

7

 

 

Consolidated Statements of Operations for the Years Ended December 31,

 

2007, 2006 and 2005

8

 

 

Consolidated Statements of Shareholders’ Equity for the Years Ended

 

December 31, 2007, 2006 and 2005

9

 

 

Consolidated Statements of Cash Flows for the Years Ended December 31,

 

2007, 2006 and 2005

11

 

 

Notes to Consolidated Financial Statements

13

 

 

 

Schedule II Valuation and Qualifying Accounts

49

 

Schedule III Real Estate and Accumulated Depreciation

50

 

Schedule IV Mortgage Loans on Real Estate

58

 

Financial statement schedules not listed herein are either not required or are not present in amounts sufficient to require submission of the schedule or the information required to be included therein is included in our consolidated financial statements in Item 15 or are reported elsewhere.

 

 

5

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

CBL & Associates Properties, Inc.:

 

We have audited the accompanying consolidated balance sheets of CBL & Associates Properties, Inc. and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.

 

We conducted our audits in accordance with the 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, such consolidated financial statements present fairly, in all material respects, the financial position of CBL & Associates Properties, Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, 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 described in Note 17 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123(R), Share Based Payment, effective January 1, 2006, utilizing the modified prospective application transition method.

 

As described in Note 19 to the consolidated financial statements, the Company adopted SEC Staff Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, effective December 31, 2006, and recorded a cumulative effect adjustment as of January 1, 2006.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control  — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2008, expressed an unqualified opinion on the Company’s internal control over financial reporting.

 

/s/ DELOITTE & TOUCHE LLP

 

Atlanta, Georgia

February 28, 2008

 

 

6

CBL & Associates Properties, Inc.

Consolidated Balance Sheets

(In thousands, except share data)

 

 

December 31,

ASSETS

2007

 

2006

Real estate assets:

 

 

 

Land

$917,578

 

$779,727

Buildings and improvements

7,263,907

 

5,944,476

 

8,181,485

 

6,724,203

Accumulated depreciation

(1,102,767)

 

(924,297)

 

7,078,718

 

5,799,906

Developments in progress

323,560

 

294,345

Net investment in real estate assets

7,402,278

 

6,094,251

Cash and cash equivalents

65,826

 

28,700

Receivables:

 

 

 

Tenant, net of allowance for doubtful accounts of $1,126 in 2007 and $1,128 in 2006

72,570

 

71,573

Other

10,257

 

9,656

Mortgage notes receivable

135,137

 

21,559

Investments in unconsolidated affiliates

142,550

 

78,826

Intangible lease assets and other assets

276,429

 

214,245

 

$8,105,047

 

$6,518,810

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

Mortgage and other notes payable

$5,869,318

 

$4,564,535

Accounts payable and accrued liabilities

394,884

 

309,969

Total liabilities

6,264,202

 

4,874,504

Commitments and contingencies (Notes 3, 5 and 15)

 

 

 

Minority interests

920,297

 

559,450

Shareholders’ equity:

 

 

 

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

 

 

 

8.75% Series B cumulative redeemable preferred stock, 2,000,000 shares outstanding in

2006

-

 

20

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

2007 and 2006

5

 

5

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

2007 and 2006

7

 

7

Common stock, $.01 par value, 180,000,000 shares authorized, 66,179,747 and

65,421,311 shares issued and outstanding in 2007 and 2006 respectively

662

 

654

Additional paid-in capital

990,048

 

1,074,450

Accumulated other comprehensive income (loss)

(20)

 

19

Retained earnings (accumulated deficit)

(70,154)

 

9,701

Total shareholders’ equity

920,548

 

1,084,856

 

$8,105,047

 

$6,518,810

 

 

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

 

 

7

CBL & Associates Properties, Inc.

Consolidated Statements of Operations

(In thousands, except per share amounts)

 

 

Year Ended December 31,

 

2007

 

2006

 

2005

REVENUES:

 

 

 

 

 

Minimum rents

$646,383

 

$616,147

 

$544,321

Percentage rents

22,472

 

23,825

 

22,846

Other rents

23,121

 

20,061

 

17,387

Tenant reimbursements

318,808

 

307,037

 

275,868

Management, development and leasing fees

7,983

 

5,067

 

20,521

Other

21,860

 

23,365

 

19,476

Total revenues

1,040,627

 

995,502

 

900,419

EXPENSES:

 

 

 

 

 

Property operating

169,688

 

159,827

 

149,507

Depreciation and amortization

243,790

 

228,531

 

178,163

Real estate taxes

87,610

 

80,316

 

67,341

Maintenance and repairs

58,145

 

54,153

 

49,952

General and administrative

37,852

 

39,522

 

39,197

Impairment of real estate assets

-

 

480

 

1,334

Other

18,525

 

18,623

 

15,444

Total expenses

615,610

 

581,452

 

500,938

Income from operations

425,017

 

414,050

 

399,481

Interest and other income

10,923

 

9,084

 

6,831

Interest expense

(287,884)

 

(257,067)

 

(208,183)

Loss on extinguishment of debt

(227)

 

(935)

 

(6,171)

Impairment of marketable securities

(18,456)

 

-

 

-

Gain on sales of real estate assets

15,570

 

14,505

 

53,583

Gain on sale of management contracts

-

 

-

 

21,619

Equity in earnings of unconsolidated affiliates

3,502

 

5,295

 

8,495

Income tax provision

(8,390)

 

(5,902)

 

-

Minority interest in earnings:

 

 

 

 

 

Operating Partnership

(46,246)

 

(70,323)

 

(112,061)

Shopping center properties

(12,215)

 

(4,136)

 

(4,879)

Income from continuing operations

81,594

 

104,571

 

158,715

Operating income of discontinued operations

1,497

 

4,538

 

3,842

Gain (loss) on discontinued operations

6,056

 

8,392

 

(82)

Net income

89,147

 

117,501

 

162,475

Preferred dividends

(29,775)

 

(30,568)

 

(30,568)

Net income available to common shareholders

$59,372

 

$86,933

 

$131,907

Basic per share data:

 

 

 

 

 

Income from continuing operations, net of preferred dividends

$0.79

 

$1.16

 

$2.04

Discontinued operations

0.12

 

$0.20

 

0.06

Net income available to common shareholders

$0.91

 

$1.36

 

$2.10

Weighted average common shares outstanding

65,323

 

63,885

 

62,721

Diluted per share data:

 

 

 

 

 

Income from continuing operations, net of preferred dividends

$0.79

 

$1.13

 

$1.98

Discontinued operations

0.11

 

$0.20

 

0.05

Net income available to common shareholders

$0.90

 

$1.33

 

$2.03

Weighted average common and potential dilutive common shares outstanding

65,913

 

65,269

 

64,880

The accompanying notes are an integral part of these statements.

 

8

CBL & Associates Properties, Inc.

Consolidated Statements of Shareholders’ Equity

(In thousands, except share data)

 

Preferred Stock

Common Stock

Additional Paid-in Capital

Deferred Compensation

Accumulated Other

Comprehensive

Income (Loss)

Retained

Earnings (Accumulated

Deficit)

Total

Balance, December 31, 2004

$32

$627

$1,025,478

($3,081)

$ -

$31,095

$1,054,151

Net income

-

-

-

-

-

162,475

162,475

Net unrealized gain on available-for-sale securities

-

-

-

-

288

-

288

Total comprehensive income

 

 

 

 

 

 

162,763

Dividends declared - common stock

-

-

-

-

-

(111,294)

(111,294)

Dividends declared - preferred stock

-

-

-

-

-

(30,568)

(30,568)

Additional costs of issuing 700,000 shares of Series D preferred stock

-

-

(193)

-

-

-

(193)

Issuance of 230,041 shares of common stock and restricted common stock

-

2

9,011

(7,896)

-

-

1,117

Repurchase of 1,371,034 shares of common stock

-

(14)

(54,984)

-

-

-

(54,998)

Exercise of stock options

-

8

9,733

-

-

-

9,741

Accelerated vesting of share-based compensation

-

-

480

256

-

-

736

Accrual under deferred compensation arrangements

-

-

780

-

-

-

780

Issuance of stock under deferred compensation arrangement

-

2

(2)

-

-

-

-

Amortization of deferred compensation

-

-

-

1,826

-

-

1,826

Conversion of Operating Partnership units into 52,136 shares of common stock

-

-

10,304

-

-

-

10,304

Adjustment for minority interest in Operating Partnership

-

-

37,157

-

-

-

37,157

Balance, December 31, 2005-as previously reported

32

625

1,037,764

(8,895)

288

51,708

1,081,522

Cumulative effect of adjustments resulting from the adoption of SAB No. 108

-

-

9,696

-

-

(7,262)

2,434

Adjustments for minority interest in Operating Partnership

-

-

(2,036)

-

-

-

(2,036)

Balance, January 1, 2006 – as adjusted

32

625

1,045,424

(8,895)

288

44,446

1,081,920

Net income

-

-

-

-

-

117,501

117,501

Realized gain on available-for-sale securities

-

-

-

-

(1,073)

-

(1,073)

Unrealized gain on available-for-sale securities

-

-

-

-

804

-

804

Total comprehensive income

 

 

 

 

 

 

117,232

Dividends declared - common stock

-

-

-

-

-

(121,678)

(121,678)

Dividends declared - preferred stock

-

-

-

-

-

(30,568)

(30,568)

Reclassification of deferred compensation upon adoption of SFAS No. 123(R)

-

-

(8,895)

8,895

-

-

-

Issuance of 244,472 shares of common stock and restricted common stock

-

2

2,721

-

-

-

2,723

Cancellation of 34,741 shares of restricted common stock

-

-

(1,154)

-

-

-

(1,154)

Exercise of stock options

-

7

8,915

-

-

-

8,922

Accrual under deferred compensation arrangements

-

-

93

-

-

-

93

Amortization of deferred compensation

-

-

3,987

-

-

-

3,987

Income tax benefit from stock-based compensation

-

-

3,181

-

-

-

3,181

Conversion of Operating Partnership units into 1,979,644 shares of common

   stock

-

20

21,963

-

-

-

21,983

Adjustment for minority interest in Operating Partnership

-

-

(1,785)

-

-

-

(1,785)

Balance, December 31, 2006

$ 32

$ 654

$ 1,074,450

$-

$19

$9,701

$ 1,084,856

 

 

9

 

 

CBL & Associates Properties, Inc.

Consolidated Statements of Shareholders’ Equity

(In thousands, except share data)

(Continued)

 

 

 

Preferred Stock

Common Stock

Additional

Paid-in

Capital

Deferred Compensation

Accumulated

Other

Comprehensive Income (Loss)

Retained

Earnings (Accumulated Deficit)

Total

Balance, December 31, 2006

$ 32

$ 654

$ 1,074,450

$-

$19

$9,701

$ 1,084,856

Net income

-

-

-

-

-

89,147

89,147

Net unrealized loss on available-for-sale securities

-

-

-

-

(18,495)

-

(18,495)

Impairment of marketable securities

-

-

-

-

18,456

-

18,456

Total comprehensive income

 

 

 

 

 

 

89,108

Dividends declared - common stock

-

-

-

-

-

(135,672)

(135,672)

Dividends declared - preferred stock

-

-

-

-

-

(26,145)

(26,145)

Repurchase of 148,500 shares of common stock

-

(1)

(1,612)

-

-

(3,555)

(5,168)

Redemption of 8.75% Series B Cumulative Redeemable Stock

(20)

-

(96,350)

-

-

(3,630)

(100,000)

Issuance of 98,349 shares of common stock and restricted common stock

-

1

3,486

-

-

-

3,487

Cancellation of 42,611 shares of restricted common stock

-

-

(1,245)

-

-

-

(1,245)

Exercise of stock options

-

8

11,359

-

-

-

11,367

Accrual under deferred compensation arrangements

-

-

51

-

-

-

51

Amortization of deferred compensation

-

-

3,639

-

-

-

3,639

Income tax benefit from stock-based compensation

-

-

5,631

-

-

-

5,631

Adjustment for minority interest in Operating Partnership

-

-

(9,361)

-

-

-

(9,361)

Balance, December 31, 2007

$ 12

$ 662

$ 990,048

$-

$ (20)

$ (70,154)

$ 920,548

 

 

The accompanying notes are an integral part of these statements.

10

CBL & Associates Properties, Inc.

Consolidated Statements of Cash Flows

(In thousands)

 

 

Year Ended December 31,

 

2007

2006

2005

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

Net income

$ 89,147

$ 117,501

$ 162,475

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

 

 

 

Minority interest in earnings

58,461

74,459

116,940

Depreciation

159,823

141,750

133,834

Amortization

92,266

96,111

55,381

Net amortization of above and below market leases

(10,584)

(12,581)

(6,434)

Amortization of debt premiums

(7,714)

(7,501)

(7,347)

Gain on sales of real estate assets

(15,570)

(14,505)

(53,583)

Impairment of marketable securities

18,456

-

-

Realized gain on available-for-sale securities

-

(1,073)

-

(Gain) loss on discontinued operations

(6,056)

(8,392)

82

Gain on sale of management contracts

-

-

(21,619)

Share-based compensation expense

6,862

6,190

3,951

Income tax benefit from share-based compensation

9,104

5,750

-

Equity in earnings of unconsolidated affiliates

(3,502)

(5,295)

(8,495)

Distributions of earnings from unconsolidated affiliates

9,450

12,285

7,347

Write-off of development projects

2,216

923

560

Loss on extinguishment of debt

227

935

6,171

Impairment of real estate assets

-

480

1,334

Changes in:

 

 

 

Tenant and other receivables

(3,827)

(20,083)

(9,879)

Other assets

(1,787)

(2,788)

(1,116)

Accounts payable and accrued liabilities

73,307

4,745

16,496

Net cash provided by operating activities

470,279

388,911

396,098

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

Additions to real estate assets

(564,720)

(452,383)

(361,285)

Acquisitions of real estate assets and intangible lease assets

(376,444)

-

(426,537)

Proceeds from sales of real estate assets

68,620

127,117

64,350

Proceeds from sales of available-for-sale securities

-

2,507

-

Purchases of available-for-sale securities

(24,325)

(15,464)

-

Proceeds from sale of management contracts

-

-

22,000

Costs related to sale of management contracts

-

-

(381)

Additions to mortgage notes receivable

(102,933)

(300)

(859)

Payments received on mortgage notes receivable

4,617

224

13,173

Distributions in excess of equity in earnings of unconsolidated affiliates

18,519

16,852

15,523

Additional investments in and advances to unconsolidated affiliates

(112,274)

(18,046)

(27,840)

Purchase of minority interests in shopping center properties

(8,007)

-

-

Purchase of minority interests in the Operating Partnership

(9,502)

(3,610)

(2,172)

Changes in other assets

(4,792)

(4,136)

(10,652)

Net cash used in investing activities

(1,103,121)

(347,239)

(714,680)

 

 

 

11

CBL & Associates Properties, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Continued)

 

 

Year Ended December 31,

 

2007

2006

2005

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

Proceeds from mortgage and other notes payable

1,354,516

1,007,073

946,825

Principal payments on mortgage and other notes payable

(305,356)

(776,092)

(353,806)

Additions to deferred financing costs

(8,579)

(5,588)

(3,407)

Prepayment fees to extinguish debt

(227)

(557)

(6,524)

Proceeds from issuance of common stock

315

361

508

Proceeds from exercise of stock options

11,367

8,922

9,741

Income tax benefit from share-based compensation

(9,104)

(5,750)

-

Additional costs of preferred stock offerings

-

-

(193)

Repurchase of common stock

(5,168)

(6,706)

(48,292)

Redemption of preferred stock

(100,000)

-

-

Contributions from minority partners

5,493

-

-

Distributions to minority interests

(114,583)

(110,037)

(89,459)

Dividends paid to holders of preferred stock

(26,145)

(30,568)

(31,214)

Dividends paid to common shareholders

(132,561)

(122,868)

(102,525)

Net cash provided by (used in) financing activities

669,968

(41,810)

321,654

Net change in cash and cash equivalents

37,126

(138)

3,072

Cash and cash equivalents, beginning of period

28,700

28,838

25,766

Cash and cash equivalents, end of period

$ 65,826

$ 28,700

$ 28,838

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

 

 

12

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, open-air centers and community shopping centers. CBL’s shopping center properties are located in 27 states, but are primarily in the southeastern and midwestern United States.

 

CBL conducts substantially all of its business through CBL & Associates Limited Partnership (the “Operating Partnership”). As of December 31, 2007, the Operating Partnership owned controlling interests in 75 regional malls/open-air centers, 28 associated centers (each located adjacent to a regional mall), 13 community centers and 13 office buildings, including CBL’s corporate office building. The Operating Partnership consolidates the financial statements of all entities in which it has a controlling financial interest or where it is the primary beneficiary of a variable interest entity. The Operating Partnership owned non-controlling interests in nine regional malls, four associated centers, two community centers and six office buildings. Because one or more of the other partners have substantive participating rights, the Operating Partnership does not control these partnerships and joint ventures and, accordingly, accounts for these investments using the equity method. The Operating Partnership had four mall expansions, two associated/lifestyle centers, three community centers, a mixed-use center and an office building under construction as December 31, 2007. 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, 2007, CBL Holdings I, Inc., the sole general partner of the Operating Partnership, owned a 1.6% general partnership interest in the Operating Partnership and CBL Holdings II, Inc. owned a 55.1% limited partnership interest for a combined interest held by CBL of 56.7%.

 

The minority interest in the Operating Partnership is held primarily by CBL & Associates, Inc. and its affiliates (collectively “CBL’s Predecessor”) and by affiliates of The Richard E. Jacobs Group, Inc. (“Jacobs”). CBL’s Predecessor contributed their interests in certain real estate properties and joint ventures to the Operating Partnership in exchange for a limited 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 limited partner interests when the Operating Partnership acquired the majority of Jacobs’ interests in 23 properties in January 2001 and the balance of such interests in February 2002. At December 31, 2007, CBL’s Predecessor owned a 15.0% limited partner interest, Jacobs owned a 19.6% limited partner interest and various third parties owned an 8.7% limited partner interest in the Operating Partnership. CBL’s Predecessor also owned 6.5 million shares of CBL’s common stock at December 31, 2007, for a combined effective interest of 20.5% in the Operating Partnership.

 

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

 

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

 

 

 

13

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Material intercompany transactions have been eliminated.

 

Certain historical amounts have been reclassified to conform to the current year presentation. The financial results of certain properties are reported as discontinued operations in the consolidated financial statements. Except where noted, the information presented in the Notes to Consolidated Financial Statements excludes discontinued operations. See Note 4 for further discussion.

 

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, as if vacant, and tenant improvements, and (ii) identifiable intangible assets and liabilities, generally consisting of above-market leases, in-place leases and tenant relationships, which are included in other assets, and below-market leases, which are included in accounts payable and accrued liabilities. 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 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. The amortization of above- and below-market leases is recorded as an adjustment to minimum rental revenue, while the amortization of all other lease-related intangibles is recorded as amortization expense. 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.

 

 

 

 

 

 

14

                 The Company’s acquired intangibles and their balance sheet classifications as of December 31, 2007 and 2006, are summarized as follows:

 

 

December 31, 2007

 

December 31, 2006

 

Cost

 

Accumulated

Amortization

 

Cost

 

Accumulated

Amortization

Other assets:

 

 

 

 

 

 

 

Above-market leases

$ 79,566

 

$ (18,337)

 

$ 40,509

 

$ (11,579)

In-place leases

98,315

 

(38,725)

 

69,615

 

(28,941)

Tenant relationships

49,796

 

(4,462)

 

49,796

 

(2,320)

Accounts payable and accrued liabilities:

 

 

 

 

 

 

 

Below-market leases

122,367

 

(42,751)

 

86,736

 

(31,386)

 

 

These intangible assets are related to specific tenant leases. Should a termination occur earlier than the date indicated in the lease, the related intangible assets or liabilities, if any, related to the lease are recorded as expense or income, as applicable. The total net amortization expense of the above acquired intangibles was $4,387, $6,570 and $3,630 in 2007, 2006 and 2005, respectively. The estimated total net amortization expense for the next five succeeding years is $9,538 in 2008, $7,195 in 2009, $6,666 in 2010, $5,685 in 2011 and $5,355 in 2012.

 

Total interest expense capitalized was $15,414, $11,504 and $8,385 in 2007, 2006 and 2005, 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 is charged to operations.

 

During 2006, the Company recognized a loss of $274 on the sale of two community centers and a loss of $206 on the sale of land. The aggregate loss of $480 was recorded as a loss on impairment of real estate assets.

 

The Company determined that two community centers met the criteria to be reflected as held for sale as of December 31, 2005 and recognized a loss on impairment of $1,029.

 

In January 2005, the Company completed the third phase of the Galileo America joint venture transaction discussed in Note 5. A loss had been recorded in 2004 to reduce the carrying value of the related assets to their estimated fair values. The Company recognized an additional impairment loss on this transaction of $262 in the first quarter of 2005 when the estimated amounts from 2004 were adjusted to actual.

 

The Company sold a community center in October 2005 and recorded a loss on impairment of $43.

 

 

There were no impairment losses on real estate assets during 2007.

 

 

15

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with original maturities of three months or less as cash equivalents.

 

Restricted Cash

 

Restricted cash of $35,370 and $34,814 was included in other assets at December 31, 2007 and 2006, respectively. Restricted cash consists primarily of cash held in escrow accounts for debt service, insurance, real estate taxes, capital improvements and deferred maintenance as required by the terms of certain mortgage notes payable, as well as contributions from tenants to be used for future marketing activities.

 

Joint Ventures

 

Initial investments in joint ventures that are in economic substance a capital contribution to the joint venture are recorded in an amount equal to the Company’s historical carryover basis in the real estate contributed. Initial investments in joint ventures that are in economic substance the sale of a portion of the Company’s interest in the real estate are accounted for as a contribution of real estate recorded in an amount equal to the Company’s historical carryover basis in the ownership percentage retained and as a sale of real estate with profit recognized to the extent of the other joint venturers’ interests in the joint venture. Profit recognition assumes the Company has no commitment to reinvest with respect to the percentage of the real estate sold and the accounting requirements of the full accrual method under Statement of Financial Accounting Standards (“SFAS”) No. 66, Accounting for Sales of Real Estate, are met.

 

The Company accounts for its investment in joint ventures where it owns a non-controlling interest or where it is not the primary beneficiary of a variable interest entity using the equity method of accounting. Under the equity method, the Company’s cost of investment is adjusted for its share of equity in the earnings of the unconsolidated affiliate and reduced by distributions received. Generally, distributions of cash flows from operations and capital events are first made to partners to pay cumulative unpaid preferences on unreturned capital balances and then to the partners in accordance with the terms of the joint venture agreements.

 

Any differences between the cost of the Company’s investment in an unconsolidated affiliate and its underlying equity as reflected in the unconsolidated affiliate’s financial statements generally result from costs of the Company’s investment that are not reflected on the unconsolidated affiliate’s financial statements, capitalized interest on its investment and the Company’s share of development and leasing fees that are paid by the unconsolidated affiliate to the Company for development and leasing services provided to the unconsolidated affiliate during any development periods. At December 31, 2007 and 2006, the net difference between the Company’s investment in unconsolidated affiliates and the underlying equity of unconsolidated affiliates was $1,126 and $1,587, respectively, which is generally amortized over a period of 40 years.

 

Deferred Financing Costs

 

Net deferred financing costs of $14,989 and $11,881 were included in other assets at December 31, 2007 and 2006, respectively. Deferred financing costs include fees and costs incurred to obtain financing and are amortized on a straight-line basis to interest expense over the terms of the related notes payable. Amortization expense was $4,188, $4,178, and $5,031 in 2007, 2006 and 2005, respectively. Accumulated amortization was $11,719 and $10,385 as of December 31, 2007 and 2006, respectively.

 

16

Marketable Securities

 

Other assets include marketable securities consisting of corporate equity securities that are classified as available for sale. Unrealized gains and losses on available-for-sale securities that are deemed to be temporary in nature are recorded as a component of accumulated other comprehensive income (loss) in shareholders’ equity. Realized gains and losses are included in other income. Gains or losses on securities sold are based on the specific identification method.

 

If a decline in the value of an investment is deemed to be other than temporary, the investment is written down to fair value and an impairment loss is recognized in the current period to the extent of the decline in value. In determining when a decline in fair value below cost of an investment in marketable securities is other than temporary, the following factors, among others, are evaluated:

 

 

The probability of recovery.

 

The Company’s ability and intent to retain the security for a sufficient period of time for it to recover.

 

The significance of the decline in value.

 

The time period during which there has been a significant decline in value.

 

Current and future business prospects and trends of earnings.

 

Relevant industry conditions and trends relative to their historical cycles.

 

Market conditions.

During 2007, the Company recognized an other-than-temporary impairment of certain marketable real estate securities in the amount of $18,456 to write down the carrying value of the Company’s investment to its fair value of $21,333.

 

The following is a summary of the equity securities held by the Company as of December 31, 2007 and 2006:

 

 

 

 

 

Gross Unrealized

 

 

 

 

 

Adjusted Cost

 

Gains

 

Losses

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2007

 

$

21,388

 

$

9

 

$

(29

)

$

21,368

 

December 31, 2006

 

 

16,597

 

 

24

 

 

(4

)

 

16,617

 

 

Derivative Financial Instruments

The Company recognizes its derivative financial instruments as either assets or liabilities in the consolidated balance sheets and measures those instruments at fair value. The accounting for changes in the fair value (i.e., gain or loss) of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship, and further, on the type of hedging relationship. To qualify as a hedging instrument, a derivative must pass prescribed effectiveness tests, performed quarterly using both qualitative and quantitative methods. The Company entered into a derivative agreement effective December 31, 2007, that qualified as a hedging instrument and was designated, based upon the exposure being hedged, as a cash flow hedge. The fair value of the cash flow hedge as of December 31, 2007 was $0. To the extent it is effective, changes in the fair value of a cash flow hedge are reported in other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged item affects earnings. The ineffective portion of the hedge, if any, is recognized in current earnings during the period of change in fair value. The gain or loss on the termination of an effective cash flow hedge is reported in other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged item affects earnings.

 

 

17

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.

 

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 2007, 2006 and 2005.

 

The Company has also elected taxable REIT subsidiary status for some of its subsidiaries. This enables the Company to receive income and provide services that would otherwise be impermissible for REITs. For these entities, deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the temporary differences reverse. A valuation allowance for deferred tax assets is provided if the Company believes all or some portion of the deferred tax asset may not be realized. An increase or decrease in the valuation allowance that results from the change in circumstances that causes a change in our judgment about the realizability of the related deferred tax asset is included in income or expense, as applicable. The Company recorded an income tax provision of $8,390, $5,902 and

 

18

$0 in 2007, 2006 and 2005, respectively. The income tax provision in 2007 and 2006 consisted of a current income tax provision of $9,099 and $5,751, respectively, and a deferred income tax provision (benefit) of $(709) and $151, respectively.

 

The Company had a net deferred tax asset of $4,332 and $4,291 at December 31, 2007 and 2006, respectively. The net deferred tax asset at December 31, 2007 and 2006 is included in other assets and primarily consisted of operating expense accruals and differences between book and tax depreciation.

 

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 accounted for more than 5.0% of the Company’s total revenues in 2007, 2006 or 2005.

 

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:

 

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2005

 

Weighted average common shares

 

65,713

 

64,225

 

63,004

 

Effect of nonvested stock awards

 

(390

)

(340

)

(283

)

Denominator – basic earnings per share

 

65,323

 

63,885

 

62,721

 

Dilutive effect of:

 

 

 

 

 

 

 

Stock options

 

456

 

1,189

 

1,741

 

Nonvested stock awards

 

94

 

138

 

223

 

Deemed shares related to deferred compensation arrangements

 

40

 

57

 

195

 

Denominator – diluted earnings per share

 

65,913

 

65,269

 

64,880

 

 

Comprehensive Income (Loss)

 

Comprehensive income includes all changes in shareholders’ equity during the period, except those resulting from investments by shareholders and distributions to shareholders. Other comprehensive income (loss) for all periods presented represents unrealized gains (losses) on available for sale securities.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP 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.

 

19

Recent Accounting Pronouncements

 

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), which was effective for fiscal years beginning after December 15, 2006. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No.109, Accounting for Income Taxes, by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.

 

The Company adopted FIN 48 as of January 1, 2007 and has analyzed its various federal and state filing positions. Based on this evaluation, the Company believes that its accruals for income tax liabilities are adequate and, therefore, no reserves for uncertain income tax positions have been recorded pursuant to FIN 48. Additionally, the Company did not record a cumulative effect adjustment related to the adoption of FIN 48.

 

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework that clarifies the fair value measurement objective within GAAP and its application under the various pronouncements that require or permit fair value measurements, and expands disclosures about fair value measurements. It is intended to increase consistency and comparability among fair value estimates used in financial reporting. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The transition adjustment, which is measured as the difference between the carrying amount and the fair value of those financial instruments at the date SFAS No. 157 is initially applied, should be recognized as a cumulative effect adjustment to the opening balance of retained earnings for the fiscal year in which SFAS No. 157 is initially applied. The Company is currently evaluating the impact of adopting SFAS No. 157 on its financial position and results of operations.

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, although early application is allowed. The Company is currently evaluating the impact of adopting SFAS No. 159 on its financial position and results of operations.

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

 

20

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51, which requires that a noncontrolling interest in a consolidated subsidiary be displayed in the consolidated statement of financial position as a separate component of equity. After control is obtained, a change in ownership interests that does not result in a loss of control should be accounted for as an equity transaction. A change in ownership of a consolidated subsidiary that results in a loss of control and deconsolidation is a significant event that triggers gain or loss recognition, with the establishment of a new fair value basis in any remaining ownership interests. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The Company is currently evaluating the impact of adopting SFAS No. 160 on its financial position and results of operations.

In December 2007, the FASB issued SFAS No. 133 Implementation Issue No. E23 (“Issue No. E23”), which provides further clarification for determining when the use of the short-cut method is appropriate. The implementation guidance in this issue is effective for hedging relationships designated on or after January 1, 2008. The adoption of Issue No. E23 is not expected to have a material impact on the Company’s consolidated financial statements.

In September 2006, the Securities and Exchange Commission’s staff issued Staff Accounting Bulletin (“SAB”) No. 108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 requires companies to evaluate the materiality of identified unadjusted errors on each financial statement and related financial statement disclosure using both the rollover approach and the iron curtain approach, as those terms are defined in SAB No. 108. The rollover approach quantifies misstatements based on the amount of the error in the current year financial statements, whereas the iron curtain approach quantifies misstatements based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement’s year(s) of origin. Financial statements would require adjustment when either approach results in quantifying a misstatement that is material. Correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended. If a company determines that an adjustment to prior year financial statements is required upon adoption of SAB No. 108 and does not elect to restate its previous financial statements, then it must recognize the cumulative effect of applying SAB No. 108 in fiscal 2006 beginning balances of the affected assets and liabilities with a corresponding adjustment to the fiscal 2006 opening balance in retained earnings. SAB No. 108 is effective for interim periods of the first fiscal year ending after November 15, 2006. The Company adopted SAB No. 108 on December 31, 2006 and, in accordance with the initial application provisions of SAB No. 108, adjusted retained earnings as of January 1, 2006. This adjustment was considered to be immaterial individually and in the aggregate in prior years based on the Company’s historical method of assessing materiality. See Note 19 for further discussion.

 

NOTE 3. ACQUISITIONS

 

The Company includes the results of operations of real estate assets acquired in the consolidated statements of operations from the date of the related acquisition.

 

2007 Acquisitions

 

Westfield Acquisition

 

The Company closed on two separate transactions with the Westfield Group (“Westfield”) on October 16, 2007, involving four malls located in the St. Louis, MO area. In the first transaction, Westfield contributed three malls to CW Joint Venture, LLC, a Company-controlled entity (“CWJV”), and the Company contributed six malls and three associated centers. Because the terms of CWJV provide for the Company to control CWJV and to receive all of CWJV’s net cash flows after payment of operating expenses, debt service payments, and perpetual preferred joint venture unit distributions,

 

21

described below, the Company has accounted for the three malls contributed by Westfield as an acquisition. In the second transaction, the Company directly acquired the fourth mall from Westfield.

 

The purchase price of the three malls contributed to CWJV by Westfield plus the mall that was directly acquired by the Company was $1,035,325. The total purchase price consisted of $164,055 of cash, including transaction costs, the assumption of $458,182 of non-recourse debt that bears interest at a weighted-average fixed interest rate of 5.73% and matures at various dates from July 2011 to September 2016, and the issuance of $404,113 of perpetual preferred joint venture units (“PJV units”) of CWJV, which is net of a reduction for working capital adjustments of $8,975. The Company recorded a total net discount of $4,045, computed using a weighted-average interest rate of 5.78%, since the debt assumed was at a weighted-average below-market interest rate compared to similar debt instruments at the date of acquisition.

 

In November 2007, Westfield contributed a vacant anchor location at one of the malls to CWJV in exchange for $12,000 of additional PJV units. The Company has also accounted for this transaction as an acquisition.

 

The PJV units of CWJV pay an annual preferred distribution at a rate of 5.0%. The Company will have the right, but not the obligation, to purchase the PJV units after October 16, 2012 at their liquidation value, plus accrued and unpaid distributions. The Company is responsible for management and leasing of CWJV’s properties and owns all of the common units of CWJV, entitling it to receive 100% of CWJV’s cash flow after operating expenses, debt service payments and PJV unit distributions. Westfield’s preferred interest in CWJV is included in minority interest in the consolidated balance sheet.

 

Other Acquisitions

 

On November 30, 2007, the Company acquired a portfolio of eight community centers located in Greensboro and High Point, NC, and twelve office buildings located in Greensboro and Raleigh, NC and Newport News, VA from the Starmount Company for a total cash purchase price of $183,928.

 

The Company also entered into a 50/50 joint venture that purchased a portfolio of additional retail and office buildings in North Carolina from the Starmount Company on November 30, 2007. See Note 5 for additional information.

 

The results of operations of the acquired properties from Westfield and the Starmount Company have been included in the consolidated financial statements since their respective dates of acquisition. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the respective acquisition dates during the year ended December 31, 2007:

 

Land

$

99,609

 

Buildings and improvements

 

1,098,404

 

Above—market leases

 

39,572

 

In—place leases

 

31,745

 

Total assets

 

1,269,330

 

Mortgage notes payable assumed

 

(458,182

)

Net discount on mortgage notes payable assumed

 

4,045

 

Below—market leases

 

(42,122

)

Net assets acquired

$

773,070

 

 

 

The following unaudited pro forma financial information is for the years ended December 31, 2007 and 2006. It presents the results of the Company as if each of the 2007 acquisitions had occurred at the beginning of each period presented. 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 at the beginning of each of these periods. The pro forma financial

 

22

information also does not project the consolidated results of operations for any future period. The pro forma results for the years ended December 31, 2007 and 2006 are as follows:

 

 

 

2007

 

2006

 

Total revenues

 

$

1,129,089

 

$

1,105,632

 

Total expenses

 

 

(682,392

)

 

(663,415

)

Income from operations

 

$

446,697

 

$

442,217

 

Income from continuing operations

 

$

147,721

 

$

186,392

 

Net income available to common shareholders

 

$

125,499

 

$

168,754

 

Basic per share data:

 

 

 

 

 

 

 

Income from continuing operations, net of preferred dividends

 

$

1.80

 

$

2.44

 

Net income available to common shareholders

 

$

1.92

 

$

2.64

 

Diluted per share data:

 

 

 

 

 

 

 

Income from continuing operations, net of preferred dividends

 

$

1.79

 

$

2.39

 

Net income available to common shareholders

 

$

1.90

 

$

2.59

 

 

 

2006 Acquisitions

 

The Company did not complete any acquisitions in 2006.

 

2005 Acquisitions

 

Effective June 1, 2005, the Company acquired a 70% interest in Laurel Park Place, a regional mall in Livonia, MI, for a purchase price of $80,363. The purchase price consisted of $2,828 in cash, the assumption of $50,654 of non-recourse debt that bears interest at a stated rate of 8.50% and matures in December 2012 and the issuance of 571,700 Series L special common units (the “L-SCUs”) in the Operating Partnership with a fair value of $26,881. The Company recorded a debt premium of $10,552, 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. The terms of the L-SCUs are described in Note 9.

 

The Company may elect to acquire the remaining 30% ownership interest in Laurel Park Place, or a portion thereof, at any time following the acquisition date for a purchase price of $14,000, which will be paid either through the issuance of common units of limited partnership interest in the Operating Partnership or with cash, at the Company’s election. If the Company exercises its right to acquire the remaining 30% interest, or a portion thereof, prior to December 2012 through the issuance of common units, the common units issued will not be entitled to receive distributions until after December 2012. If the Company does not exercise its right to acquire the remaining 30% interest by December 2012, then the partner owning that interest will thereafter receive a preferred return equal to the greater of 12% or the 10-year treasury rate plus 800 basis points on the portion of its joint venture interest that has not yet been acquired by the Company. The Company receives all of the profits and losses of Laurel Park Place and is responsible for all of its debt. The $14,000 value of the minority partner’s interest has been recorded in Accounts Payable and Accrued Liabilities.

 

On July 14, 2005, the Company acquired The Mall of Acadiana, a super-regional mall in Lafayette, LA, for a cash purchase price, including transaction costs, of $175,204. The Company also entered into 10-year lease agreements for 13.4 acres of land adjacent to The Mall of Acadiana, which provide the Company the right to purchase the land for a cash purchase price of $3,327 during the first year of the lease term, $3,510 during the second year and amounts increasing by 10% per year for each year of the lease term thereafter. After the first year, the seller may put the land to the Company for a price equal to the amounts set forth in the previous sentence. The Company also obtained a ten-year option to acquire another adjacent 14.9 acre tract of land for a cash purchase price of $3,245 during the first six months of the option, which increases to $3,407 during the second six months of the option and to

 

23

$3,570 during the remaining nine years of the option. The Company acquired the 13.4 acre tract of land in 2006.

 

On November 7, 2005, the Company acquired Layton Hills Mall in Salt Lake City, UT, for a cash purchase price, including transaction costs, of $120,926. The Company funded a portion of the purchase price with a new, short-term loan of $102,850 that bore interest at the London Interbank Offered Rate (“LIBOR”) plus 95 basis points. The Company retired this loan in May 2006.

 

On November 16, 2005, the Company acquired Oak Park Mall in Overland, KS, Hickory Point Mall in Forsyth, IL, and Eastland Mall in Bloomington, IL, for a purchase price, including transaction costs, of $508,180, which consisted of $127,111 in cash, the assumption of $335,100 of interest-only, non-recourse loans that bear interest at a stated rate of 5.85% and mature in November 2015 and the issuance of 1,144,924 Series K special common units (the “K-SCUs”) of limited partnership interest in the Operating Partnership with a fair value of $45,969. The Company funded part of the cash portion of the purchase price with a new, non-recourse loan of $33,150 that bears interest at 5.85% and matures in November 2015. The terms of the K-SCUs are described in Note 9.

 

The results of operations of the acquired properties have been included in the consolidated financial statements since their respective dates of acquisition. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the respective acquisition dates during the year ended December 31, 2005:

 

Land

$

95,863

 

Buildings and improvements

 

763,523

 

Above—market leases

 

30,759

 

Tenant relationships

 

49,796

 

In—place leases

 

24,021

 

Total assets

 

963,962

 

Mortgage notes payable assumed

 

(385,754

)

Premiums on mortgage notes payable assumed

 

(10,552

)

Below—market leases

 

(54,263

)

Other long—term liabilities

 

(14,474

)

Net assets acquired

$

498,919

 

 

 

The following unaudited pro forma financial information is for the year ended December 31, 2005. It presents the results of the Company as if each of the 2005 acquisitions had occurred on January 1, 2005. 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, 2005. The pro forma financial information also does not project the consolidated results of operations for any future period. The pro forma results for the year ended December 31, 2005 are as follows:

 

 

2005

Total revenues

$971,647

Total expenses

(549,938)

Income from operations

$421,709

Income from continuing operations

$153,319

Net income available to common shareholders

$123,526

Basic per share data:

 

Income from continuing operations, net of preferred dividends

$1.96

Net income available to common shareholders

$1.96

Diluted per share data:

 

Income from continuing operations, net of preferred dividends

$1.89

Net income available to common shareholders

$1.90

 

 

24

NOTE 4. DISCONTINUED OPERATIONS

 

During August 2007, the Company sold Twin Peaks Mall in Longmont, CO to a third party for an aggregate sales price of $33,600 and recognized a gain on the sale of $3,971. During December 2007, the Company sold The Shops at Pineda Ridge in Melbourne, FL to a third party for an aggregate sales price of $8,500 and recognized a gain on the sale of $2,294.

 

During May 2006, the Company sold three community centers for an aggregate sales price of $42,280 and recognized a gain of $7,215. The Company also sold two community centers in May 2006 for an aggregate sales price of $63,000 and recognized a loss on impairment of real estate assets of $274. All five of these community centers were sold to Galileo America LLC (“Galileo America”) in connection with a put right the Company had previously entered into with Galileo America. The Company, as tenant, entered into separate master lease agreements with Galileo America, as landlord, covering a total of three spaces in the properties sold to Galileo America. 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 two years from the closing date. The Company had a liability of $56 and $252 at December 31, 2007 and 2006, respectively, for the amounts to be paid over the remaining terms of the master lease obligations. To the extent the Company is relieved of its obligations under the master lease agreements as a result of leasing the spaces to third parties, the Company will recognize additional gain on sale of real estate assets.

 

During 2005, the Company sold six community centers for an aggregate sales price of $12,600. Additionally, the Company determined that two community centers met the criteria to be reflected as held for sale as of December 31, 2005 and recognized a loss on impairment of $1,029.

 

Total revenues of the centers described above that are included in discontinued operations were $4,851, $11,322 and $11,837 in 2007, 2006 and 2005, respectively. All periods presented have been adjusted to reflect the operations of the centers described above as discontinued operations.

 

 

NOTE 5. JOINT VENTURES

 

Unconsolidated Affiliates

 

At December 31, 2007, the Company had investments in the following 15 entities, which are accounted for using the equity method of accounting:

 

Joint Venture

Property Name

Company’s

Interest

Governor’s Square IB

Governor’s Plaza

50.00%

Governor’s Square Company

Governor’s Square

47.50%

High Pointe Commons, LP

High Pointe Commons

50.00%

Imperial Valley Mall L.P.

Imperial Valley Mall

60.00%

Imperial Valley Peripheral L.P.

Imperial Valley Mall (vacant land)

60.00%

Kentucky Oaks Mall Company

Kentucky Oaks Mall

50.00%

Mall of South Carolina L.P.

Coastal Grand—Myrtle Beach

50.00%

Mall of South Carolina Outparcel L.P.

Coastal Grand—Myrtle Beach (vacant land)

50.00%

Mall Shopping Center Company

Plaza del Sol

50.60%

Parkway Place L.P.

Parkway Place

45.00%

Triangle Town Member LLC

Triangle Town Center, Triangle Town Commons and Triangle Town Place

50.00%

York Town Center, LP

York Town Center

50.00%

JG Gulf Coast Town Center

Gulf Coast Town Center

50.00%

CBL Brazil

Plaza Macae

60.00%

CBL-TRS Joint Venture, LLC

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

buildings

50.00%

 

 

25

Condensed combined financial statement information of these unconsolidated affiliates is presented as follows:

 

 

December 31,

 

2007

2006

ASSETS:

 

 

Net investment in real estate assets

$     1,020,068

$       588,300

Other assets

86,367

37,047

Total assets

$   1,106,435

$       625,347

LIABILITIES:

 

 

Mortgage and other notes payable

$        875,387

$       489,810

Other liabilities

36,376

18,526

Total liabilities

911,763

508,336

OWNERS' EQUITY:

 

 

The Company

126,071

80,414

Other investors

68,601

36,596

Total owners' equity

194,672

117,010

Total liabilities and owners’ equity

$     1,106,435

$       625,346

 

 

 

 

 

Year Ended December 31,

 

2007

2006

2005

 

 

 

 

Total revenues

$105,256

$94,785

$118,823

Depreciation and amortization

(31,177)

(26,488)

(30,273)

Other operating expenses

(32,579)

(28,514)

(32,738)

Income from operations

41,500

39,783

55,812

Interest income

283

176

246

Interest expense

(36,850)

(34,731)

(35,083)

Gain on sales of real estate assets

3,118

5,244

6,717

Discontinued operations

-

-

55

Net income

$8,051

$10,472

$27,747

 

Debt on these properties is non-recourse, excluding Parkway Place. See Note 15 for a description of guarantees the Company has issued related to certain unconsolidated affiliates.

 

In June 2007, JG Gulf Coast Town Center LLC obtained a ten-year, non-recourse mortgage note payable of $190,800 that has a fixed interest rate of 5.601% and matures on July 2017. The net proceeds were used to retire the outstanding borrowings of $143,023 under the construction loan that was incurred to develop Phase I and Phase II of Gulf Coast Town Center.

 

In December 2006, Kentucky Oaks Mall Company obtained a ten-year, non-recourse mortgage note payable of $30,000 that has a fixed interest rate of 5.27% and matures in January 2017. The net proceeds were used to retire the outstanding borrowings of $29,684 under the previous mortgage loan.

 

In September 2005, Imperial Valley Mall L.P. obtained a ten-year, non-recourse mortgage note payable of $60,000 that has a fixed interest rate of 4.985% and matures in September 2015. The proceeds of the loan were used to retire the outstanding borrowings of $58,265 under the construction loan that was incurred to develop Imperial Valley Mall.

 

CBL-TRS Joint Venture

 

Effective November 30, 2007, the Company entered into a 50/50 joint venture, CBL-TRS Joint Venture, LLC (“CBL-TRS”), with Teachers’ Retirement System of The State of Illinois (“TRS”). CBL-TRS acquired a portfolio of retail and office buildings in North Carolina including Friendly Center and The Shops at Friendly Center in Greensboro and six office buildings located adjacent to Friendly Center. The portfolio was acquired from the Starmount Company. The total purchase price paid by CBL-TRS was $260,679, which consisted of $216,146 in

 

26

cash, including transaction costs, and the assumption of $44,533 of non-recourse debt at a fixed interest rate of 5.90% that matures in January 2017.

 

The Company and TRS each contributed cash of $58,045 to CBL-TRS. The Company also made a short-term loan of $100,000 to CBL-TRS that is to be repaid through financing to be obtained independently by CBL-TRS. The financing is expected to close in March 2008.

 

Under the terms of the joint venture agreement, neither member is required to make additional capital contributions, except as specifically stated in the agreement governing the joint venture. CBL-TRS’ profits and distributions of cash flows are allocated 50/50 to TRS and the Company.

 

CBL Brazil

 

In October 2007, the Company entered into a condominium partnership agreement with several individual investors and a former land owner, to acquire a 60% interest in a new retail development in Macaé, Brazil. The Company’s total share of the development costs is capped at R$31,207 (Reas), or using the exchange rate as of December 31, 2007 of 0.562114, $17,542 USD. At December 31, 2007, the Company had incurred total funding of $9,813 USD. Tenco Realty (“Tenco”), a retail owner, operator and developer based in Belo Horizonte, Brazil, will develop and manage the center. Cash flows will be distributed on a pari passu basis among the partners. In November 2007, the Company announced that it has agreed to form a joint venture with Tenco. CBL will have the opportunity to purchase a minimum 51% interest in any future Tenco developments.

 

Triangle Town Member LLC Joint Venture

 

On November 16, 2005, the Company formed a 50/50 joint venture Triangle Town Member LLC, with Jacobs to own Triangle Town Center and its associated and lifestyle centers, Triangle Town Place and Triangle Town Commons, in Raleigh, NC. The Company assumed management, leasing and any future development responsibilities of the properties.

 

Jacobs’ initial contribution consisted of the three shopping centers and the Company made an initial cash contribution of $1,560. Concurrent with its formation, the joint venture entered into a new ten-year, fixed rate non-recourse loan of $200,000, secured by the collective centers. The proceeds from the loan were used to retire an existing construction loan totaling $121,828 and the balance was paid to Jacobs as a partial return of Jacobs’ equity. The joint venture equity will be equalized between Jacobs and the Company through future contributions by the Company and through property cash flow distributions.

 

Under the terms of the joint venture agreement, the Company is required to fund any additional equity necessary for capital expenditures, including future development or expansion of the property, and any operating deficits of the joint venture. The Company has guaranteed funding of such items up to a maximum of $50,000. The joint venture’s profits and losses are allocated 50/50 to Jacobs and the Company. The Company receives a preferred return on its invested capital in the joint venture and will, after payment of such preferred return and repayment of the Company’s invested capital, and repayment of the balance of Jacobs’ equity, share equally with Jacobs in the joint venture’s cash flows.

 

Galileo America Joint Venture

 

On September 24, 2003, the Company formed Galileo America, a joint venture with Galileo America, Inc., the U.S. affiliate of Australia-based Galileo America Shopping Trust, to invest in community centers throughout the United States. The arrangement provided 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. The three phases had been closed on by January 5, 2005. The Company recognized a loss on impairment of real estate assets of $262 during the year ended December 31, 2005 related to the properties included in the third phase.

 

27

 

The Company, as tenant, entered into separate master lease agreements with Galileo America, as landlord, covering certain spaces in certain of the properties sold to the joint venture. Under each master lease agreement, the Company was 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. Two properties in the first phase and one in the second phase were subject to master lease agreements. During 2005, the Company recognized a gain of $2,505 as a result of being relieved of its obligation under the master lease arrangements as spaces were leased to third parties.

 

On August 10, 2005, the Company transferred all of its 8.4% ownership interest in Galileo America to Galileo America in exchange for Galileo America’s interest in two community centers: Springdale Center in Mobile, AL, and Wilkes-Barre Township Marketplace in Wilkes-Barre Township, PA. The two properties had a fair value of $60,000. The Company recognized a gain of $42,022, in accordance with SFAS No. 153, on the redemption of its interest in Galileo America, which represents the excess of the fair value of the two properties over the carrying amount of the Company’s investment in Galileo America of $17,978. The Company had the right to put the two properties to Galileo America for $60,000 in cash at any time for one year following the redemption,as well as additional property at Springdale Center that the Company held in a ground lease for $3,000 in cash. As discussed in Note 4, the Company exercised its put right and sold these properties to Galileo America in May 2006. The Company also entered into an agreement to provide advisory services to Galileo America for a period of three years in exchange for $1,000 per year. The Company recorded a loss on impairment during 2005 related to these properties, which is discussed in Note 4.

 

The Company sold its management and advisory contracts with Galileo America to New Plan Excel Realty Trust, Inc. (“New Plan”) for $22,000 in cash and, after reductions for closing costs, recognized a gain of $21,619 during 2005. The Company also transferred its remaining obligations of $3,818 under the master lease agreement to New Plan by paying New Plan a cash payment of $1,925. The Company recognized a gain of $1,893 during 2005 as a result of the settlement of the remaining master lease liability.

 

New Plan retained the Company to manage nine properties that Galileo America had recently acquired from a third party for a term of 17 years beginning on the third anniversary of the closing and will pay the Company a management fee of $1,000 per year. At any time after November 22, 2007, New Plan could terminate the agreement by paying the Company a termination fee of $7,000.

 

In October 2007, the Company received notification that New Plan had determined to exercise its right to terminate the management agreement by paying the Company a termination fee of $7,000, payable on August 10, 2008. However, the Company has not recognized the $7,000 as income in the consolidated financial statements due to uncertainty regarding the collectibility of the fee. The Company will recognize the $7,000 as gain in the period that it determines collectibility is reasonably assured.

 

Separately, Galileo America entered into an agreement to acquire New Plan’s interest in a portfolio of properties. Under the terms of its agreement with Galileo America, the Company received an acquisition fee of $8,000 related to that transaction, which was recognized as management fee revenues during 2005.

 

As a result of the disposition of its ownership interest in Galileo America and the sale of the related management and advisory contracts, the Company recorded additional compensation expense of $1,301 in 2005 related to the severance of affected personnel, including $736 related to the accelerated vesting of stock-based compensation awards for certain of the affected personnel.

 

28

Cost Method Investments

 

In February 2007, the Company acquired a 6.2% minority interest in subsidiaries of Jinsheng Group (“Jinsheng”), an established mall operating and real estate development company located in Nanjing, China, for $10,125. As of December 31, 2007, Jinsheng owns controlling interests in four home decor shopping malls and two general retail shopping centers.

 

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

 

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

 

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

 

Variable Interest Entities

 

In August 2007, the Company entered into a joint venture agreement with a third party to develop and operate Statesboro Crossing, an open-air shopping center in Statesboro, GA. The Company holds a 50% ownership interest in the joint venture. The Company determined that its investment represents a variable interest in a variable interest entity and that the Company is the primary beneficiary. As a result, the joint venture is presented in the accompanying financial statements as of December 31, 2007 on a consolidated basis, with the interests of the third party reflected as minority interest. At December 31, 2007, this joint venture had total assets of $4,921.

 

In May 2007, the Company entered into a joint venture agreement with certain third parties to develop and operate The Village at Orchard Hills, a lifestyle center in Grand Rapids Township, MI. The Company holds a 50% ownership interest in the joint venture. The Company determined that its investment represents a variable interest in a variable interest entity and that the Company is the primary beneficiary. As a result, the joint venture is presented in the accompanying financial statements as of December 31, 2007 on a consolidated basis, with the interests of the third parties reflected as minority interest. At December 31, 2007, this joint venture had total assets of $5,169.

 

In March 2007, the Company entered into a joint venture agreement with a third party to develop and operate Settlers Ridge, an open-air shopping center in Robinson Township, PA. The Company holds a 60% ownership interest in the joint venture. The Company determined that its investment represents a variable interest in a variable interest entity and that the Company is the primary beneficiary. The joint venture is presented in the accompanying financial statements on a consolidated basis, with the interests

 

29

of the third party reflected as minority interest. At December 31, 2007, this joint venture had total assets of $31,549.

 

The Company has a 10% ownership interest and is the primary beneficiary in a joint venture that owns and operates Willowbrook Plaza in Houston, TX, Massard Crossing in Ft. Smith, AR and Pemberton Plaza in Vicksburg, MS. At December 31, 2007 and 2006, this joint venture had total assets of $53,727 and $54,516, respectively, and a mortgage note payable of $36,535 and $36,987, respectively.

 

In April 2005, the Company formed JG Gulf Coast Town Center LLC, a joint venture with Jacobs to develop Gulf Coast Town Center in Lee County (Ft. Myers/Naples), Florida. Under the terms of the joint venture agreement, the Company initially contributed $40,335 for a 50% interest in the joint venture, the proceeds of which were used to refund the aggregate acquisition and development costs incurred with respect to the project that were previously paid by Jacobs. The Company must also provide any additional equity necessary to fund the development of the property, as well as to fund up to an aggregate of $30,000 of operating deficits of the joint venture. The Company receives a preferred return of 11% on its invested capital in the joint venture and will, after payment of such preferred return and repayment of the Company’s invested capital, share equally with Jacobs in the joint venture’s profits.

 

In 2007, JG Gulf Coast Town Center obtained a non-recourse mortgage note payable of $190,800, the proceeds of which were used to retire the outstanding borrowings of $143,023 on the construction loan that funded the construction of the property. The net proceeds of $47,777 were first distributed to CBL to the extent of its unreturned capital advances plus accrued and unpaid preferred returns, and then pro rata to the Company and Jacobs.

 

As of December 31, 2006, the Company determined that this joint venture was a variable interest entity in which it was the primary beneficiary in accordance with FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities and consolidated the joint venture. During the fourth quarter of 2007, the Company reconsidered whether or not this entity was a variable interest entity and determined that it was not. As a result, the Company ceased consolidating this variable interest entity and began accounting for it as an unconsolidated affiliate using the equity method of accounting during the fourth quarter of 2007.

 

In October 2006, the Company entered into a loan agreement with a third party under which the Company would loan the third party up to $18,000 to fund land acquisition costs and certain predevelopment expenses for the purpose of developing a shopping center. The loan agreement provides that the Company may convert the loan to a 50% ownership interest in the third party at anytime. The Company determined that its loan to the third party represents a variable interest in a variable interest entity and that the Company is the primary beneficiary. As a result, the Company consolidates this entity. At December 31, 2007 and 2006, this joint venture had total assets of $18,233 and $10,743, respectively.

 

In October 2006, the Company entered into a loan agreement with a third party under which the Company would loan the third party up to $7,300 to fund land acquisition costs and certain predevelopment expenses for the purpose of developing a shopping center. The loan agreement provides that, in certain circumstances, the Company may convert the loan to a 25% ownership interest in the third party. As of December 31, 2006, the Company determined that its loan to the third party was a variable interest in a variable interest entity and that the Company was the primary beneficiary. As a result, the Company consolidated this entity as of December 31, 2006. During 2007, the Company reconsidered its status as the primary beneficiary of this variable interest entity and determined that it no longer was the primary beneficiary. Therefore, the Company ceased consolidating this variable interest entity and has recorded the loan as a mortgage note receivable. The loan bears interest at 9.0% and matures on October 31, 2008.

 

 

30

 

 

 

NOTE 6. MORTGAGE AND OTHER NOTES PAYABLE

 

 

Mortgage and other notes payable consisted of the following:

 

 

December 31, 2007

 

December 31, 2006

 

Amount

Weighted Average Interest Rate (1)

 

Amount

Weighted Average Interest Rate (1)

Fixed-rate debt:

 

 

 

 

 

Non-recourse loans on operating properties

$4,543,515

5.85%

 

$3,517,710

5.99%

Variable-rate debt:

 

 

 

 

 

Recourse term loans on operating properties

81,767

6.15%

 

101,464

6.48%

Lines of credit (2)

1,165,032

6.28%

 

830,932

6.19%

Construction loans

79,004

6.20%

 

114,429

6.61%

Total variable-rate debt

1,325,803

6.13%

 

1,046,825

6.26%

Total

$5,869,318

5.92%

 

$4,564,535

6.06%

 

(1)

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

(2)

The Company has entered into an interest rate swap on a notional amount of $250,000 related to its largest secured credit facility to effectively fix the interest rate on that portion of the line of credit. Therefore, this amount is currently reflected in fixed-rate debt.

 

Non-recourse and recourse term loans include loans that are secured by properties owned by the Company that have a net carrying value of $6,031,639 at December 31, 2007.

 

Fixed-Rate Debt

 

At December 31, 2007, fixed-rate loans bear interest at stated rates ranging from 4.52% to 8.42%. Outstanding borrowings under fixed-rate loans include net unamortized debt premiums of $22,927 that were recorded when the Company assumed debt to acquire real estate assets that was at a net above-market interest rate compared to similar debt instruments at the date of acquisition. Fixed-rate loans generally provide for monthly payments of principal and/or interest and mature at various dates from February 2008 through May 2017, with a weighted average maturity of 5.1 years.

 

During the second quarter of 2007, the Company obtained two separate ten-year, non-recourse loans totaling $207,520 that bear interest at fixed rates ranging from 5.60% to 5.66%, with a weighted average of 5.61%. The loans are secured by Gulf Coast Town Center and Eastgate Crossing. The proceeds were used to retire two variable rate loans totaling $143,258 and to reduce outstanding balances on the Company’s credit facilities.

 

During the first quarter of 2007, the Company obtained six separate ten-year, non-recourse loans totaling $417,040 that bear interest at fixed rates ranging from 5.67% to 5.68%, with a weighted average of 5.67%. The loans are secured by Mall of Acadiana, Citadel Mall, The Plaza at Fayette Mall, Layton Hills Mall and its associated center, Hamilton Corner and The Shoppes at St. Clair Square. The proceeds were used to retire $92,050 of mortgage notes payable that were scheduled to mature during the succeeding twelve months and to reduce outstanding balances on the Company’s credit facilities. The mortgage notes payable that were retired consisted of two variable rate term loans totaling $51,825 and three fixed rate loans totaling $40,225. The Company recorded a loss on extinguishment of debt of $227 related to prepayment fees and the write-off of unamortized deferred financing costs associated with the loans that were retired.

 

During the third quarter of 2006, the Company obtained four separate ten-year, non-recourse loans totaling $317,000 that bear interest at fixed rates ranging from 5.86% to 6.10%, with a weighted

 

31

average rate of 5.96%. The proceeds were used to retire $249,752 of mortgage notes payable that were scheduled to mature during the succeeding twelve months and to pay outstanding balances on the Company’s credit facilities. The mortgage notes payable that were retired consisted of three variable rate term loans totaling $189,150 and one fixed rate loan of $60,602. The Company recorded a loss on extinguishment of debt of $935 related to prepayment fees and the write-off of unamortized deferred financing costs associated with the loans that were retired.

 

Variable-Rate Debt

 

Recourse term loans bear interest at variable interest rates indexed to the prime lending rate or LIBOR. At December 31, 2007, interest rates on recourse loans varied from 5.54% to 6.49%. These loans mature at various dates from June 2008 to December 2010, with a weighted average maturity of 1.7 years.

 

Unsecured Line of Credit

 

The Company has an unsecured credit facility that is used for construction, acquisition and working capital purposes, as well as issuances of letters of credit. The unsecured credit facility has total availability of $560,000 that bears interest at the London Interbank Offered Rate (“LIBOR”) plus a margin of 0.75% to 1.20% based on the Company’s leverage, as defined in the agreement to the facility. Additionally, the Company pays an annual fee equal to 0.1% of the amount of total availability under the unsecured credit facility. The credit facility matures in August 2008 and has three one-year extension options, which are at the Company’s election. At December 31, 2007, the outstanding borrowings of $490,232 under the unsecured credit facility had a weighted average interest rate of 5.98%.

 

In November 2007, in conjunction with the acquisition of certain properties from the Starmount Company or its affiliates (the “Starmount Properties”), the Company entered into an Unsecured Credit Agreement (the “Agreement”) with Wells Fargo Bank, National Association, as administrative agent, U.S. Bank National Association, Bank of America, N.A., and Aareal Bank AG. Under the terms of the Agreement, the Company may borrow up to a total of $459,140 through a series of up to three separate advances. The proceeds received from the advances may only be used to fund the acquisition of the Starmount Properties. Borrowings of up to $193,000 and $266,140 mature on November 30, 2008 and November 30, 2010 (the “Maturity Dates”), respectively. The Company may extend each of the Maturity Dates by up to two periods of one year each and must pay an extension fee equal to 0.15% of the then current outstanding amount. The advances bear interest at a rate of LIBOR plus a margin ranging from 0.95% to 1.40% based on the Company’s leverage ratio, as defined in the Agreement.  

Accrued and unpaid interest on the outstanding principal amount of each advance is payable monthly and the Company may make voluntary prepayments prior to the Maturity Dates without penalty. Net proceeds from a sale, or the Company’s share of excess proceeds from any refinancings, of any of the properties originally purchased with borrowings from this unsecured credit agreement must be used to pay down any remaining outstanding balance. The Agreement contains default provisions customary for transactions of this nature and also contains cross-default provisions for defaults of the Company’s $560,000 unsecured facility and $525,000 unsecured facility. At December 31, 2007, the outstanding borrowings under this unsecured credit agreement totaled $348,800 and had a weighted average interest rate of 5.95%.

 

Secured Lines of Credit

 

The Company has four secured lines of credit that are used for construction, acquisition, and working capital purposes, as well as issuances of letters of credit. Each of these lines is secured by mortgages on certain of the Company’s operating properties. Borrowings under the secured lines of credit bear interest at a rate of LIBOR plus a margin ranging from 0.80% to 0.90% and had a weighted average interest rate of 5.70% at December 31, 2007. The Company also pays a fee based on the amount of unused availability under its largest secured credit facility at a rate of 0.125% or 0.250%, depending on the level

 

32

of unused availability. The following summarizes certain information about the secured lines of credit as of December 31, 2007:

 

Total Available

 

Total Outstanding

 

Maturity

Date

$525,000

 

$525,000

 

February 2009

100,000

 

13,800

 

June 2009

20,000

 

20,000

 

March 2010

17,200

 

17,200

 

April 2010

$662,200

 

$576,000

 

 

 

In September 2007, the Company amended its largest secured credit facility to increase the maximum availability from $476,000 to $525,000 and to substitute certain collateral under the facility.

 

On December 31, 2007, the Company entered into a $250,000 pay fixed/receive variable interest rate swap agreement with Wells Fargo Bank, National Association, to hedge the interest rate risk exposure on an amount of borrowings on the Company’s largest secured credit facility equal to the swap notional amount. This interest rate swap hedges the risk of changes in cash flows on the Company’s designated forecasted interest payments attributable to changes in 1-month LIBOR, the designated benchmark interest rate being hedged, thereby reducing exposure to variability in cash flows relating to interest payments on the variable-rate debt. The interest rate swap will effectively fix the interest payments on the portion of debt principal corresponding to the swap notional amount at 4.605%. The swap had no value as of December 31, 2007, and matures on December 30, 2009.

 

In May 2007, the Company amended its $100,000 secured credit facility to change the maturity date from June 1, 2008 to June 1, 2009 and to revise the investment concentration covenant for consistency with the Company’s major credit facilities.

 

The secured lines of credit are secured by 22 of the Company’s properties, which had an aggregate net carrying value of $512,236 at December 31, 2007.

 

Letters of Credit

 

At December 31, 2007, the Company had additional secured and unsecured lines of credit with a total commitment of $42,654 that are only used for issuing letters of credit. The letters of credit outstanding under these lines of credit totaled $18,362 at December 31, 2007.

 

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. Additionally, certain property-specific mortgage notes payable require the maintenance of debt service coverage ratios on their respective properties. The Company was in compliance with all covenants and restrictions at December 31, 2007.

 

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

 

33

 

Debt Maturities

 

As of December 31, 2007, the scheduled principal payments on all mortgage and other notes payable, including construction loans and lines of credit, are as follows:

 

2008

$1,113,019

2009

974,443

2010

765,647

2011

314,081

2012

540,887

Thereafter

2,138,314

 

5,846,391

Net unamortized premiums

22,927

 

$5,869,318

 

Of the $1,130,219 of scheduled principal payments in 2008, $1,068,786 is related to eleven loans and three lines of credit that are scheduled to mature in 2008. The Company intends to extend, retire or refinance these loans.

 

NOTE 7. LOSS ON EXTINGUISHMENT OF DEBT

 

The losses on extinguishment of debt resulted from prepayment penalties, the write-off of unamortized deferred financing costs and unamortized debt premiums when notes payable were retired before their scheduled maturity dates as follows:

 

 

Year Ended December 31,

 

2007

 

2006

 

2005

 

 

 

 

 

 

Prepayment fees

$227

 

$557

 

$6,524

Unamortized deferred financing costs

-

 

378

 

976

Unamortized debt premiums

-

 

-

 

(1,329)

 

$227

 

$935

 

$6,171

 

NOTE 8. SHAREHOLDERS’ EQUITY

 

Common Stock Repurchase Plan

 

On August 2, 2007, the Company’s board of directors approved a $100,000 common stock repurchase plan effective for twelve months. Under the August 2007 plan, purchases of shares of the Company’s common stock may be made from time to time, subject to market conditions and at prevailing market prices, through open market purchases. Any stock repurchases are to be funded through the Company’s available cash and credit facilities. The Company is not obligated to repurchase any shares of stock under the plan and the Company may terminate the plan at any time. Repurchased shares are deemed retired and are, accordingly, cancelled and no longer considered issued. As of December 31, 2007, the Company had repurchased 148,500 shares at a cost of approximately $5,168. The cost of repurchased shares is recorded as a reduction in the respective components of shareholders’ equity.

 

In November 2005, the Company’s board of directors approved a plan to repurchase up to $60,000 of the Company’s common stock by December 31, 2006. The Company had repurchased 1,371,034 shares of its common stock as of December 31, 2005 for a total of $54,998. The Company did not repurchase any additional shares under this plan subsequent to December 31, 2005.

 

Preferred Stock

 

On June 28, 2007, the Company redeemed its 2,000,000 outstanding shares of 8.75% Series B Cumulative Redeemable Stock (the “Series B Preferred Stock”) for $100,000, representing a liquidation preference of $50.00 per share, plus accrued and unpaid dividends of $2,139. In connection with the

 

34

 

 

redemption of the Series B Preferred Stock, the Company incurred a charge of $3,630 to write off direct issuance costs that were recorded as a reduction of additional paid-in capital when the Series B Preferred Stock was issued. The charge is included in preferred dividends in the accompanying consolidated statement of operations for the year ended December 31, 2007.

 

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 convertible into any other securities of the Company. The Series C Preferred Stock cannot be redeemed by the Company prior to August 22, 2008. After that date, the Company may redeem shares, in whole or in part, at any time for a cash redemption price of $250.00 per share ($25.00 per depositary share) plus accrued and unpaid dividends. The net proceeds of $111,227 were used to partially fund certain acquisitions and to reduce outstanding borrowings on the Company’s credit facilities.

 

On December 13, 2004, the Company issued 7,000,000 depositary shares in a public offering, each representing one-tenth of a share of 7.375% Series D Cumulative Redeemable Preferred Stock (the “Series D Preferred Stock”) with a par value of $0.01 per share. The Series D Preferred Stock has a liquidation preference of $250.00 per share ($25.00 per depositary share). The dividends on the Series D Preferred Stock are cumulative, accrue from the date of issuance and are payable quarterly in arrears at a rate of $18.4375 per share ($1.84375 per depositary share) per annum. The Series D 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 D Preferred Stock cannot be redeemed by the Company prior to December 13, 2009. After that date, the Company may redeem shares, in whole or in part, at any time for a cash redemption price of $250.00 per share ($25.00 per depositary share) plus accrued and unpaid dividends. The net proceeds of $169,333 were used to reduce outstanding borrowings on the Company’s credit facilities.

 

Holders of each series of preferred stock will have limited voting rights if dividends are not paid for six or more quarterly periods and in certain other events.

 

Dividends

 

On November 6, 2007, the Company declared a cash dividend of $0.5450 per share of common stock for the quarter ended December 31, 2007. The dividend was paid on January 15, 2008, to shareholders of record as of December 28, 2007. The total dividend of $36,149 is included in accounts payable and accrued liabilities at December 31, 2007. The total dividend included in accounts payable and accrued liabilities at December 31, 2006 was $33,038.

 

                

 

35

The allocations of dividends declared and paid for income tax purposes are as follows:

 

 

Year Ended December 31,

 

2007

 

2006

 

2005

Dividends declared:

 

 

 

 

 

Common stock

$2.06000

 

$1.87750

 

$1.76625

Series B preferred stock

$1.09375

 

$4.37500

 

$4.37500

Series C preferred stock

$19.375

 

$19.375

 

$19.375

Series D preferred stock

$18.4375

 

$18.4375

 

$19.3594

 

 

 

 

 

 

Allocations:

 

 

 

 

 

Common stock

 

 

 

 

 

Ordinary income

77.86%

 

97.56%

 

100.00%

Capital gains 15% rate

1.65%

 

2.22%

 

0.00%

Capital gains 25% rate

0.00%

 

0.22%

 

0.00%

Return of capital

20.49%

 

0.00%

 

0.00%

Total

100.00%

 

100.00%

 

100.00%

 

 

 

 

 

 

Preferred stock (1)

 

 

 

 

 

Ordinary income

97.93%

 

97.56%

 

100.00%

Capital gains 15% rate

2.07%

 

2.22%

 

0.00%

Capital gains 25% rate

0.00%

 

0.22%

 

0.00%

Total

100.00%

 

100.00%

 

100.00%

 

(1) The allocations for income tax purposes are the same for each series of preferred stock for each period presented.

 

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 22 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 interests are based on their ownership percentage of the Operating Partnership at December 31, 2007 and 2006. The ownership percentage is determined by dividing the number of Operating Partnership Units held by the minority interests at December 31, 2007 and 2006 by the total Operating Partnership Units outstanding at December 31, 2007 and 2006, respectively. The minority interest ownership percentage in assets and liabilities of the Operating Partnership was 43.3% and 43.7% at December 31, 2007 and 2006, respectively.

 

Income is allocated to the Operating Partnership’s minority interests 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 interests 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 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. During 2007 and 2006, the Company allocated

 

36

$9,361 and $1,785, respectively, from shareholders’ equity to minority interest. In 2005, the Company allocated $37,157 from minority interest to shareholders’ equity.

 

The total minority interest in the Operating Partnership was $493,515 and $550,905 at December 31, 2007 and 2006, respectively.

 

On November 6, 2007, the Operating Partnership declared a distribution of $28,235 to the Operating Partnership’s limited partners. The distribution was paid on January 15, 2008. This distribution represented a distribution of $0.5450 per unit for each common unit and $0.7322 to $0.7572 per unit for certain special common units in the Operating Partnership. The total distribution is included in accounts payable and accrue