CBL-9.30.2011-10Q
Table of Contents

UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-Q
______________
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011
Or
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM ____________ TO _______________
 
COMMISSION FILE NO. 1-12494
______________
CBL & ASSOCIATES PROPERTIES, INC.
(Exact Name of registrant as specified in its charter)
______________
DELAWARE  
 
   62-1545718
 
 
 
(State or other jurisdiction of incorporation or organization)     
 
 (I.R.S. Employer Identification Number)
                       
 
2030 Hamilton Place Blvd., Suite 500, Chattanooga,  TN  37421-6000
(Address of principal executive office, including zip code)
423.855.0001
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 
 Yes x   
  No o
                               
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 Yes x   
  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
 Large accerlerated filer x
Accerlerated filer o
 Non-accelerated filer o (Do not check if smaller reporting company)
Smaller Reporting Company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 Yes o  
  No x
As of November 2, 2011, there were 148,364,359 shares of common stock, par value $0.01 per share, outstanding.

1

Table of Contents

CBL & Associates Properties, Inc.

Table of Contents

PART I
FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1:   Financial Statements

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

ASSETS
September 30,
2011
 
December 31,
2010
Real estate assets:
 
 
 
Land
$
926,423

 
$
928,025

Buildings and improvements
7,585,004

 
7,543,326

 
8,511,427

 
8,471,351

Accumulated depreciation
(1,883,878
)
 
(1,721,194
)
 
6,627,549

 
6,750,157

Developments in progress
151,271

 
139,980

Net investment in real estate assets
6,778,820

 
6,890,137

Cash and cash equivalents
61,912

 
50,896

Receivables:
 

 
 

 Tenant, net of allowance for doubtful accounts of $1,971
     in 2011 and $3,167 in 2010
79,471

 
77,989

 Other, net of allowance for doubtful accounts of $1,397
     in 2011
12,347

 
11,996

Mortgage and other notes receivable
26,942

 
30,519

Investments in unconsolidated affiliates
179,504

 
179,410

Intangible lease assets and other assets
283,499

 
265,607

 
$
7,422,495

 
$
7,506,554

 
 
 
 
 
 
 
 
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
 

 
 

Mortgage and other indebtedness
$
5,233,148

 
$
5,209,747

Accounts payable and accrued liabilities
314,828

 
314,651

Total liabilities
5,547,976

 
5,524,398

Commitments and contingencies (Notes 5 and 11)


 


Redeemable noncontrolling interests:  
 

 
 

Redeemable noncontrolling partnership interests  
24,507

 
34,379

Redeemable noncontrolling preferred joint venture interest
423,834

 
423,834

Total redeemable noncontrolling interests
448,341

 
458,213

Shareholders' equity:
 

 
 

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

 
 

 7.75% Series C Cumulative Redeemable Preferred
     Stock, 460,000 shares outstanding
5

 
5

 7.375% Series D Cumulative Redeemable Preferred
     Stock, 1,815,000 shares outstanding
18

 
18

 Common stock, $.01 par value, 350,000,000 shares
     authorized, 148,363,832 and 147,923,707 issued and
     outstanding in 2011 and 2010, respectively
1,484

 
1,479

Additional paid-in capital
1,667,294

 
1,657,507

Accumulated other comprehensive income
961

 
7,855

Dividends in excess of cumulative earnings
(440,798
)
 
(366,526
)
Total shareholders' equity
1,228,964

 
1,300,338

Noncontrolling interests
197,214

 
223,605

Total equity
1,426,178

 
1,523,943

 
$
7,422,495

 
$
7,506,554

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

3

Table of Contents

CBL & Associates Properties, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2011
 
2010
 
2011
 
2010
REVENUES:
 
 
 
 
 
 
 
Minimum rents
$
174,917

 
$
167,742

 
$
515,682

 
$
500,178

Percentage rents
3,040

 
2,602

 
8,894

 
8,680

Other rents
4,206

 
4,236

 
13,797

 
13,321

Tenant reimbursements
77,524

 
77,370

 
231,688

 
231,376

Management, development and leasing fees
1,909

 
1,369

 
4,814

 
4,676

Other
8,415

 
7,351

 
26,372

 
21,822

Total revenues
270,011

 
260,670

 
801,247

 
780,053

 
 
 
 
 
 
 
 
OPERATING EXPENSES:
 

 
 

 
 

 
 

Property operating
39,479

 
37,393

 
115,729

 
111,585

Depreciation and amortization
71,404

 
71,814

 
211,496

 
211,035

Real estate taxes
23,801

 
24,676

 
73,482

 
73,796

Maintenance and repairs
13,898

 
12,826

 
43,997

 
41,459

General and administrative
10,092

 
10,495

 
33,133

 
31,890

Loss on impairment of real estate
51,304

 

 
55,761

 

Other
7,446

 
6,351

 
22,795

 
19,467

Total operating expenses
217,424

 
163,555

 
556,393

 
489,232

Income from operations
52,587

 
97,115

 
244,854

 
290,821

Interest and other income
598

 
832

 
1,755

 
2,831

Interest expense
(70,643
)
 
(71,178
)
 
(209,771
)
 
(216,052
)
Gain on extinguishment of debt

 

 
581

 

Gain on sales of real estate assets
2,890

 
562

 
3,637

 
2,577

Equity in earnings (losses) of unconsolidated affiliates
989

 
(1,558
)
 
4,222

 
(610
)
Income tax (provision) benefit
(4,653
)
 
1,264

 
1,770

 
5,052

Income (loss) from continuing operations
(18,232
)
 
27,037

 
47,048

 
84,619

Operating income (loss) of discontinued operations
(57
)
 
611

 
27,986

 
(25,251
)
Gain (loss) on discontinued operations
(31
)
 
29

 
86

 
29

Net income (loss)
(18,320
)
 
27,677

 
75,120

 
59,397

Net (income) loss attributable to noncontrolling interests in:
 

 
 

 
 

 
 

Operating partnership
7,760

 
(3,605
)
 
(5,443
)
 
(4,992
)
Other consolidated subsidiaries
(6,166
)
 
(6,133
)
 
(18,708
)
 
(18,394
)
Net income (loss) attributable to the Company
(16,726
)
 
17,939

 
50,969

 
36,011

Preferred dividends
(10,594
)
 
(8,359
)
 
(31,782
)
 
(22,745
)
Net income (loss) attributable to common shareholders
$
(27,320
)
 
$
9,580

 
$
19,187

 
$
13,266



4

Table of Contents

CBL & Associates Properties, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
(Continued)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2011
 
2010
 
2011
 
2010
Basic per share data attributable to common shareholders:
 

 
 

 
 

 
 

Income (loss) from continuing operations, net of preferred dividends
$
(0.18
)
 
$
0.07

 
$
(0.02
)
 
$
0.23

Discontinued operations

 

 
0.15

 
(0.13
)
Net income (loss) attributable to common shareholders
$
(0.18
)
 
$
0.07

 
$
0.13

 
$
0.10

Weighted average common shares outstanding
148,363

 
138,075

 
148,264

 
138,037

 
 
 
 
 
 
 
 
Diluted earnings per share data attributable to common shareholders:
 
 

 
 

 
 

Income (loss) from continuing operations, net of preferred dividends
$
(0.18
)
 
$
0.07

 
$
(0.02
)
 
$
0.23

Discontinued operations

 

 
0.15

 
(0.13
)
Net income (loss) attributable to common shareholders
$
(0.18
)
 
$
0.07

 
$
0.13

 
$
0.10

Weighted average common and potential dilutive common shares outstanding
148,405

 
138,121

 
148,310

 
138,079

 
 
 
 
 
 
 
 
Amounts attributable to common shareholders:
 

 
 

 
 

 
 

Income (loss) from continuing operations, net of preferred dividends
$
(27,252
)
 
$
9,115

 
$
(2,682
)
 
$
31,592

Discontinued operations
(68
)
 
465

 
21,869

 
(18,326
)
Net income (loss) attributable to common shareholders
$
(27,320
)
 
$
9,580

 
$
19,187

 
$
13,266

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.21

 
$
0.20

 
$
0.63

 
$
0.60


The accompanying notes are an integral part of these statements.


5

Table of Contents

CBL & Associates Properties, Inc.
Condensed Consolidated Statements of Equity
(In thousands)
 
 
 
 
Equity
 
 
 
Shareholders' Equity
 
 
 
 
 
Redeemable Noncontrolling Partnership Interests
 
Preferred
 Stock
 
Common
 Stock
 
Additional
 Paid-in
 Capital
 
Accumulated Other Comprehensive Income
 
Dividends in Excess of Cumulative Earnings
 
Total Shareholders' Equity
 
Noncontrolling Interests
 
Total
 Equity
Balance, January 1, 2010
$
22,689

 
$
12

 
$
1,379

 
$
1,399,654

 
$
491

 
$
(283,640
)
 
$
1,117,896

 
$
302,483

 
$
1,420,379

Net income
2,997

 

 

 

 

 
36,011

 
36,011

 
4,935

 
40,946

Other comprehensive income (loss):
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net unrealized gain on available-for-sale securities
44

 

 

 

 
3,879

 

 
3,879

 
1,431

 
5,310

Net unrealized gain on hedging instruments
21

 

 

 

 
1,867

 

 
1,867

 
681

 
2,548

Realized loss on foreign currency translation adjustment
1

 

 

 

 
123

 

 
123

 
45

 
168

Net unrealized gain (loss) on foreign currency
      translation adjustment
(397
)
 

 

 

 
(962
)
 

 
(962
)
 
1,203

 
241

Other comprehensive income (loss)
(331
)
 
 

 
 

 
 

 
 

 
 

 
4,907

 
3,360

 
8,267

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends declared - common stock

 

 

 

 

 
(82,834
)
 
(82,834
)
 

 
(82,834
)
Dividends declared - preferred stock

 

 

 

 

 
(22,745
)
 
(22,745
)
 

 
(22,745
)
Issuance of preferred stock in equity offering

 
6

 

 
121,262

 

 

 
121,268

 

 
121,268

Issuance of common stock and restricted common stock

 

 
1

 
164

 

 

 
165

 

 
165

Cancellation of restricted common stock

 

 

 
(175
)
 

 

 
(175
)
 

 
(175
)
Exercise of stock options

 

 
1

 
941

 

 

 
942

 

 
942

Accrual under deferred compensation arrangements

 

 

 
30

 

 

 
30

 

 
30

Amortization of deferred compensation

 

 

 
1,844

 

 

 
1,844

 

 
1,844

Income tax effect of share-based compensation
(10
)
 

 

 
(1,468
)
 

 

 
(1,468
)
 
(337
)
 
(1,805
)
Distributions to noncontrolling interests
(7,787
)
 

 

 

 

 

 

 
(43,993
)
 
(43,993
)
Adjustment for noncontrolling interests
2,311

 

 

 
(10,050
)
 

 

 
(10,050
)
 
7,739

 
(2,311
)
Adjustment to record redeemable
     noncontrolling interests at redemption value
7,781

 

 

 
(7,781
)
 

 

 
(7,781
)
 

 
(7,781
)
Balance, September 30, 2010
$
27,650

 
$
18

 
$
1,381

 
$
1,504,421

 
$
5,398

 
$
(353,208
)
 
$
1,158,010

 
$
274,187

 
$
1,432,197


The accompanying notes are an integral part of these statements.


6

Table of Contents

CBL & Associates Properties, Inc.
Condensed Consolidated Statements of Equity
(In thousands)
(Continued)
 
 
 
Equity
 
 
 
Shareholders' Equity
 
 
 
 
 
Redeemable Noncontrolling Partnership Interests
 
Preferred
 Stock
 
Common
 Stock
 
Additional
 Paid-in
 Capital
 
Accumulated Other Comprehensive Income
 
Dividends in Excess of Cumulative Earnings
 
Total Shareholders' Equity
 
Noncontrolling Interests
 
Total
 Equity
Balance, January 1, 2011
$
34,379

 
$
23

 
$
1,479

 
$
1,657,507

 
$
7,855

 
$
(366,526
)
 
$
1,300,338

 
$
223,605

 
$
1,523,943

Net income
3,055

 

 

 

 

 
50,969

 
50,969

 
5,661

 
56,630

Other comprehensive loss:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Unrealized loss on available-for-sale securities
(28
)
 

 

 

 
(2,652
)
 

 
(2,652
)
 
(723
)
 
(3,375
)
Realized loss on sale of marketable securities

 

 

 

 
17

 

 
17

 
5

 
22

Unrealized loss on hedging instruments
(45
)
 

 

 

 
(4,259
)
 

 
(4,259
)
 
(1,162
)
 
(5,421
)
Other comprehensive loss
(73
)
 
 

 
 

 
 

 
 

 
 

 
(6,894
)
 
(1,880
)
 
(8,774
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Conversion of operating partnership special
     common units to shares of common stock

 

 
1

 
728

 

 

 
729

 
(729
)
 

Dividends declared - common stock

 

 

 

 

 
(93,459
)
 
(93,459
)
 

 
(93,459
)
Dividends declared - preferred stock

 

 

 

 

 
(31,782
)
 
(31,782
)
 

 
(31,782
)
Issuance of common stock and restricted common stock

 

 
2

 
233

 

 

 
235

 

 
235

Cancellation of restricted common stock

 

 

 
(184
)
 

 

 
(184
)
 

 
(184
)
Exercise of stock options

 

 
2

 
1,953

 

 

 
1,955

 

 
1,955

Accrual under deferred compensation arrangements

 

 

 
41

 

 

 
41

 

 
41

Amortization of deferred compensation

 

 

 
1,629

 

 

 
1,629

 

 
1,629

Contributions from noncontrolling interests

 

 

 

 

 

 

 
1,040

 
1,040

Distributions to noncontrolling interests
(6,405
)
 

 

 

 

 

 

 
(31,545
)
 
(31,545
)
Adjustment for noncontrolling interests
2,181

 

 

 
(3,243
)
 

 

 
(3,243
)
 
1,062

 
(2,181
)
Adjustment to record redeemable
     noncontrolling interests at redemption value
(8,630
)
 

 

 
8,630

 

 

 
8,630

 

 
8,630

Balance, September 30, 2011
$
24,507

 
$
23

 
$
1,484

 
$
1,667,294

 
$
961

 
$
(440,798
)
 
$
1,228,964

 
$
197,214

 
$
1,426,178


The accompanying notes are an integral part of these statements.


7

Table of Contents

CBL & Associates Properties, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
  
 
Nine Months Ended
September 30,
 
2011
 
2010
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
75,120

 
$
59,397

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

Depreciation and amortization
211,582

 
216,016

Net amortization of deferred finance costs and debt premiums
8,143

 
5,219

Net amortization of intangible lease assets and liabilities
(1,179
)
 
(1,481
)
Gain on sales of real estate assets
(3,637
)
 
(2,577
)
Realized foreign currency loss

 
169

Gain on sale of discontinued operations
(86
)
 
(29
)
Write-off of development projects
51

 
420

Share-based compensation expense
1,769

 
1,932

Income tax effect of share-based compensation

 
(1,815
)
Net realized loss on sale of available-for-sale securities
22

 

Write-down of mortgage and other notes receivable
1,900

 

Loss on impairment of real estate
55,761

 

Loss on impairment of real estate from discontinued operations
2,239

 
25,435

Gain on extinguishment of debt
(581
)
 

Gain on extinguishment of debt from discontinued operations
(31,434
)
 

Equity in (earnings) losses of unconsolidated affiliates
(4,222
)
 
610

Distributions of earnings from unconsolidated affiliates
6,171

 
3,554

Provision for doubtful accounts
1,999

 
2,950

Change in deferred tax accounts
(5,032
)
 
2,245

Changes in:
 

 
 

Tenant and other receivables
(3,908
)
 
(8,623
)
Other assets
552

 
(5,918
)
Accounts payable and accrued liabilities
2,905

 
(7,666
)
Net cash provided by operating activities
318,135

 
289,838

 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Additions to real estate assets
(149,321
)
 
(80,689
)
Acquisition of real estate assets
(12,172
)
 

(Additions) reductions to restricted cash
(13,571
)
 
16,837

Proceeds from sales of real estate assets
20,495

 
5,485

Additions to mortgage and other notes receivable
(5,300
)
 

Payments received on mortgage and other notes receivable
4,817

 
1,485

Net purchases of available-for-sale securities

 
(9,975
)
Additional investments in and advances to unconsolidated affiliates
(20,041
)
 
(22,019
)
Distributions in excess of equity in earnings of unconsolidated affiliates
13,094

 
28,548

Changes in other assets
(10,770
)
 
(4,089
)
Net cash used in investing activities
(172,769
)
 
(64,417
)

8

Table of Contents

 
CBL & Associates Properties, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
(Continued)
 
 
 
 
 
 
Nine Months Ended
September 30,
 
 
2011
 
2010
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Proceeds from mortgage and other indebtedness
$
1,373,265

 
$
637,113

 
Principal payments on mortgage and other indebtedness
(1,315,890
)
 
(824,371
)
 
Additions to deferred financing costs
(16,154
)
 
(4,418
)
 
Proceeds from issuances of common stock
136

 
104

 
Proceeds from issuances of preferred stock

 
121,268

 
Proceeds from exercises of stock options
1,955

 
942

 
Income tax effect of share-based compensation

 
1,815

 
Contributions from noncontrolling interests
1,040

 

 
Distributions to noncontrolling interests
(55,033
)
 
(64,409
)
 
Dividends paid to holders of preferred stock
(31,782
)
 
(22,745
)
 
Dividends paid to common shareholders
(91,887
)
 
(62,114
)
 
Net cash used in financing activities
(134,350
)
 
(216,815
)
 
 
 
 
 
 
NET CHANGE IN CASH AND CASH EQUIVALENTS
11,016

 
8,606

 
CASH AND CASH EQUIVALENTS, beginning of period
50,896

 
48,062

 
CASH AND CASH EQUIVALENTS, end of period
$
61,912

 
$
56,668

 
 
 
 
 
 
SUPPLEMENTAL INFORMATION:
 

 
 

 
Cash paid for interest, net of amounts capitalized
$
202,097

 
$
212,343


 
The accompanying notes are an integral part of these statements.


9

Table of Contents

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

Note 1 – Organization and Basis of Presentation
 
CBL & Associates Properties, Inc. (“CBL”), a Delaware corporation, is a self-managed, self-administered, fully-integrated real estate investment trust (“REIT”) that is engaged in the ownership, development, acquisition, leasing, management and operation of regional shopping malls, open-air centers, community centers and office properties.  Its shopping centers are located in 26 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 September 30, 2011, the Operating Partnership owned controlling interests in 77 regional malls/open-air centers, 30 associated centers (each located adjacent to a regional mall), eight community centers and 14 office buildings, including CBL’s corporate office building. The Operating Partnership consolidates the financial statements of all entities in which it has a controlling financial interest or where it is the primary beneficiary of a variable interest entity.  At September 30, 2011, the Operating Partnership owned non-controlling interests in seven regional malls, four associated centers, five 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 controlling interests in two community center expansions, one mall expansion and three mall redevelopments under construction at September 30, 2011.  The Operating Partnership also holds options to acquire certain development properties owned by third parties.
 
CBL is the 100% owner of two qualified REIT subsidiaries, CBL Holdings I, Inc. and CBL Holdings II, Inc. At September 30, 2011, CBL Holdings I, Inc., the sole general partner of the Operating Partnership, owned a 1.0% general partner interest in the Operating Partnership and CBL Holdings II, Inc. owned a 76.9% limited partner interest for a combined interest held by CBL of 77.9%.
 
The noncontrolling interest in the Operating Partnership is held primarily by CBL & Associates, Inc. and its affiliates (collectively “CBL’s Predecessor”) and by affiliates of The Richard E. Jacobs Group, Inc. (“Jacobs”). CBL’s Predecessor contributed their interests in certain real estate properties and joint ventures to the Operating Partnership in exchange for a limited partner interest when the Operating Partnership was formed in November 1993. Jacobs contributed their interests in certain real estate properties and joint ventures to the Operating Partnership in exchange for limited partner interests when the Operating Partnership acquired the majority of Jacobs’ interests in 23 properties in January 2001 and the balance of such interests in February 2002. At September 30, 2011, CBL’s Predecessor owned a 9.8% limited partner interest, Jacobs owned a 6.9% limited partner interest and third parties owned a 5.4% limited partner interest in the Operating Partnership.  CBL’s Predecessor also owned 7.4 million shares of CBL’s common stock at September 30, 2011, for a total combined effective interest of 13.7% in the Operating Partnership.
 
The Operating Partnership conducts CBL’s property management and development activities through CBL & Associates Management, Inc. (the “Management Company”) to comply with certain requirements of the Internal Revenue Code of 1986, as amended (the “Code”). The Operating Partnership owns 100% of both of the Management Company’s preferred stock and common stock.
 
CBL, the Operating Partnership and the Management Company are collectively referred to herein as “the Company”.
 
The accompanying condensed consolidated financial statements are unaudited; however, they have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair presentation of the financial statements for these interim periods have been included. Material intercompany transactions have been eliminated. The results for the interim period ended September 30, 2011 are not necessarily indicative of the results to be obtained for the full fiscal year.

These condensed consolidated financial statements should be read in conjunction with CBL’s audited consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2010, as amended.
 



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Note 2 – Recent Accounting Pronouncements
 
Accounting Guidance Adopted
 
In July 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (“ASU No. 2010-20”).  ASU No. 2010-20 requires entities to provide extensive new disclosures in their financial statements about their financing receivables, including credit risk exposures and the allowance for credit losses.  The new disclosures include information regarding credit quality, impaired or modified receivables, non-accrual or past due receivables and activity related to modified receivables and the allowance for credit losses.  In January 2011, the FASB issued ASU No. 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20 (“ASU No. 2011-01”).  ASU No. 2011-01 delayed immediately the effective date for disclosures prescribed by ASU No. 2010-20 that relate to troubled debt restructurings.  The adoption of the non-deferred disclosures prescribed by ASU No. 2010-20 did not have an impact on the Company’s condensed consolidated financial statements.
  
In April 2011, the FASB issued ASU No. 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (“ASU No. 2011-02”).  ASU No. 2011-02 provides additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring.  For public entities, these amendments are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011.   The adoption of these amendments did not have an impact on the Company’s condensed consolidated financial statements.

 Accounting Pronouncements Not Yet Effective

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU No. 2011-04”).  The objective of this accounting update is to align the principles for fair value measurements and the related disclosure requirements under GAAP and International Financial Reporting Standards (“IFRSs”), thus improving the comparability of fair value measurements presented and disclosed in financial statements.  This amendment is effective for interim and annual periods beginning after December 15, 2011 and should be applied prospectively.  The adoption of ASU No. 2011-04 will not have a material impact on the Company’s condensed consolidated financial statements.
 
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (“ASU No. 2011-05”).  The objective of this accounting update is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income.  The FASB decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity and require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  This new accounting guidance is effective for interim and annual periods beginning after December 15, 2011 and is required to be applied retrospectively.  The Company currently presents components of its other comprehensive income as part of the statement of changes in stockholders’ equity and, as such, is evaluating the preferred method between the two options available.  While the adoption of ASU No. 2011-05 will change the presentation format of the Company’s condensed consolidated financial statements, it will not have an impact on the amounts reported in those statements.

Note 3 – Fair Value Measurements
 
The Company has categorized its financial assets and financial liabilities that are recorded at fair value into a hierarchy based on whether the inputs to valuation techniques are observable or unobservable.  The fair value hierarchy contains three levels of inputs that may be used to measure fair value as follows:
 
Level 1 – Inputs represent quoted prices in active markets for identical assets and liabilities as of the measurement date.
 
Level 2 – Inputs, other than those included in Level 1, represent observable measurements for similar instruments in active markets, or identical or similar instruments in markets that are not active, and observable measurements or market data for instruments with substantially the full term of the asset or liability.
 

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Level 3 – Inputs represent unobservable measurements, supported by little, if any, market activity, and require considerable assumptions that are significant to the fair value of the asset or liability.  Market valuations must often be determined using discounted cash flow methodologies, pricing models or similar techniques based on the Company’s assumptions and best judgment.
 
The following tables set forth information regarding the Company’s financial instruments that are measured at fair value in the condensed consolidated balance sheets as of September 30, 2011 and December 31, 2010:
 
 
 
 
Fair Value Measurements at Reporting Date Using
 
Fair Value at
September 30, 2011
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Available-for-sale securities
$
32,014

 
$
20,185

 
$

 
$
11,829

Privately held debt and equity securities
2,475

 

 

 
2,475

Interest rate caps
1

 

 
1

 

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Interest rate swaps
$
5,560

 
$

 
$
5,560

 
$

 
 
 

 
Fair Value Measurements at Reporting Date Using
 
Fair Value at
December 31, 2010
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
Assets:
 

 
 

 
 

 
 

Available-for-sale securities
$
22,052

 
$
22,052

 
$

 
$

Privately held debt and equity securities
2,475

 

 

 
2,475

Interest rate cap
3

 

 
3

 

 
Intangible lease assets and other assets in the consolidated balance sheets include marketable securities consisting of corporate equity securities, mortgage/asset-backed securities, mutual funds and bonds that are classified as available for sale.  Net unrealized gains and losses on available-for-sale securities that are deemed to be temporary in nature are recorded as a component of accumulated other comprehensive income in redeemable noncontrolling interests, shareholders’ equity and noncontrolling interests.  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.  During the three and nine month periods ended September 30, 2011 and 2010, the Company did not record any write-downs related to other-than-temporary impairments.  During the nine months ended September 30, 2011, the Company recognized realized losses of $22 related to sales of marketable securities.  The fair value of the Company’s available-for-sale securities is based on quoted market prices and, thus, is classified under Level 1.  The following is a summary of the equity securities held by the Company as of September 30, 2011 and December 31, 2010:


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Gross Unrealized
 
 
 
Adjusted Cost
 
Gains
 
Losses
 
Fair Value
September 30, 2011:
 
 
 
 
 
 
 
Common stocks
$
4,207

 
$
6,373

 
$
(5
)
 
$
10,575

Mutual funds
5,539

 
18

 
(99
)
 
5,458

Mortgage/asset-backed securities
1,748

 
12

 

 
1,760

 Government and government sponsored entities
14,960

 
46

 
(1,542
)
 
13,464

Corporate bonds
699

 
24

 

 
723

International bonds
33

 
1

 

 
34

 
$
27,186

 
$
6,474

 
$
(1,646
)
 
$
32,014

 
 
 
 

 
Gross Unrealized
 
 

 
Adjusted Cost
 
Gains
 
Losses
 
Fair Value
December 31, 2010:
 

 
 

 
 

 
 

Common stocks
$
4,207

 
$
8,347

 
$
(4
)
 
$
12,550

Mutual funds
5,318

 
37

 
(39
)
 
5,316

Mortgage/asset-backed securities
1,571

 

 
(6
)
 
1,565

Government and government sponsored entities
1,864

 
8

 
(11
)
 
1,861

Corporate bonds
710

 
18

 

 
728

International bonds
32

 

 

 
32

 
$
13,702

 
$
8,410

 
$
(60
)
 
$
22,052

 
The Company holds a secured convertible promissory note from Jinsheng Group (“Jinsheng”), in which the Company also holds a cost-method investment.  The secured convertible note is non-interest bearing and is secured by shares of Jinsheng.  Since the secured convertible note is non-interest bearing and there is no active market for Jinsheng’s debt, the Company performed an analysis on the note considering credit risk and discounting factors to determine the fair value.  Due to the significant estimates and assumptions used in the valuation of the note, the Company has classified it under Level 3.  The Company performed quantitative and qualitative analyses of its investment as of September 30, 2011 and determined that the current balance of the secured convertible note of $2,475 is not impaired.  See Note 5 for further discussion.
 
The Company uses interest rate hedges to mitigate the effect of interest rate movements on its variable-rate debt.  The Company had four interest rate swaps and two interest rate caps as of September 30, 2011 and one interest rate cap as of December 31, 2010 that qualify as hedging instruments and are designated as cash flow hedges.  The interest rate caps are included in intangible lease assets and other assets and the interest rate swaps are reflected in accounts payable and accrued liabilities in the accompanying condensed consolidated balance sheets.  The swaps and caps have predominantly met the effectiveness test criteria since inception and changes in their fair values are, thus, primarily reported in other comprehensive income and are reclassified into earnings in the same period or periods during which the hedged items affect earnings.  The fair values of the Company’s interest rate hedges, classified under Level 2, are determined using a proprietary model which is based on prevailing market data for contracts with matching durations, current and anticipated London Interbank Offered Rate (“LIBOR”) information, consideration of the Company’s credit standing, credit risk of the counterparties and reasonable estimates about relevant future market conditions.  See Note 6 for further information regarding the Company’s interest rate hedging activity.
 
The carrying values of cash and cash equivalents, receivables, accounts payable and accrued liabilities are reasonable estimates of their fair values because of the short-term nature of these financial instruments.  Based on the interest rates for similar financial instruments, the carrying value of mortgage notes receivable is a reasonable estimate of fair value.  The estimated fair value of mortgage and other indebtedness was $5,534,315 and $5,709,860 at September 30, 2011 and December 31, 2010, respectively.  The estimated fair value was calculated by discounting future cash flows for the notes payable using estimated market rates at which similar loans would be made currently.

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The following table sets forth information regarding the Company’s assets that are measured at fair value on a nonrecurring basis:
 
 
 
Fair Value Measurements at Reporting Date Using
 
 
 
Fair Value at
September 30, 2011
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
 
Total Losses
Asset:
 
 
 
 
 
 
 
 
 
Long-lived assets
$
22,481

 
$

 
$

 
$
22,481

 
$
55,140

 
In accordance with the Company's quarterly impairment review process, the Company recorded a non-cash impairment of real estate of $50,683 in the third quarter of 2011 related to Columbia Place in Columbia, SC, to write-down the depreciated book value as of September 30, 2011 from $56,746 to an estimated fair value of $6,063 as of the same date. Columbia Place has experienced declining cash flows as a result of changes in property-specific market conditions, which were further exacerbated by the recent economic conditions, that have negatively impacted leasing activity and occupancy.

The Company recorded an impairment of real estate of $622 related to an outparcel that was sold in September 2011 for net proceeds after selling costs of $1,477, which was less than its carrying amount of $2,099.

The Company recorded a non-cash impairment of real estate of $4,457 during the second quarter of 2011 related to Settlers Ridge - Phase II, which was under construction at June 30, 2011.  The property had a carrying value of $19,330 as of June 30, 2011 that was written down to its estimated fair value of $14,873 as of the same date. The property is expected to be sold upon completion and stabilization and the loss was recorded to write down the book value of the property to its estimated fair value.  The fair value was estimated using the expected sales price and the projected book value of the completed property.

The fair value reflected in the table above reflects the estimated fair value of $6,063 of Columbia Place as of September 30, 2011 and the estimated fair value of Settlers Ridge Phase II of $14,873 as of June 30, 2011, adjusted for capital expenditures and depreciation expense during the third quarter of 2011.

The revenues of Columbia Place and Settlers Ridge Phase II accounted for approximately 1.0% of total consolidated revenues for the trailing twelve months ended September 30, 2011. A reconciliation of each property's carrying values for the nine months ended September 30, 2011 is as follows:
 
Columbia Place
 
Settlers Ridge Phase II
 
Total
Beginning carrying value, January 1, 2011
$
58,207

 
$
12,461

 
$
70,668

Capital expenditures
14

 
8,505

 
8,519

Depreciation expense
(1,475
)
 
(91
)
 
(1,566
)
Loss on impairment of real estate
(50,683
)
 
(4,457
)
 
(55,140
)
Ending carrying value, September 30, 2011
$
6,063

 
$
16,418

 
$
22,481


 
Note 4 – Acquisitions and Discontinued Operations
 
Acquisitions

On September 30, 2011, the Company purchased Northgate Mall located in Chattanooga, TN, for a total cash purchase price of $12,172. The results of operations of Northgate Mall are included in the consolidated financial statements beginning on the date of acquisition. The following table summarizes the preliminary allocation of the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date:

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Table of Contents

    
Land
$
1,217

Buildings and improvements
10,590

Above-market leases
243

In-place leases
365

Total assets
12,415

Below-market leases
(243
)
Net assets acquired
$
12,172


Discontinued Operations

In February 2011, the Company completed the sale of Oak Hollow Mall in High Point, NC, for a gross sales price of $9,000.  Net proceeds from the sale were used to retire the outstanding principal balance and accrued interest of $40,281 on the non-recourse loan secured by the property in accordance with the lender’s agreement to modify the outstanding principal balance and accrued interest to equal the net sales price for the property and, as a result, the Company recorded a gain on the extinguishment of debt of $31,434 in the first quarter of 2011.  The Company also recorded a loss on impairment of real estate in the first quarter of 2011 of $2,746 to write down the book value of the property to the net sales price.  As of June 30, 2010, the Company recorded a loss on impairment of real estate of $25,435 related to the property to write down its depreciated book value to its then estimated fair value.  The results of operations of this property, the gain on extinguishment of debt and the losses on impairment of real estate are reflected in discontinued operations for the three and nine month periods ended September 30, 2010 and the nine months ended September 30, 2011, as applicable.
 
In October 2010, the Company completed the sale of Pemberton Square, located in Vicksburg, MS, for a sales price of $1,863 less commissions and customary closing costs for a net sales price of $1,782.  The Company recorded a gain of $379 attributable to the sale in the fourth quarter of 2010.  Proceeds from the sale were used to reduce the outstanding borrowings on the Company’s $525,000 secured credit facility.  The results of operations of this property are included in discontinued operations for the three and nine month periods ended September 30, 2010 .
 
In December 2010, the Company completed the sale of Milford Marketplace, located in Milford, CT, and the conveyance of its ownership interest in phase I of Settlers Ridge, located in Robinson Township, PA, for a sales price of $111,835 less commissions and customary closing costs for a net sales price of $110,709.  The Company recorded a loss on impairment of assets of $12,363 in the fourth quarter of 2010 to reflect the fair value of the properties at the time of the sale. During the second quarter of 2011, the Company reduced the initial amount of the impairment loss by $507 to record settlements of estimated expenses related to the transactions based on actual amounts. Net proceeds from the sale, after repayment of a construction loan, were used to reduce the outstanding borrowings on the Company’s $525,000 secured credit facility.  The results of operations of these properties are included in discontinued operations for the three and nine month periods ended September 30, 2010.
 
In December 2010, the Company completed the sale of Lakeview Pointe, located in Stillwater, OK, for a sales price of $21,000 less commissions and customary closing costs for a net sales price of $20,631.  The Company recorded a loss on impairment of real estate assets of $1,302 in the fourth quarter of 2010 to reflect the fair value of the property at the time of sale.  Net proceeds from the sale, after repayment of a construction loan, were used to reduce the outstanding borrowings on the Company’s $525,000 secured credit facility.  The results of operations of this property are included in discontinued operations for the three and nine month periods ended September 30, 2010.

Total revenues of the centers described above that are included in discontinued operations were $39 and $5,469 for the three months ended September 30, 2011 and 2010, respectively, and $(450) and $14,416 for the nine months ended September 30, 2011 and 2010, respectively.  Discontinued operations for the three and nine month periods ended September 30, 2011 and 2010 also include settlements of estimated expenses based on actual amounts for properties sold during previous years.
 


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Table of Contents

Note 5 – Unconsolidated Affiliates, Noncontrolling Interests and Cost Method Investments
 
Unconsolidated Affiliates
 
At September 30, 2011, the Company had investments in the following 16 entities, which are accounted for using the equity method of accounting:
Joint Venture
Property Name
Company's
Interest
CBL-TRS Joint Venture, LLC
Friendly Center, The Shops at Friendly Center and a portfolio
   of six office buildings
50.0
%
CBL-TRS Joint Venture II, LLC
Renaissance Center
50.0
%
Governor’s Square IB
Governor’s Plaza
50.0
%
Governor’s Square Company
Governor’s Square
47.5
%
High Pointe Commons, LP
High Pointe Commons
50.0
%
High Pointe Commons II-HAP, LP
High Pointe Commons - Christmas Tree Shop
50.0
%
Imperial Valley Mall L.P.
Imperial Valley Mall
60.0
%
Imperial Valley Peripheral L.P.
Imperial Valley Mall (vacant land)
60.0
%
JG Gulf Coast Town Center LLC
Gulf Coast Town Center
50.0
%
Kentucky Oaks Mall Company
Kentucky Oaks Mall
50.0
%
Mall of South Carolina L.P.
Coastal Grand—Myrtle Beach
50.0
%
Mall of South Carolina Outparcel L.P.
Coastal Grand—Myrtle Beach (Coastal Grand Crossing
   and vacant land)
50.0
%
Port Orange I, LLC
The Pavilion at Port Orange Phase I
50.0
%
Triangle Town Member LLC
Triangle Town Center, Triangle Town Commons
   and Triangle Town Place
50.0
%
West Melbourne I, LLC
Hammock Landing Phases I and II
50.0
%
York Town Center, LP
York Town Center
50.0
%

Although the Company has majority ownership of certain of these joint ventures, it has evaluated these investments and concluded that the other partners or owners in these joint ventures have substantive participating rights, such as approvals of:
 
the pro forma for the development and construction of the project and any material deviations or modifications thereto;
the site plan and any material deviations or modifications thereto;
the conceptual design of the project and the initial plans and specifications for the project and any material deviations or modifications thereto;
any acquisition/construction loans or any permanent financings/refinancings;
the annual operating budgets and any material deviations or modifications thereto;
the initial leasing plan and leasing parameters and any material deviations or modifications thereto; and
any material acquisitions or dispositions with respect to the project.
As a result of the joint control over these joint ventures, the Company accounts for these investments using the equity method of accounting.

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Table of Contents


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

 
Total for the Three Months
Ended September 30,
 
Company's Share for the Three
Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Revenues
$
37,290

 
$
38,814

 
$
20,683

 
$
17,884

Depreciation and amortization expense
(12,481
)
 
(13,713
)
 
(7,020
)
 
(5,681
)
Interest expense
(12,903
)
 
(14,228
)
 
(7,195
)
 
(5,658
)
Other operating expenses (1)
(10,842
)
 
(12,535
)
 
(5,599
)
 
(8,047
)
Gain (loss) on sales of real estate assets
79

 
(1
)
 
120

 
(47
)
Operating loss of discontinued operations

 
(19
)
 

 
(9
)
Net income (loss)
$
1,143

 
$
(1,682
)
 
$
989

 
$
(1,558
)
 
 
 
Total for the Nine Months
Ended September 30,
 
Company's Share for the Nine
Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Revenues
$
114,237

 
$
116,187

 
$
63,667

 
$
60,195

Depreciation and amortization expense
(37,581
)
 
(40,957
)
 
(21,132
)
 
(20,885
)
Interest expense
(39,140
)
 
(41,929
)
 
(21,655
)
 
(21,269
)
Other operating expenses
(33,647
)
 
(36,162
)
 
(18,024
)
 
(18,800
)
Gain on sales of real estate assets
1,744

 
1,289

 
1,366

 
73

Operating income of discontinued operations

 
151

 

 
76

Net income (loss)
$
5,613

 
$
(1,421
)
 
$
4,222

 
$
(610
)

(1)
The Company's share of other operating expense for the three months ended September 30, 2010 includes an adjustment of $2,119 to reduce earnings previously allocated to it based on the terms of certain joint venture agreements. There is no effect of this adjustment on any other period presented.

Noncontrolling Interests
 
Noncontrolling interests include the aggregate noncontrolling partnership interest in the Operating Partnership that is not owned by the Company and for which each of the noncontrolling limited partners has the right to exchange all or a portion of its partnership interests for shares of the Company’s common stock, or at the Company’s election, their cash equivalent.  Noncontrolling interests also includes the aggregate noncontrolling ownership interest in the Company’s other consolidated subsidiaries that is held by third parties and for which the related partnership agreements either do not include redemption provisions or are subject to redemption provisions that do not require classification outside of permanent equity.  As of September 30, 2011, the total noncontrolling interests of $197,214 consisted of third-party interests in the Operating Partnership and in other consolidated subsidiaries of $190,827 and $6,387 respectively.  The total noncontrolling interests at December 31, 2010 of $223,605 consisted of third-party interests in the Operating Partnership and in other consolidated subsidiaries of $217,519 and $6,086, respectively.
 
Redeemable noncontrolling interests include a noncontrolling partnership interest in the Operating Partnership that is not owned by the Company and for which the partnership agreement includes redemption provisions that may require the Company to redeem the partnership interest for real property.  Redeemable noncontrolling interests also includes the aggregate noncontrolling ownership interest in other consolidated subsidiaries that is held by third parties and for which the related partnership agreements contain redemption provisions at the holder’s election that allow for redemption through cash and/or properties.  The total redeemable noncontrolling partnership interests of $24,507 as of September 30, 2011 consisted of third-party interests in the Operating Partnership and in the Company’s consolidated subsidiary that provides security and maintenance services to third

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Table of Contents

parties of $18,413 and $6,094, respectively.  At December 31, 2010, the total redeemable noncontrolling partnership interests of $34,379 consisted of third-party interests in the Operating Partnership and in the Company’s consolidated security and maintenance services subsidiary of $28,070 and $6,309, respectively.
 
The redeemable noncontrolling preferred joint venture interest includes the preferred joint venture units (“PJV units”) issued to the Westfield Group (“Westfield”) for the acquisition of certain properties during 2007.  See Note 11 for additional information related to the PJV units.  Activity related to the redeemable noncontrolling preferred joint venture interest represented by the PJV units is as follows:
 
Nine Months Ended
September 30,
 
2011
 
2010
Beginning Balance
$
423,834

 
$
421,570

Net income attributable to redeemable noncontrolling
     preferred joint venture interest
15,436

 
15,454

Distributions to redeemable noncontrolling
     preferred joint venture interest
(15,436
)
 
(15,336
)
Issuance of preferred joint venture interest

 
2,146

Ending Balance
$
423,834

 
$
423,834

 
Cost Method Investments
 
The Company owns a 6.2% noncontrolling interest in subsidiaries of Jinsheng, an established mall operating and real estate development company located in Nanjing, China. As of September 30, 2011, Jinsheng owns controlling interests in 12 home furnishing shopping malls.
 
The Company also holds a secured convertible promissory note 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, 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). See Note 3 for further discussion.
 
The Company accounts for its noncontrolling 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 noncontrolling interest and the secured note are reflected as investment in unconsolidated affiliates in the accompanying condensed consolidated balance sheets.  The Company performed quantitative and qualitative analyses of its noncontrolling investment as of September 30, 2011 and determined that the carrying value of its investment of $4,819 is not impaired.
 


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Note 6 – Mortgage and Other Indebtedness
 
Mortgage and other indebtedness consisted of the following:
 
September 30, 2011
 
December 31, 2010
 
Amount
 
Weighted
Average
Interest
Rate (1)
 
Amount
 
Weighted
Average
Interest
Rate (1)
Fixed-rate debt:
 
 
 
 
 
 
 
Non-recourse loans on operating properties (2)
$
4,047,205

 
5.63
%
 
$
3,664,293

 
5.85
%
Recourse term loans on operating properties
78,075

 
5.89
%
 
30,449

 
6.00
%
Total fixed-rate debt
4,125,280

 
5.64
%
 
3,694,742

 
5.85
%
Variable-rate debt:
 

 
 

 
 

 
 

Non-recourse term loans on operating properties
113,500

 
3.60
%
 
114,625

 
3.61
%
Recourse term loans on operating properties
285,067

 
2.36
%
 
350,106

 
2.28
%
Construction loans
57,061

 
3.25
%
 
14,536

 
3.32
%
Secured lines of credit
215,026

 
2.99
%
 
598,244

 
3.38
%
Unsecured term loans
437,214

 
1.60
%
 
437,494

 
1.66
%
Total variable-rate debt
1,107,868

 
2.35
%
 
1,515,005

 
2.65
%
Total
$
5,233,148

 
4.94
%
 
$
5,209,747

 
4.92
%
 
(1)
Weighted-average interest rate includes the effect of debt premiums (discounts), but excludes amortization of deferred financing costs.
(2)
The Company has four interest rate swaps on notional amounts totaling $118,641 as of September 30, 2011 related to its variable-rate loans on operating properties to effectively fix the interest rate on the respective loans.  Therefore, these amounts are reflected in fixed-rate debt in 2011.

Secured Lines of Credit
 
The Company has three secured lines of credit that are used for mortgage retirement, working capital, construction and acquisition 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. In August 2011, the Company sold one of the operating properties that was pledged as collateral on its $105,000 facility. As a result, total capacity on that facility was reduced from $105,000 to $100,084. In October 2011, the Company pledged another operating property as collateral to the facility, which increased the total capacity back to $105,000.

During the second and third quarters of 2011, the three secured facilities were modified to remove a 1.50% floor on LIBOR.  Pursuant to the terms of the modifications, borrowings under these secured lines of credit bear interest at LIBOR plus an applicable spread, ranging from 2.00% to 3.00%, based on the Company’s leverage ratio.  Without giving effect to actual LIBOR, the removal of the 1.50% floors and the reduction in the spreads resulted in a decrease in the interest rates on the $525,000 and $520,000 facilities of approximately 2.75% and on the $105,000 facility of approximately 2.50%, respectively.  The Company also executed extensions on the maturity of each of the facilities. The three secured lines of credit had a weighted average interest rate of 2.99% at September 30, 2011. The Company also pays fees based on the amount of unused availability under its secured lines of credit at rates ranging from 0.15% to 0.35% of unused availability. The following summarizes certain information about the secured lines of credit as of September 30, 2011:     
    
 
Total
Capacity
 
 
Total
Outstanding
 
 
Maturity
Date
 
Extended
Maturity
Date
$
100,084

 
$
17,700


 
June 2013
 
N/A
525,000

 
47,130

(1)
 
February 2014
 
February 2015
520,000

 
150,196

 
 
April 2014
 
N/A
$
1,145,084

 
$
215,026

 
 
 
 
 
 
(1)
There was an additional $4,870 outstanding on this secured line of credit as of September 30, 2011 for letters of credit.  Up to $50,000 of the capacity on this line can be used for letters of credit.  


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Table of Contents

See Note 15 regarding subsequent events that affected the outstanding borrowings on the secured credit facilities.

Unsecured Term Facilities
 
The Company has an unsecured term loan that bears interest at LIBOR plus a margin ranging from 0.95% to 1.40%, based on the Company’s leverage ratio.  At September 30, 2011, the outstanding borrowings of $209,214 under this loan had a weighted average interest rate of 1.34%.  The loan was obtained for the exclusive purpose of acquiring certain properties from the Starmount Company or its affiliates.  The Company completed its acquisition of the properties in February 2008 and, as a result, no further draws can be made against the loan.  The loan matures in November 2011 and has a one-year extension option that the Company intends to exercise, for an outside maturity date of November 2012.  Net proceeds from a sale, or the Company’s share of excess proceeds from any refinancings, of any of the properties originally purchased with borrowings from this unsecured term loan must be used to pay down any remaining outstanding balance.
 
The Company has an unsecured term loan with total capacity of $228,000 that bears interest at LIBOR plus a margin ranging from 1.50% to 1.80%, based on the Company’s leverage ratio.  At September 30, 2011, the outstanding borrowings of $228,000 under the unsecured term loan had a weighted average interest rate of 1.83%.  The loan matures in April 2012 and has a one--year extension option remaining, which is at the Company’s election, for an outside maturity date of April 2013.

Letters of Credit
 
At September 30, 2011, the Company had additional secured and unsecured lines of credit with a total commitment of $16,021 that can only be used for issuing letters of credit. The letters of credit outstanding under these lines of credit totaled $12,045 at September 30, 2011.
 
Covenants and Restrictions
 
The agreements to the $525,000 and $520,000 secured lines of credit contain, among other restrictions, certain financial covenants including the maintenance of certain financial coverage ratios, minimum net worth requirements, and limitations on cash flow distributions.  The Company was in compliance with all covenants and restrictions at September 30, 2011.
 
The agreements to the $525,000 and $520,000 secured credit facilities and the two unsecured term facilities described above, each with the same lead lender, contain default and cross-default provisions customary for transactions of this nature (with applicable customary grace periods) in the event (i) there is a default in the payment of any indebtedness owed by the Company to any institution which is a part of the lender groups for the credit facilities, or (ii) there is any other type of default with respect to any indebtedness owed by the Company to any institution which is a part of the lender groups for the credit facilities and such lender accelerates the payment of the indebtedness owed to it as a result of such default.  The credit facility agreements provide that, upon the occurrence and continuation of an event of default, payment of all amounts outstanding under these credit facilities and those facilities with which these agreements reference cross-default provisions may be accelerated and the lenders’ commitments may be terminated.  Additionally, any default in the payment of any recourse indebtedness greater than $50,000, or any non-recourse indebtedness greater than $100,000, of the Company, the Operating Partnership and/or significant subsidiaries, as defined in the credit facilities, regardless of whether the lending institution is a part of the lender groups for the credit facilities, will constitute an event of default under the agreements to the credit facilities.
 
Several of the Company’s malls/open-air centers, associated centers and community centers, in addition to 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. 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.
 
Mortgages on Operating Properties
 
During the third quarter of 2011, the Company closed on two ten-year, non-recourse mortgage loans totaling $128,800, including a $50,800 loan secured by Alamance Crossing in Burlington, NC and a $78,000 loan secured by Asheville Mall in Asheville, NC. The loans bear interest at fixed rates of 5.83% and 5.80%, respectively. Proceeds were used to repay existing loans with principal balances of $51,847 and $61,346, respectively, and to pay down the Company's $525,000 secured credit facility.



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Table of Contents

During the second quarter of 2011, the Company closed on two separate ten-year, non-recourse mortgage loans totaling $277,000, including a $185,000 loan secured by Fayette Mall in Lexington, KY and a $92,000 loan secured by Mid Rivers Mall in St. Charles, MO.  The loans bear interest at fixed rates of 5.42% and 5.88%, respectively.  Proceeds were used to repay existing loans with principal balances of $84,733 and $74,748, respectively, and to pay down the Company’s $105,000 secured credit facility.  In addition, the Company retired a loan with a principal balance of $36,317 that was secured by Panama City Mall in Panama City, FL with borrowings from its $105,000 facility.
 
During the first quarter of 2011, the Company closed on five separate non-recourse mortgage loans totaling $268,905.  These loans have ten-year terms and include a $95,000 loan secured by Parkdale Mall and Parkdale Crossing in Beaumont, TX; a $99,400 loan secured by Park Plaza in Little Rock, AR; a $44,100 loan secured by EastGate Mall in Cincinnati, OH; a $19,800 loan secured by Wausau Center in Wausau, WI; and a $10,605 loan secured by Hamilton Crossing in Chattanooga, TN.  The loans bear interest at a weighted average fixed rate of 5.64% and are not cross-collateralized.

Also during the first quarter of 2011, the Company closed on four separate loans totaling $120,165.  These loans have five-year terms and include a $36,365 loan secured by Stroud Mall in Stroud, PA; a $58,100 loan secured by York Galleria in York, PA; a $12,100 loan secured by Gunbarrel Pointe in Chattanooga, TN; and a $13,600 loan secured by CoolSprings Crossing in Nashville, TN.  These four loans have partial-recourse features totaling $13,998, which will be reduced by $5,650 upon the opening of a certain tenant in late 2011 and will further decrease as the aggregate principal amount outstanding on the loans is amortized.  The loans bear interest at LIBOR plus a margin of 2.40% and are not cross-collateralized.  The Company has interest rate swaps in place for the full term of each five-year loan to effectively fix the interest rates.  As a result, these loans bear interest at a weighted average fixed rate of 4.57%.  See Interest Rate Hedge Instruments below for additional information.
 
Proceeds from the nine loans that closed during the first quarter of 2011 were used predominantly to pay down the outstanding balance of the Company’s $520,000 secured credit facility.  Eight of the new loans were secured with properties previously used as collateral to secure the $520,000 credit facility.
 
Scheduled Principal Payments
 
As of September 30, 2011, the scheduled principal payments of the Company’s consolidated debt, excluding extensions available at the Company’s option, on all mortgage and other indebtedness, including construction loans and lines of credit, are as follows: 
2011
$
364,708

2012
991,651

2013
554,866

2014
409,744

2015
813,499

Thereafter
2,098,321

 
5,232,789

Net unamortized premiums
359

 
$
5,233,148

 
The remaining scheduled principal payments in 2011 of $364,708 include the maturing principal balance of an operating property loan totaling $133,884, which was retired subsequent to September 30, 2011, and the unsecured term facility with an outstanding balance of $209,214 related to the Starmount acquisition, which has a one-year extension that the Company intends to exercise.  Subsequent to September 30, 2011, the Company also retired an operating property loan with a principal balance as of September 30, 2011 of $20,786 that was scheduled to mature in March 2012.  
 
The Company’s mortgage and other indebtedness had a weighted average maturity of 4.1 years as of September 30, 2011 and 3.5 years as of December 31, 2010.
 
Interest Rate Hedge Instruments
 
The Company records its derivative instruments in its consolidated balance sheets at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the derivative has been designated as a hedge and, if so, whether the hedge has met the criteria necessary to apply hedge accounting.



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Table of Contents

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements.  To accomplish these objectives, the Company primarily uses interest rate swaps and caps as part of its interest rate risk management strategy.  Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.  Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.
 
The effective portion of changes in the fair value of derivatives designated as, and that qualify as, cash flow hedges is recorded in accumulated other comprehensive income (loss) (“AOCI/L”) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.  Such derivatives were used to hedge the variable cash flows associated with variable-rate debt.
 
During the first quarter of 2011, the Company entered into four pay fixed/receive variable interest rate swaps with an initial aggregate notional amount of $120,165, amortizing to $100,009, to hedge the interest rate risk exposure on the borrowings on four of its operating properties equal to the aggregate swap notional amount.  These interest rate swaps hedge 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 swaps effectively fix the interest payments on the portion of debt principal corresponding to the swap notional amount at a weighted average rate of 4.57%.
 
Also during the first quarter of 2011, the Company entered into an interest rate cap agreement with an initial notional amount of $64,265, amortizing to $63,555, to hedge the risk of changes in cash flows on the letter of credit supporting certain bonds related to one of its operating properties equal to the then-outstanding cap notional. The interest rate cap protects the Company from increases in the hedged cash flows attributable to overall changes in the USD-SIFMA Municipal Swap Index above the strike rate of the cap on the debt.  The strike rate associated with the interest rate cap is 1.00%.
 
As of September 30, 2011, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
 
Interest Rate
Derivative
 
Number of
Instruments
 
Notional
Amount
Outstanding
Interest Rate Caps
 
2
 
$
133,305

Interest Rate Swaps
 
4
 
$
118,641


Instrument Type
 
Location in
Consolidated
Balance Sheet
 
Outstanding
Notional
Amount
 
Designated
Benchmark
Interest Rate
 
Strike
Rate
 
Fair
Value at
9/30/11
 
Fair
Value at
12/31/10
 
Maturity
Date
Pay fixed/ Receive
 variable Swap
 
Accounts payable and
accrued liabilities
 
$57,361
(amortizing
to $48,337)
 
1-month
LIBOR
 
2.149
%
 
$
(2,644
)
 
$

 
Apr 2016
Pay fixed/ Receive
   variable Swap
 
Accounts payable and
accrued liabilities
 
$35,905
(amortizing
to $30,276)
 
1-month
LIBOR
 
2.187