CBL & ASSOCIATES PROPERTIES, INC. The following discussion and analysis of financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and accompanying notes that are included in this Form 10-Q. Capitalized terms used, but not defined, in this Management's Discussion and Analysis of Financial Condition and Results of Operations have the same meanings as defined in the notes to the condensed consolidated financial statements. In this discussion, the terms "we," "us" and "our" refer to the Company or the Company and theOperating Partnership collectively, as the text requires. Certain statements made in this section or elsewhere in this report may be deemed "forward-looking statements" within the meaning of the federal securities laws. All statements other than statements of historical fact should be considered to be forward-looking statements. In many cases, these forward-looking statements may be identified by the use of words such as "will," "may," "should," "could," "believes," "expects," "anticipates," "estimates," "intends," "projects," "goals," "objectives," "targets," "predicts," "plans," "seeks," and variations of these words and similar expressions. Any forward-looking statement speaks only as of the date on which it is made and is qualified in its entirety by reference to the factors discussed throughout this report. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, forward-looking statements are not guarantees of future performance or results and we can give no assurance that these expectations will be attained. It is possible that actual results may differ materially from those indicated by these forward-looking statements due to a variety of known and unknown risks and uncertainties. Currently, one of the most significant factors that could cause actual outcomes to differ materially from our forward-looking statements is the potential adverse effect of the COVID-19 pandemic, and federal, state, and/or local regulatory guidelines to control it, on our financial condition, operating results and cash flows, our tenants and their customers, the real estate market in which we operate, the global economy and the financial markets. The extent to which the COVID-19 pandemic impacts us and our tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the direct and indirect economic effects of the pandemic and containment measures, and potential changes in consumer behavior, among others. In addition to the risk factors described in Part I, Item 1A of our Annual Report on Form 10-K, as amended, for the year endedDecember 31, 2019 , and in Part II, Item 1A of this report, such known risks and uncertainties, many of which may be influenced by the COVID-19 pandemic, include, without limitation: • general industry, economic and business conditions; • interest rate fluctuations;
• costs and availability of capital, including debt, and capital requirements;
• costs and availability of real estate;
• inability to consummate acquisition opportunities and other risks
associated with acquisitions;
• competition from other companies and retail formats;
• changes in retail demand and rental rates in our markets;
• shifts in customer demands including the impact of online shopping;
• tenant bankruptcies or store closings;
• changes in vacancy rates at our properties;
• changes in operating expenses;
• changes in applicable laws, rules and regulations;
• sales of real property;
• uncertainty and economic impact of pandemics, epidemics or other public
health emergencies or fear of such events, such as the recent COVID-19
pandemic;
• cyber-attacks or acts of cyber-terrorism;
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• changes in, or withdrawal of, the credit ratings of the Operating
Partnership's senior unsecured long-term indebtedness;
• the ability to obtain suitable equity and/or debt financing and thecontinued availability of financing, in the amounts and on the terms
necessary to support our future refinancing requirements and business;
and
• other risks referenced from time to time in filings with the SEC and
those factors listed or incorporated by reference into this report.
This list of risks and uncertainties is only a summary and is not intended to be
exhaustive. We disclaim any obligation to update or revise any forward-looking
statements to reflect actual results or changes in the factors affecting the
forward-looking information.
EXECUTIVE OVERVIEW
We are a self-managed, self-administered, fully integrated REIT that is engaged
in the ownership, development, acquisition, leasing, management and operation of
regional shopping malls, open-air and mixed-use centers, outlet centers,
associated centers, community centers, office and other properties. See Note
1 to the condensed consolidated financial statements for information on our
property interests as of June 30, 2020 . We have elected to be taxed as a REIT
for federal income tax purposes.
On March 11, 2020 , the World Health Organization classified COVID-19 as a
pandemic. Due to the extraordinary governmental actions taken to contain
COVID-19, we are unable to predict the full extent of the pandemic's impact on
our results of operations for the remainder of 2020. As a result, we previously
withdrew our full-year 2020 same-center NOI and FFO per share, as adjusted,
guidance and underlying assumptions and do not plan to reinstate full-year 2020
guidance until there is further clarity on the impact of the pandemic.
In response to local and state mandated closures, our entire portfolio, except
for a few properties, closed in March. Beginning in late April, government
agencies began allowing the re-opening of properties with specified health and
safety restrictions. As of August 1, 2020 , all of our mall properties, but one,
have re-opened and we have implemented strict procedures and guidelines for our
employees, tenants and property visitors based on CDC and other health agency
recommendations. Our properties continue to update these policies and
procedures, following any new mandates and regulations, as required. The safety
and health of our customers, employees and tenants remains a top priority.
Our financial and operating results for the second quarter reflect the temporary
closure of our portfolio for a significant period due to government mandates.
Revenues for the quarter were impacted by a major increase in the estimate for
uncollectible revenues related to rents due from tenants that recently filed for
bankruptcy or are struggling financially, as well as amounts that were abated as
part of negotiations. Store closures and rent loss from prior tenant
bankruptcies and lower percentage rent related to lower retail sales also
impacted revenues. We offset a portion of this decline through aggressive
actions to reduce costs both at the property and corporate levels, including
company-wide salary reductions, furloughs, reductions-in-force and other expense
reduction initiatives. However, the pandemic has accelerated a number of tenant
bankruptcies, resulting in an expectation of additional store closures and lost
rent through the remainder of the year.
The mandated closures resulted in nearly all of our tenants closing for a period
of time and/or shortening operating hours. As a result, we have experienced an
increased level of requests for rent deferrals and abatements, as well as
defaults on rent obligations. While, in general, we believe that tenants have a
clear contractual obligation to pay rent, we have been working with our tenants
to address rent deferral requests. Based on completed or in process agreements
with 20 of our top tenants as a percentage of total revenues, excluding tenants
in bankruptcy, we anticipate collecting over 60% of related rent for the second
quarter, with the remainder expected to be deferred or abated. We remain in
negotiations with tenants and are unable to predict the outcome of those
discussions. As we finalize negotiations, rent collections as a percentage of
billed cash-based rents have increased with certain past-due amounts being paid,
resulting in an overall collection rate for April through July 2020 of over 54%.
As of early August 2020 , July rent collections are currently estimated at 49%;
however, we anticipate an improvement in the collection rate as we finalize
negotiations with retailers and additional past due amounts are collected. We
currently estimate that we will defer $17.0 million , at our share, of rents that
were billed for April, May and June 2020 based on agreements that have been
executed or are in active negotiation. We continue to assess rent relief
requests from our tenants but are unable to predict the resolution or impact of
these discussions.
We implemented a full financial COVID-19 response to improve liquidity and
reduce costs. These significant actions included drawing $280 million on our
secured line of credit, eliminating all non-essential expenditures, implementing
a company-wide furlough and salary reduction program and delaying and suspending
capital expenditures, including redevelopment investments. See the "Liquidity
and Capital Resources" section for more information.
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As discussed in " Note 1 - Organization and Basis of Presentation " and "Note 8 - Mortgage and Other Indebtedness, Net" to the condensed consolidated financial statements and in " Liquidity and Capital Resources " herein, we have received notices of default and reservation of rights letters from the administrative agent under the secured credit facility asserting that certain defaults and events of default have occurred and continue to exist by reason of the our failure to comply with certain restrictive covenants, including the liquidity covenant, in the secured credit facility and resulting from the failure to make the 2023 Notes Interest Payment and the 2026 Notes Interest Payment prior to the expiration of the applicable grace periods. In addition, onAugust 6, 2020 , we received a notice of imposition of base rate and post-default rate letter from the administrative agent under the secured credit facility, which (i) informed us that following an asserted event of default onMarch 19, 2020 , all outstanding loans were converted to base rate loans at the expiration of the applicable interest periods and (ii) seeks payment of approximately$4.8 million related thereto for April throughJune 2020 . The administrative agent also informed us that from and afterAugust 6, 2020 , interest will accrue on all outstanding obligations at the post-default rate. See Note 1 - Organization and Basis of Presentation and Liquidity and Capital Resources for additional information. We have engagedWeil, Gotshal & Manges LLP andMoelis & Company LLC (the "Advisors") to assist us in exploring several alternatives to reduce overall leverage and interest expense and to extend the maturity of our debt including (i) the senior secured credit facility, which includes a revolving facility with a balance of$675.9 million and term loan with a balance of$447.5 million as ofJune 30, 2020 , that matures inJuly 2023 and (ii) the Notes with balances of$450.0 million ,$300.0 million , and$625.0 million , as ofJune 30, 2020 , that mature inDecember 2023 ,October 2024 andDecember 2026 , respectively, as well as the cumulative unpaid dividends on our preferred stock and the special common units of limited partnership interest in theOperating Partnership . The Advisors commenced discussions inMay 2020 with advisors to certain holders of the Notes and the credit committee of the senior secured credit facility. We may pursue a comprehensive capital structure solution that will address our funded indebtedness and outstanding equity interests that may result in the reorganization of the Company. Given the impact of the COVID-19 pandemic on the retail and broader markets, the ongoing weakness of the credit markets and significant uncertainties associated with each of these matters, we believe that there is substantial doubt that we will continue to operate as a going concern within one year after the date our condensed consolidated financial statements for the quarter endedJune 30, 2020 are issued. See " Note 1 - Organization and Basis of Presentation " to the condensed consolidated financial statements for additional information. We had a net loss for the three and six months endedJune 30, 2020 of$72.8 million and$212.1 million respectively, compared to a net loss for the three and six months endedJune 30, 2019 of$29.7 million and$76.5 million , respectively. We recorded a net loss attributable to common shareholders for the three and six months endedJune 30, 2020 of$81.5 million and$215.3 million , respectively compared to a net loss for the three and six months endedJune 30, 2019 of$35.4 million and$85.6 million , respectively. In addition to the impact of the government mandated closures, significant items that affected the comparability between the three-month periods include loss on impairment that is$28.3 million lower and an increase in the income tax provision of$15.3 million due to the recognition of a valuation allowance against our deferred tax assets. For the six-month periods, in addition to the impact of the government mandated closures, significant items that affected the comparability between the six-month periods include litigation settlement expense of$88.2 million and gain on extinguishment of debt of$71.7 million that were recognized in the six months endedJune 30, 2019 , as well as loss on impairment that is$80.5 million higher in the six months endedJune 30, 2020 . We also deconsolidated three outlet centers in the third and fourth quarters of 2019. Same-center NOI and FFO are non-GAAP measures. For a description of same-center NOI, a reconciliation from net income (loss) to same-center NOI, and an explanation of why we believe this is a useful performance measure, see Non-GAAP Measure - Same-center Net Operating Income in "Results of Operations." For a description of FFO, a reconciliation from net income (loss) attributable to common shareholders to FFO allocable toOperating Partnership common unitholders, and an explanation of why we believe this is a useful performance measure, see "Non-GAAP Measure - Funds from Operations."
RESULTS OF OPERATIONS
Properties that were in operation for the entire year during 2019 and the six months endedJune 30, 2020 are referred to as the "Comparable Properties ." SinceJanuary 1, 2019 , we have opened one self-storage facility, deconsolidated three outlet centers and disposed of ten properties:
Properties Opened
Property Location Date Opened
Mid
(1) This property is owned by a 50/50 joint venture that is accounted for using
the equity method of accounting and is included in equity in earnings of
unconsolidated affiliates in the accompanying condensed consolidated
statements of operations.
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Table of Contents Deconsolidations Property Location Date of Deconsolidation
The Outlet Shoppes at
(1) This property is owned by a joint venture that is accounted for using the
equity method of accounting and is included in equity in earnings of
unconsolidated affiliates in the accompanying condensed consolidated
statements of operations from the date of deconsolidation.
Dispositions
Property Location Sales Date
850 Greenbrier Circle Chesapeake, VA July 2019
Acadiana Mall Lafayette, LA January 2019
Barnes & Noble parcel High Point, NC July 2019
Cary Towne Center Cary, NC January 2019
Courtyard by Marriott at Pearland Town Center
Winston-Salem, NC September 2019
The Forum at Grandview Madison, MS July 2019
Honey Creek Mall Terre Haute, IN April 2019
Kroger at Foothills Plaza Maryville, TN July 2019
The Shoppes at Hickory Point Forsyth, IL April 2019
Non-core properties are defined as Excluded Malls - see definition that follows under " Operational Review."
Comparison of the Three Months EndedJune 30, 2020 to the Three Months EndedJune 30, 2019 Revenues Total for the Three Months Comparable Ended June 30, Properties 2020 2019 Change Core Non-core Deconsolidation Dispositions Total Change Rental revenues$ 120,222 $ 185,393 $ (65,171 ) $ (46,375 ) $ (4,749 ) $ (10,735 )$ (3,312 ) $ (65,171 ) Management, development and 1,055 2,586 (1,531 ) (1,531 ) - - - (1,531 ) leasing fees Other 2,934 5,398 (2,464 ) (1,904 ) (385 ) (86 ) (89 ) (2,464 ) Total revenues$ 124,211 $ 193,377 $ (69,166 ) $ (49,810 ) $ (5,134 ) $ (10,821 )$ (3,401 ) $ (69,166 ) Rental revenues from theComparable Properties declined due to$1.6 million of rent abatements on past due rents and an estimate of$31.5 million in uncollectible revenues for past due rents related to tenants that are in bankruptcy or are struggling financially, primarily as a result of mandated property closures. Percentage rent declined as a result of lower retail sales due to mandated property closures. Rental revenues were also negatively impacted by rent concessions that were in effect prior to the COVID-19 pandemic for tenants with high occupancy cost levels and tenants that closed in 2019 due to bankruptcy. 44
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Operating Expenses
Total for the
Three Months Comparable
Ended June 30, Properties
2020 2019 Change Core Non-core Deconsolidation Dispositions Total Change
Property operating $ (16,906 ) $ (26,532 ) $ 9,626 $ 5,106 $ 1,024 $ 2,611 $ 885 $ 9,626
Real estate taxes (17,837 ) (19,148 ) 1,311 91 (117 ) 956 381 1,311
Maintenance and repairs (6,042 ) (11,298 ) 5,256 3,871 725 300 360 5,256Property operating expenses (40,785 ) (56,978 ) 16,193
9,068 1,632 3,867 1,626
16,193
Depreciation and amortization (52,663 ) (64,478 ) 11,815
5,538 1,759 3,741 777
11,815
General and administrative (18,727 ) (14,427 ) (4,300 )
(4,300 ) - - - (4,300 ) Loss on impairment (13,274 ) (41,608 ) 28,334 4,226 16,230 - 7,878 28,334 Other (242 ) (34 ) (208 ) (208 ) - - - (208 ) Total operating expenses$ (125,691 ) $ (177,525 ) $ 51,834 $ 14,324 $ 19,621 $ 7,608$ 10,281 $ 51,834 Property operating expenses at theComparable Properties decreased primarily due to the implementation of comprehensive programs to reduce operating expenses as a result of mandated property closures, including salary reductions, furloughs, reductions-in-force and other operating expense initiatives.
The decrease in depreciation and amortization expense related to the
General and administrative expenses increased primarily due to$7.9 million of costs related to the Company's negotiations to restructure its corporate-level debt, which was partially offset by the implementation of comprehensive programs to reduce expenses, including salary reductions, furloughs, reductions-in-force and other general and administrative expenses. In the second quarter of 2020, we recognized$13.3 million of loss on impairment of real estate to write down the book value of one mall. In the second quarter of 2019, we recognized$41.6 million of loss on impairment of real estate to write down the book value of one mall and one community center. See Note 5 to the condensed consolidated financial statements for more information.
Other Income and Expenses
Interest and other income increased$0.5 million compared to the prior-year period primarily due to interest income related to theU.S. Treasury securities that we invested in using a portion of the$280 million we drew on our secured line of credit inMarch 2020 to increase liquidity and preserve financial flexibility in light of the uncertainty surrounding the impact of the COVID-19 pandemic. This was partially offset by a decrease in interest income due to several mortgage and other notes receivable being retired since the prior year period. Interest expense increased$0.1 million due to an increase of$2.9 million in corporate interest expense primarily due to the increase in the interest rate on the secured credit facility as a result of notices of default received from the administrative agent under the secured credit facility plus default interest expense related to property-level nonrecourse loans that are in default. These increases were mostly offset by a$2.8 million decrease in property-level interest expense from the deconsolidation of three encumbered properties since the prior-year period and lower interest expense due to the continued amortization of the secured term loan and non-recourse property-level loans. During the three months endedJune 30, 2020 , we recognized$2.6 million of gain on sales of real estate assets related to the sale of two outparcels. During the three months endedJune 30, 2019 , we recognized$5.5 million of gain on sales of real estate assets primarily related to the sale of a center, a hotel and an outparcel. The income tax provision increased$15.3 million as compared to the prior-year period as we recorded a valuation allowance of$15.8 million , which reflects a full valuation allowance on our deferred tax assets. The valuation allowance was recorded due to management's evaluation of positive and negative indicators and determination that the deferred tax assets would not be realized. Equity in earnings of unconsolidated affiliates decreased by$7.9 million during the three months endedJune 30, 2020 compared to the prior-year period. The decrease was primarily due to an increase in the amortization of our inside/outside basis difference related to the three properties that were deconsolidated since the end of the prior year period as well as lower earnings of our unconsolidated affiliates due to the mandated property closures and an increase in estimates of uncollectible rental revenues. 45
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Comparison of the Six Months EndedJune 30, 2020 to the Six Months EndedJune 30, 2019 Revenues Total for the Six Months Comparable Ended June 30, Properties 2020 2019 Change Core Non-core Deconsolidation Dispositions Total Change Rental revenues$ 281,395 $ 376,373 $ (94,978 ) $ (57,541 ) $ (7,454 ) $ (21,231 )$ (8,752 ) $ (94,978 ) Management, development and 3,147 5,109 (1,962 ) (1,962 ) - - - (1,962 ) leasing fees Other 7,243 9,925 (2,682 ) (1,955 ) (187 ) (303 ) (237 ) (2,682 ) Total revenues$ 291,785 $ 391,407 $ (99,622 ) $ (61,458 ) $ (7,641 ) $ (21,534 )$ (8,989 ) $ (99,622 ) Rental revenues from theComparable Properties declined due to$1.7 million of rent abatements on past due rents and an estimate of$32.0 million in uncollectible revenues for past due rents related to tenants that are in bankruptcy or are struggling financially, primarily as a result of mandated property closures. Percentage rent declined as a result of lower retail sales due to mandated property closures. Rental revenues were also negatively impacted by rent concessions that were in effect prior to the COVID-19 pandemic for tenants with high occupancy cost levels and tenants that closed in 2019 due to bankruptcy. Operating Expenses Total for the Six Months Comparable Ended June 30, Properties 2020 2019 Change Core Non-core Deconsolidation Dispositions Total Change Property operating$ (42,615 ) $ (55,512 ) $ 12,897 $ 4,397 $ 1,147 $ 5,036$ 2,317 $ 12,897 Real estate taxes (36,285 ) (39,067 ) 2,782 (53 ) 139 1,888 808 2,782 Maintenance and repairs (17,250 ) (24,074 ) 6,824 4,465 920 506 933 6,824
Property operating expenses (96,150 ) (118,653 ) 22,503
8,809 2,206 7,430 4,058 22,503
Depreciation and amortization (108,565 ) (134,270 ) 25,705
12,981 3,447 7,195 2,082 25,705
General and administrative (36,563 ) (36,434 ) (129 )
(129 ) - - - (129 )
Loss on impairment (146,918 ) (66,433 ) (80,485 ) (102,857 ) 12,438 - 9,934 (80,485 )
Litigation settlement - (88,150 ) 88,150 88,150 - - - 88,150
Other (400 ) (34 ) (366 ) (366 ) - - - (366 )
Total operating expenses $ (388,596 ) $ (443,974 ) $ 55,378 $ 6,588 $ 18,091 $ 14,625 $ 16,074 $ 55,378
Property operating expenses at the Comparable Properties decreased primarily due
to the implementation of comprehensive programs to reduce operating expenses
following mandated property closures during the second quarter 2020, including
salary reductions, furloughs, reductions-in-force and other operating expense
initiatives.
The decrease in depreciation and amortization expense related to the Comparable
Properties primarily relates to a lower basis in depreciable assets resulting
from impairments recorded since the prior year period, as well as a higher
amount of write-offs of tenant improvements and intangible lease assets related
to store closings in the prior year period.
General and administrative expenses increased slightly due to $7.9 million of
costs related to the Company's negotiations to restructure its corporate-level
debt, partially offset by the implementation of comprehensive programs to reduce
expenses, including salary reductions, furloughs and reductions-in-force, as
well higher legal expenses in the prior year period related to the litigation
settlement and the new secured credit facility.
For the six months ended June 30, 2020 , we recognized $146.9 million of loss on
impairment of real estate to write down the book value of three malls. For the
six months ended June 30, 2019 , we recognized $66.4 million of loss on
impairment of real estate to write down the book value of three malls and one
community center. See Note 5 to the condensed consolidated financial
statements for more information.
During the three months ended
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Other Income and Expenses
Interest and other income increased$2.4 million during the six months endedJune 30, 2020 compared to the prior-year period primarily due to additional interest income received related to a mortgage note receivable that was retired in the current year and interest income related to theU.S. Treasury securities that we invested in using a portion of the$280 million we drew on our secured line of credit inMarch 2020 to increase liquidity and preserve financial flexibility in light of the uncertainty surrounding the impact of the COVID-19 pandemic. Interest expense decreased$6.9 million compared to the prior-year period. The decrease was primarily due to a$5.6 million decrease in property-level interest expense from the deconsolidation of three encumbered properties since the prior-year period and$5.3 million lower interest expense due to the continued amortization of non-recourse property-level loans and the retirement of two property-level loans. These decreases were partially offset by an increase of$0.8 million in corporate interest expense primarily due to the increase in the interest rate on the secured credit facility in the second quarter 2020 as a result of notices of default received from the administrative agent under the secured credit facility plus$2.3 million higher default interest expense related to property-level nonrecourse loans that are in default. During the three months endedJune 30, 2019 , we recorded$71.7 million of gain on extinguishment of debt related to two malls. We transferredAcadiana Mall to the lender in satisfaction of the non-recourse debt secured by the property. We sold Cary Towne Center and used the net proceeds from the sale to satisfy a portion of the non-recourse loan that secured the property. The remaining principal balance was forgiven. Equity in earnings of unconsolidated affiliates decreased by$10.2 million during the six months endedJune 30, 2020 compared to the prior-year period. The decrease was primarily due to an increase in the amortization of our inside/outside basis difference related to the three properties that were deconsolidated since the end of the prior year period as well as lower earnings of our unconsolidated affiliates due to the mandated property closures and an increase in estimates of uncollectible rental revenues.
Non-GAAP Measure
Same-center Net Operating Income
NOI is a supplemental non-GAAP measure of the operating performance of our shopping centers and other properties. We define NOI as property operating revenues (rental revenues and other income) less property operating expenses (property operating, real estate taxes and maintenance and repairs).
We compute NOI based on theOperating Partnership's pro rata share of both consolidated and unconsolidated properties. We believe that presenting NOI and same-center NOI (described below) based on ourOperating Partnership's pro rata share of both consolidated and unconsolidated properties is useful since we conduct substantially all of our business through ourOperating Partnership and, therefore, it reflects the performance of the properties in absolute terms regardless of the ratio of ownership interests of our common shareholders and the noncontrolling interest in theOperating Partnership . Our definition of NOI may be different than that used by other companies, and accordingly, our calculation of NOI may not be comparable to that of other companies. Since NOI includes only those revenues and expenses related to the operations of our shopping center properties, we believe that same-center NOI provides a measure that reflects trends in occupancy rates, rental rates, sales at the malls and operating costs and the impact of those trends on our results of operations. Our calculation of same-center NOI excludes lease termination income, straight-line rent adjustments, amortization of above and below market lease intangibles and write-offs of landlord inducement assets in order to enhance the comparability of results from one period to another. We include a property in our same-center pool when we have owned all or a portion of the property sinceJanuary 1 of the preceding calendar year and it has been in operation for both the entire preceding calendar year and current year-to-date period. New properties are excluded from same-center NOI until they meet these criteria. Properties excluded from the same-center pool that would otherwise meet these criteria are properties which are being repositioned or properties where we are considering alternatives for repositioning, where we intend to renegotiate the terms of the debt secured by the related property or return the property to the lender and those in which we own a noncontrolling interest of 25% or less.Asheville Mall , Burnsville Center,EastGate Mall ,Hickory Point Mall ,Greenbrier Mall andPark Plaza were classified as Lender Malls atJune 30, 2020 . 47
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Due to the exclusions noted above, same-center NOI should only be used as a
supplemental measure of our performance and not as an alternative to GAAP
operating income (loss) or net income (loss). A reconciliation of our
same-center NOI to net loss for the three- and six-month periods ended
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Net loss $ (72,793 ) $ (29,688 ) $ (212,087 ) $ (76,497 )
Adjustments: (1)
Depreciation and amortization 65,895 73,292 134,384 151,593
Interest expense 59,736 57,351 113,822 116,153
Abandoned projects expense 242 34 400 34
Gain on sales of real estate assets (2,623 ) (5,524 ) (2,763 ) (6,382 )
Gain on extinguishment of debt - - - (71,722 )
Loss on impairment 13,274 41,608 146,918 66,433
Litigation settlement - - - 88,150
Income tax provision 16,117 813 16,643 952
Lease termination fees (1,433 ) (1,073 ) (1,653 ) (2,090 )
Straight-line rent and above- and (236 ) (1,408 ) (2,031 ) (2,453 )
below-market rent
Net loss attributable to noncontrolling
interests 487 57 694 132
in other consolidated subsidiaries
General and administrative expenses 18,727 14,427 36,563 36,434
Management fees and non-property level (1,142 ) (4,118 ) (5,320 ) (6,784 )
revenues
Operating Partnership's share of 96,251 145,771 225,570 293,953 property NOI Non-comparable NOI (5,523 ) (12,336 ) (13,222 ) (27,338 ) Total same-center NOI$ 90,728 $ 133,435 $ 212,348 $ 266,615
(1) Adjustments are based on our
share, including our share of unconsolidated affiliates and excluding
noncontrolling interests' share of consolidated properties.
Same-center NOI decreased 32.0% for the three months ended June 30, 2020 as
compared to the prior-year period. The $42.7 million decrease for the three
months ended June 30, 2020 compared to the same period in 2019 primarily
consisted of a $54.8 million decrease in revenues offset by a $11.3 million
decline in operating expenses. Rental revenues declined $50.5 million during the
quarter primarily related to $37.8 million of estimated uncollectible revenues
related to tenants in bankruptcy or struggling financially and $2.4 million of
rent abatements. Same-center NOI was also negatively impacted by store closures
and rent concessions that were in effect prior to the COVID-19 pandemic for
tenants with high occupancy cost levels and tenants that closed in 2019 due to
bankruptcy.
Same-center NOI decreased 20.3% for the six months ended June 30, 2020 as
compared to the prior-year period. The $54.3 million decrease for the six months
ended June 30, 2020 compared to the same period in 2019 primarily consisted of a
$66.0 million decrease in revenues offset by a $11.7 million decline in
operating expenses. Rental revenues declined $64.5 million during the quarter
primarily related to $41.0 million of estimated uncollectible revenues related
to tenants in bankruptcy or struggling financially and $2.4 million of rent
abatements. Same-center NOI was also negatively impacted by store closures and
rent concessions that were in effect prior to the COVID-19 pandemic for tenants
with high occupancy cost levels and tenants that closed in 2019 due to
bankruptcy.
Operational Review
The shopping center business is, to some extent, seasonal in nature with tenants
typically achieving the highest levels of sales during the fourth quarter due to
the holiday season, which generally results in higher percentage rents in the
fourth quarter. Additionally, the malls earn most of their rents from short-term
tenants during the holiday period. Thus, occupancy levels and revenue production
are generally the highest in the fourth quarter of each year. Results of
operations realized in any one quarter may not be indicative of the results
likely to be experienced over the course of the fiscal year.
In response to local and state mandated closures due to the COVID-19 pandemic,
our entire portfolio, except for a few properties, closed. All but one of our
mall properties have re-opened and we have implemented strict procedures and
guidelines for our employees, tenants and property visitors based on CDC and
other health agency recommendations.
The mandated closures resulted in nearly all of our tenants closing for a period
of time and/or shortening operating hours. As a result, we have experienced an
increased level of requests for rent deferrals, and abatements, as well as
defaults on rent obligations. While, in general, we believe that the tenants
have a clear contractual obligation to pay rent, we have been working with our
tenants to address rent deferral requests. Based on agreements with our top 20
tenants as a
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percentage of total revenues, excluding tenants in bankruptcy, we anticipate collecting over 60% of related rent for the second quarter, with the remainder expected to be deferred or abated. We remain in negotiations with tenants and are unable to predict the outcome of those discussions. As we finalize negotiations, rent collections as a percentage of billed cash-based rents have increased with certain past-due amounts being paid, resulting in an overall collection rate April through July of over 54%. As of earlyAugust 2020 , July rent collections are currently estimated at 49%; however, we anticipate an improvement in the collection rate as we finalize negotiations with retailers and additional past due amounts are collected. We estimate that we will defer$17.0 million , at our share, of rents that were billed for April, May andJune 2020 based on agreements that have been executed or are in active negotiation. We continue to assess rent relief requests from our tenants but are unable to predict the resolution or impact of these discussions. Year-to-date, twelve national tenants have declared bankruptcy, including major tenants such as J.C. Penney, Ascena Retail Group, Stage Stores and GNC. As ofJune 30, 2020 , J.C. Penney and Ascena Retail Group, Inc. represented$18.5 million in gross annual revenue and comprised 6.1 million square feet. The remaining ten tenants in bankruptcy represented approximately$22.3 million in gross annual revenue and comprised 1.1 million square feet. The majority of these have announced some store closures but are expected to reorganize and continue to operate.
We classify our regional malls into three categories:
(1) Stabilized Malls - Malls that have completed their initial lease-up and
have been open for more than three complete calendar years.
(2) Non-stabilized Malls - Malls that are in their initial lease-up phase.
After three complete calendar years of operation, they are reclassified
on
category. The Outlet Shoppes at
non-stabilized mall as of
(3) Excluded Malls - We exclude malls from our core portfolio if they fall
in one of the following categories, for which operational metrics are
excluded:
a. Lender Malls - Malls for which we are working or intend to work
with the lender on a restructure of the terms of the loan secured
by the property or convey the secured property to the lender.
Asheville Mall , Burnsville Center, EastGate Mall , Hickory Point
Mall , Greenbrier Mall and Park Plaza were classified as Lender
Malls as of June 30, 2020 , and Greenbrier Mall , Hickory Point Mall
and Triangle Town Center were classified as Lender Malls as of June
30, 2019 . Lender Malls are excluded from our same-center pool as
decisions made while in discussions with the lender may lead to
metrics that do not provide relevant information related to the
condition of these properties.
b. Repositioning Malls - Malls that are currently being repositioned
or where we have determined that the current format of the mall no
longer represents the best use of the mall and we are in the
process of evaluating alternative strategies for the mall. This may
include major redevelopment or an alternative retail or non-retail
format, or after evaluating alternative strategies for the mall, we
may determine that the mall no longer meets our criteria for
long-term investment. The steps taken to reposition these malls,
such as signing tenants to short-term leases, which are not
included in occupancy percentages, or leasing to regional or local
tenants, which typically do not report sales, may lead to metrics
which do not provide relevant information related to the condition
of these malls. Therefore, traditional performance measures, such
as occupancy percentages and leasing metrics, excludeRepositioning
Malls. There were no malls classified as Repositioning Malls as of
June 30, 2020 and June 30, 2019 .
We derive the majority of our total revenues from the mall properties. The sources of our total revenues by property type were as follows:
Six Months Ended June 30,
2020 2019
Malls 90.9 % 88.4 %
Other Properties 9.1 % 11.6 %
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Table of Contents Mall Store Sales Mall store sales include reporting mall tenants of 10,000 square feet or less for stabilized malls and exclude license agreements, which are retail contracts that are temporary or short-term in nature and generally last more than three months but less than twelve months. Due to temporary mall and store closures that occurred during the second quarter 2020, the majority of CBL's tenants did not report sales for the full reporting period. As a result, CBL is not able to provide a complete measure of sales per square foot for the trailing twelve months endedJune 30, 2020 . Stabilized mall same-center sales per square foot for the twelve months endedJune 30, 2019 were$383 .
Occupancy
Our portfolio occupancy is summarized in the following table (1):
As of June 30,
2020 2019
Total portfolio 88.1 % 90.2 %
Malls:
Total Mall portfolio 86.6 % 88.1 %
Same-center Malls 86.6 % 88.3 %
Stabilized Malls 86.8 % 88.3 %
Non-stabilized Malls (2) 79.2 % 78.0 %
Other Properties:
Associated centers 90.5 % 96.3 %
Community centers 95.2 % 97.6 %
(1) As noted above, excluded properties are not included in occupancy metrics.
Occupancy for malls represents percentage of mall store gross leasable area
occupied under 20,000 square feet. Occupancy for other properties represents
percentage of gross leasable area occupied.
(2) Represents occupancy for The Outlet Shoppes at
2019.
Leasing
Leasing activity for the quarter was muted as we shifted our focus to
negotiating with existing tenants. To-date we have completed or are finalizing
negotiations with retailers representing the majority of second quarter rent.
These agreements generally include flexible terms on second quarter rent to
certain retailers that require assistance, such as rent deferrals, while at the
same time preserving current and future income.
The following is a summary of the total square feet of leases signed in the three- and six-month periods ended June, 2020 and 2019:
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Operating portfolio:
New leases 141,751 256,648 420,117 528,461
Renewal leases 133,671 461,251 766,431 1,153,378
Development portfolio:
New leases - 54,702 7,929 204,439
Total leased 275,422 772,601 1,194,477 1,886,278
Average annual base rents per square foot are based on contractual rents in
effect as of
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June 30,
2020 2019
Malls (1):
Same-center Stabilized Malls $ 32.14 $ 32.50
Stabilized Malls 32.24 32.48
Non-stabilized Malls (2) 24.74 24.65
Other Properties (3): 15.72 15.36
Associated centers 14.32 13.85
Community centers 16.97 16.65
Office buildings 19.16 17.94
(1) Excluded properties are not included.
(2) Represents average annual base rents for The Outlet Shoppes at
(3) Average base rents for associated centers, community centers and office
buildings include all leased space, regardless of size.
Results from new and renewal leasing of comparable small shop space of less than 10,000 square feet during the six month period endedJune 30, 2020 for spaces that were previously occupied, based on the contractual terms of the related leases inclusive of the impact of any rent concessions, are as follows: New Initial New Average Square Prior Gross Gross Rent % Change Gross Rent % Change Property Type Feet Rent PSF PSF Initial PSF (1) Average Quarter: All Property Types (2) 77,127$ 28.55 $ 27.00 (5.4 )%$ 28.09 (1.6 )% Stabilized Malls 51,365 32.19 30.91 (4.0 )% 32.46 0.8 % New leases 2,490 47.45 54.12 14.1 % 57.37 20.9 % Renewal leases 48,875 31.42 29.73 (5.4 )% 31.19 (0.7 )% Year-to-Date: All Property Types (2) 537,651$ 28.06 $ 25.75 (8.2 )%$ 26.22 (6.6 )% Stabilized Malls 496,089 28.21 25.93 (8.1 )% 26.41 (6.4 )% New leases 51,694 23.67 29.42 24.3 % 30.89 30.5 % Renewal leases 444,395 28.74 25.53 (11.2 )% 25.88 (10.0 )%
(1) Average gross rent does not incorporate allowable future increases for
recoverable common area expenses.
(2) Includes stabilized malls, associated centers, community centers and office
buildings.
New and renewal leasing activity of comparable small shop space of less than 10,000 square feet based on the lease commencement date is as follows:
Number Term Initial Average Expiring
of Square (in Rent Rent Rent Initial Rent Average Rent
Leases Feet years) PSF PSF PSF Spread Spread
Commencement 2020:
New 68 232,843 7.50 $ 29.33 $ 30.88 $ 23.98 $ 5.35 22.3 % $ 6.90 28.8 %
Renewal 320 1,022,993 2.64 27.58 27.81 32.03 (4.45 ) (13.9 )% (4.22 ) (13.2 )%
Commencement 2020 Total 388 1,255,836 3.49 27.90 28.38 30.66 (2.76 ) (9.0 )% (2.28 ) (7.4 )%
Commencement 2021:
Renewal 45 158,020 3.27 34.89 35.78 34.33 0.56 1.6 % 1.45 4.2 %
Commencement 2021 Total 45 158,020 3.27 34.89 35.78 34.33 0.56 1.6 % 1.45 4.2 %
Total 2020/2021 433 1,413,856 3.47 $ 28.68 $ 29.21 $ 31.07 $ (2.39 ) (7.7 )% $ (1.86 ) (6.0 )%
LIQUIDITY AND CAPITAL RESOURCES
As ofJune 30, 2020 , we had$275.8 million available in cash andU.S. Treasury securities and we had$675.9 million outstanding on our secured credit facility leaving$4.3 million of availability, after considering outstanding letters of credit of$1.3 million . Our total pro rata share of debt atJune 30, 2020 was$4.5 billion . 51
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InFebruary 2020 , we utilized our secured credit facility to pay off two loans secured byParkway Place andValley View Mall totaling$84.5 million . Also, we closed on a new loan secured by The Outlet Shoppes atAtlanta - Phase II in the amount of$4.7 million , with an interest rate of LIBOR plus 2.5% and a maturity date ofNovember 2023 . Proceeds were used to retire the$4.4 million existing loan. InMarch 2020 , we drew$280.0 million on our secured line of credit to increase liquidity and preserve financial flexibility in light of the uncertainty surrounding the impact of the COVID-19 pandemic. We purchased$154.2 million , including accrued interest, ofU.S. Treasury securities with a portion of the borrowings on our secured line of credit. In response to the COVID-19 pandemic, we implemented comprehensive programs to halt all non-essential expenditures, to reduce operating and overhead expenses and to reduce, defer or suspend capital expenditures, including redevelopment investments. These programs include a temporary 50% reduction to the compensation of our Chairman of the Board, our CEO and our President as well as independent director fees, a temporary 20% reduction to the compensation of our other named executive officers, salary reductions to all staff, a broad-based furlough program and 2020 capital expenditure reductions or deferrals estimated in the range of$60.0 million to$80.0 million . While we have paused several major projects, we are pursuing capital lite solutions for backfilling our remaining available anchors, including joint venture partnerships, favorable lease structures and third-party arrangements - all of which benefit our portfolio while preserving capital. Additionally, we were able to achieve debt service payment deferrals for a portion of our secured loans. Securitized lenders in general have shown minimal flexibility in amending loan payments. We have addressed nearly all our major debt maturities for 2020 and are in discussions with existing lenders for certain 2021 secured loan maturities. We have no significant unsecured debt maturities untilDecember 2023 . We are being proactive to determine the best strategies for addressing these future maturities and significantly reducing leverage. We have engagedWeil, Gotshal & Manges LLP andMoelis & Company LLC (the "Advisors") to assist us in exploring several alternatives to reduce overall leverage and interest expense and to extend the maturity of our debt including (i) the senior secured credit facility, which includes a revolving facility with a balance of$675.9 million and a term loan with a balance of$447.5 million as ofJune 30, 2020 , that matures inJuly 2023 and (ii) the Notes with balances of$450.0 million ,$300.0 million , and$625.0 million , as ofJune 30, 2020 , that mature inDecember 2023 ,October 2024 andDecember 2026 , respectively, as well as the cumulative unpaid dividends on our preferred stock and the special common units of limited partnership interest in theOperating Partnership . The Advisors commenced discussions inMay 2020 with advisors to certain holders of the Notes and the credit committee of the senior secured credit facility. We may pursue a comprehensive capital structure solution that will address our funded indebtedness and outstanding equity interests that may result in the reorganization of the Company. As discussed in " Note 8 - Mortgage and Other Indebtedness, Net" to the condensed consolidated financial statements, we elected to not make the$11.8 million interest payment due and payable onJune 1, 2020 , with respect to the 5.25% senior unsecured notes due 2023 (the "2023 Notes") (the "2023 Notes Interest Payment"). We also elected to not make the$18.6 million interest payment due and payable onJune 15, 2020 , with respect to our 5.95% senior unsecured notes due 2026 (the "2026 Notes") (the "2026 Notes Interest Payment"). We did not make either the 2023 Notes Interest Payment or the 2026 Notes Interest Payment by the last day of the respective 30-day grace periods that were provided for in the indenture governing the 2023 Notes and the 2026 Notes. Our failure to make the 2023 Notes Interest Payment and the 2026 Notes Interest Payment during the applicable grace periods constituted an "event of default" with respect to each of the 2023 Notes and the 2026 Notes. The event of default caused by our failure to make the 2023 Notes Interest Payment and the 2026 Notes Interest Payment resulted in a cross default under the secured credit facility. OnAugust 5, 2020 , we made the 2023 Notes Interest Payment to the holders of the 2023 Notes and the 2026 Notes Interest Payment to the holders of the 2026 Notes. Accordingly, from and after such payment, the nonpayment of each of the 2023 Notes Interest Payment and the 2026 Notes Interest Payment no longer constitutes (i) an "event of default" under the indenture governing the 2023 Notes and the 2026 Notes that occurred and is continuing or (ii) to the extent provided in the Bank Forbearance Agreement, an "event of default" under the secured credit facility. See the section below titled Financial Covenants and Restrictions for a discussion regarding the violation of certain covenants under our secured credit facility, the 2023 Notes and the 2026 Notes. We derive the majority of our revenues from leases with retail tenants, which have historically been the primary source for funding short-term liquidity and capital needs such as operating expenses, debt service, tenant construction allowances, recurring capital expenditures, dividends and distributions. We believe that the combination of cash flows generated from our operations, combined with cash on hand and our investment inU.S. Treasury securities will, for the foreseeable future, provide adequate liquidity to meet our cash needs assuming we continue to operate as a going concern within twelve months of the date our condensed consolidated financial statements are issued. In addition to these factors, we have options available to us to generate additional liquidity, including but not limited to, joint venture investments and decreasing expenditures related to tenant construction allowances and other capital expenditures. We also generate revenues from sales of peripheral land at our properties and from sales of real estate assets when it is determined that we can realize an optimal value for the assets. 52
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Cash Flows - Operating, Investing and Financing Activities
There was$150.1 million of cash, cash equivalents and restricted cash as ofJune 30, 2020 , an increase of$91.1 million fromDecember 31, 2019 . Of this amount,$123.4 million was unrestricted cash and cash equivalents as ofJune 30, 2020 . Also, atJune 30, 2020 , we had$152.4 million inU.S. Treasuries that are scheduled to mature betweenApril 2021 andJune 2021 .
Our net cash flows are summarized as follows (in thousands):
Six Months Ended June 30,
2020 2019 Change
Net cash provided by operating activities $ 38,370 $ 126,032 $ (87,662 )
Net cash provided by (used in) investing
activities (191,379 ) 27,104 (218,483 )
Net cash provided by (used in) financing
activities 244,079 (165,132 ) 409,211
Net cash flows $ 91,070 $ (11,996 ) $ 103,066 Cash Provided by Operating Activities
Cash provided by operating activities decreased$87.6 million primarily due to a decline in cash payments of rental revenues from tenants due to the closure of most of our malls in response to government mandates that began in March. Rental revenues also decreased due to store closures and rent concessions for tenants with high occupancy cost levels, including tenants that closed in 2019 and 2020 due to bankruptcy prior to the government mandated closures, as well as a decline in rental revenues related to dispositions.
Cash Provided by (Used in) Investing Activities
Net cash used in investing activities for 2020 was primarily related to the purchase of$153.2 million ofU.S. Treasury securities using a portion of the$280.0 million that we drew on our secured line of credit. We also expended$36.4 million on additions to real estate assets, primarily related to redevelopment projects. Net cash provided by investing activities in the prior year period related to$69.2 million of proceeds from dispositions of properties, which was partially offset by$51.1 million of additions to real estate assets.
Cash Provided by (Used in) Financing Activities
The net cash inflow for 2020 is primarily due to the$280.0 million draw on our secured credit facility in order to increase liquidity and preserve financial flexibility in light of the uncertainty surrounding the impact of the COVID-19 pandemic. Additionally, there were no common or preferred stock dividends paid for the six months endedJune 30, 2020 , as compared to$25.9 million in dividends paid to holders of common stock and$22.4 million in dividends paid to holders of preferred stock during the six months endedJune 30, 2019 .
Debt
Debt of the Company
CBL has no indebtedness. Either theOperating Partnership or one of its consolidated subsidiaries, that it has a direct or indirect ownership interest in, is the borrower on all of our debt. CBL is a limited guarantor of the Notes, as described in Note 8 to the condensed consolidated financial statements, for losses suffered solely by reason of fraud or willful misrepresentation by theOperating Partnership or its affiliates. We also provide a similar limited guarantee of theOperating Partnership's obligations with respect to our secured credit facility as ofJune 30, 2020 . 53
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Debt of the
The following tables summarize debt based on our pro rata ownership share,
including our pro rata share of unconsolidated affiliates and excluding
noncontrolling investors' share of consolidated properties, because we believe
this provides investors and lenders a clearer understanding of our total debt
obligations and liquidity (in thousands):
Weighted-
Average
Noncontrolling Unconsolidated Interest
June 30, 2020: Consolidated Interests Affiliates Total Rate (1)
Fixed-rate debt:
Non-recourse loans on operating
Properties (2) $ 1,230,227 $ (30,377 ) $ 618,902 $ 1,818,752 4.80 %
Recourse loans on operating Properties
(3) - - 9,360 9,360 3.74 %
Senior unsecured notes due 2023 (4) 448,139 - - 448,139 5.25 %
Senior unsecured notes due 2024 (5) 299,964 - - 299,964 4.60 %
Senior unsecured notes due 2026 (6) 617,911 - - 617,911 5.95 %
Total fixed-rate debt 2,596,241 (30,377 ) 628,262 3,194,126 5.07 %
Variable-rate debt:
Recourse loans on operating Properties 41,500 - 68,936 110,436 2.68 %
Construction loans 27,215 - 48,779 75,994 3.13 %
Secured line of credit 675,925 - - 675,925 2.42 %
Secured term loan 447,500 - - 447,500 2.42 %
Total variable-rate debt 1,192,140 - 117,715 1,309,855 2.49 %
Total fixed-rate and variable-rate
debt 3,788,381 (30,377 ) 745,977 4,503,981 4.32 %
Unamortized deferred financing costs (14,347 ) 291 (2,769 ) (16,825 )
Total mortgage and other indebtedness,
net $ 3,774,034 $ (30,086 ) $ 743,208 $ 4,487,156
Weighted-
Average
Noncontrolling Unconsolidated Interest
December 31, 2019: Consolidated Interests Affiliates Total Rate (1)
Fixed-rate debt:
Non-recourse loans on operating
Properties (2) $ 1,330,561 $ (30,658 ) $ 623,193 $ 1,923,096 4.88 %
Recourse loans on operating Properties
(3) - - 10,050 10,050 3.74 %
Senior unsecured notes due 2023 (4) 447,894 - - 447,894 5.25 %
Senior unsecured notes due 2024 (5) 299,960 - - 299,960 4.60 %
Senior unsecured notes due 2026 (6) 617,473 - - 617,473 5.95 %
Total fixed-rate debt 2,695,888 (30,658 ) 633,243 3,298,473 5.10 %
Variable-rate debt:
Recourse loans on operating Properties 41,950 - 69,046 110,996 4.13 %
Construction loans 29,400 - 35,362 64,762 4.45 %
Secured line of credit 310,925 - - 310,925 3.94 %
Secured term loan 465,000 - - 465,000 3.94 %
Total variable-rate debt 847,275 - 104,408 951,683 4.00 %
Total fixed-rate and variable-rate
debt 3,543,163 (30,658 ) 737,651 4,250,156 4.86 %
Unamortized deferred financing costs (16,148 ) 318 (2,851 ) (18,681 )
Total mortgage and other indebtedness,
net $ 3,527,015 $ (30,340 ) $ 734,800 $ 4,231,475 (1) Weighted-average interest rate includes the effect of debt premiums and
discounts but excludes amortization of deferred financing costs.
(2) An unconsolidated affiliate has an interest rate swap on a notional amount
outstanding of
2019 related to a variable-rate loan on
fix the interest rate on this loan to a fixed-rate of 3.22%.
(3) The unconsolidated affiliate has an interest rate swap on a notional amount
outstanding of
related to a variable-rate loan on
Improvements to effectively fix the interest rate on this loan to a
fixed-rate of 3.74%.
(4) The balance is net of an unamortized discount of
30, 2020 and
(5) The balance is net of an unamortized discount of
2020 and
(6) The balance is net of an unamortized discount of
30, 2020 and December 31, 2019 , respectively.
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The weighted-average remaining term of our total share of consolidated and
unconsolidated debt was 3.4 years and 3.9 years at
As ofJune 30, 2020 andDecember 31, 2019 , our pro rata share of consolidated and unconsolidated variable-rate debt represented 29.2% and 22.5%, respectively, of our total pro rata share of debt.
See Note 7 to the condensed consolidated financial statements for information concerning activity related to unconsolidated affiliates.
Credit Ratings
During the quarter endedJune 30, 2020 , Fitch Ratings, Moody's Investors Service and S&P Global Ratings terminated their coverage of theOperating Partnership's unsecured long-term indebtedness.
Senior Unsecured Notes
The following presents the Company's compliance with key covenant ratios, as
defined, of the Notes and the senior secured credit facility as of
Debt Covenant Compliance Ratios (1) Required Actual Total debt to total assets < 60% 56 % Secured debt to total assets < 40% 36 % Total unencumbered assets to unsecured debt > 150% 191 %
Consolidated income available for debt service to > 1.5x 2.4 x
annual debt service charge Minimum debt yield on outstanding balance (2) > 10% 11.1 %
(1) The debt covenant compliance ratios for the secured line of credit, the
secured term loan and the senior unsecured notes are defined and computed on
the same basis.
(2) The minimum debt yield on outstanding balance debt covenant compliance ratio only applies to the secured credit facility. If the minimum debt yield on outstanding balance is 11.0% or below, then the lender will initiate a cash trap where all cash flow of the properties that secure the credit facility will be held in escrow and may also be used for debt service. If subsequently the minimum debt yield on outstanding balance is greater than 11.0% for two consecutive quarters, then all amounts are released from escrow and returned to the borrower. Management projects that the Company will maintain compliance with the above covenants throughJune 30, 2021 . Uncertainty in the current economic environment due to the COVID-19 pandemic may significantly impact the judgments regarding estimates and assumptions utilized by management in preparing its projections of future cash flows, which were made using the best information available to management at the time. Actual results could differ materially from management's projections.
Financial Covenants and Restrictions
As discussed in " Note 8 - Mortgage and Other Indebtedness, Net" to the condensed consolidated financial statements, we elected not to make the 2023 Notes Interest Payment and the 2026 Notes Interest Payment.The Operating Partnership did not make either the 2023 Notes Interest Payment or the 2026 Notes Interest Payment by the last day of the respective 30-day grace periods provided for in the indenture governing the 2023 Notes and the 2026 Notes.The Operating Partnership's failure to make the 2023 Notes Interest Payment and the 2026 Notes Interest Payment during the applicable grace periods constituted an "event of default" with respect to each of the 2023 Notes and the 2026 Notes. We entered into forbearance agreements, as amended, with certain beneficial owners and/or investment advisors or managers of discretionary funds, accounts or other entities for the holders or beneficial owners (the "Holders") of in excess of 50% of the aggregate principal amount of each of the 2023 Notes and the 2026 Notes. Pursuant to the forbearance agreements, among other provisions, the Holders of the 2023 Notes and the 2026 Notes agreed to forbear from exercising any rights and remedies under the indenture governing the 2023 Notes and the 2026 Notes solely with respect to the respective defaults from the nonpayment of the 2023 Notes Interest Payment and the 2026 Notes Interest Payment. The event of default caused by theOperating Partnership's failure to make the 2023 Notes Interest Payment and the 2026 Notes Interest Payment resulted in a cross default under the secured credit facility. We entered into a forbearance agreement, as amended, (the "Bank Forbearance Agreement") with the administrative agent for the lenders under the secured credit facility pursuant to which, among other provisions, the administrative agent, on behalf of itself and the lenders, agreed to forbear from exercising any rights and remedies under the secured credit facility agreement solely with respect to the specified defaults (as defined in the Bank Forbearance Agreement), including the cross-default resulting from the failure to pay the 2023 Notes Interest Payment or the 2026 Notes Interest Payment. 55
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OnAugust 5, 2020 , prior to the expiration of the forbearance periods in the forbearance agreements with the Holders of the 2023 Notes and the 2026 Notes and the Bank Forbearance Agreement, we made the 2023 Notes Interest Payment to the holders of the 2023 Notes and the 2026 Notes Interest Payment to the holders of the 2026 Notes. Accordingly, from and after such payment, the nonpayment of each of the 2023 Notes Interest Payment and the 2026 Notes Interest Payment no longer constitutes (i) an "event of default" under the indenture governing the 2023 Notes and the 2026 Notes that occurred and is continuing or (ii) to the extent provided in the Bank Forbearance Agreement, an "event of default" under the secured credit facility. On each ofMay 26, 2020 ,June 2, 2020 ,June 16, 2020 andAugust 6, 2020 , we received notices of default and reservation of rights letters from the administrative agent under our secured credit facility asserting that certain defaults and events of default have occurred and continue to exist by reason of our failure to comply with certain restrictive covenants, including the liquidity covenant, in the secured credit facility and resulting from the failure to make the 2023 Notes Interest Payment and the 2026 Notes Interest Payment prior to the expiration of the applicable grace periods. In addition, onAugust 6, 2020 , we received a notice of imposition of base rate and post-default rate letter from the administrative agent under the secured credit facility, which (i) informed us that following an asserted event of default onMarch 19, 2020 , all outstanding loans were converted to base rate loans at the expiration of the applicable interest periods and (ii) seeks payment of approximately$4.8 million related thereto for April throughJune 2020 . The base rate is defined as the highest of (i) the prime rate, (ii) the federal funds rate plus 0.50% and (iii) the LIBOR Market Index Rate plus 1.0%, plus 1.25%. The base rate onJuly 1, 2020 was 4.50%. The administrative agent also informed us that from and afterAugust 6, 2020 , interest will accrue on all outstanding obligations at the post-default , which is equal to the rate that otherwise would be in effect plus 5.0%. The post-default rate at the time of notification was 9.50%. We disagree with the assertions made by the administrative agent as to the imposition of the base rate and post-default rate interest and related matters, and intend to vigorously defend any such claims. As of the date of this report, the lenders under the secured credit facility have not accelerated the outstanding amount due and payable on the loans or commenced foreclosure proceedings, but they may seek to exercise one or more of these remedies in the future. In addition, as a result of the events of default asserted by the administrative agent in such letters, the administrative agent may deny our request for future LIBOR interest periods, which would result in an increase in annual interest expense of approximately$23.1 million based on the base rate and$78.6 million based on the post-default rate. We have commenced discussions with the administrative agent on behalf of the lenders with respect to these assertions? however, there can be no assurance that we will agree upon a favorable resolution with respect to such claims. Failure to reach a consensual resolution of these claims or to complete a refinancing or other restructuring could have a material adverse effect on our liquidity, financial condition and results of operations, which may result in filing a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in order to implement a restructuring plan. Given the impact of the COVID-19 pandemic on the retail and broader markets, the ongoing weakness of the credit markets and significant uncertainties associated with each of these matters, we believe that there is substantial doubt that we will continue to operate as a going concern within one year after the date our condensed consolidated financial statements for the six months ended June 30, 2020 are issued. See Note 1 - Organization and Basis of Presentation to the condensed consolidated financial statements for additional information.
Unencumbered Consolidated Portfolio Statistics
(Dollars in thousands, except sales per square foot data)
% of
Consolidated
Unencumbered
Sales Per Square NOI for
Foot for the Twelve Months the Six Months
Ended (1) (2) Occupancy (2) Ended
6/30/20 (3) 6/30/19 6/30/20 6/30/19 6/30/20 (4 )
Unencumbered consolidated
Properties:
Tier 1 Malls $ 375 88.8 % 83.1 % 19.2 % (5 )
Tier 2 Malls 337 80.7 % 86.2 % 34.5 %
Tier 3 Malls 278 82.6 % 86.5 % 23.9 %
Total Malls N/A 320 82.9 % 85.8 % 77.6 %
Total Associated Centers N/A N/A 90.9 % 96.1 % 16.3 %
Total Community Centers N/A N/A 98.8 % 99.4 % 5.3 %
Total Office Buildings & Other N/A N/A 100.0 % 86.7 % 0.8 %
Total Unencumbered Consolidated
Portfolio N/A $ 320 86.3 % 89.8 % 100.0 %
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(1) Represents same-center sales per square foot for mall tenants 10,000 square
feet or less for stabilized malls.
(2) Operating metrics are included for unencumbered operating properties and do
not include sales or occupancy of unencumbered parcels.
(3) Due to temporary mall and store closures that occurred during the second
quarter 2020, the majority of CBL's tenants did not report sales for the full
reporting period. As a result, CBL is not able to provide a complete measure
of sales per square foot for the quarter or trailing twelve months.
(4) Our consolidated unencumbered properties generated approximately 34.7% of
total consolidated NOI of
dispositions) for the six months ended
(5) NOI is derived from unencumbered portions of Tier One properties that are
otherwise secured by a loan. The unencumbered portions include outparcels,
anchors and former anchors that have been redeveloped.
Equity
In 2019, we suspended all future dividends on our common stock and preferred stock, as well as distributions to all noncontrolling interest investors in ourOperating Partnership . The dividend arrearage created by our board of directors' decision to suspend the dividends that continue to accrue on our outstanding preferred stock currently makes us ineligible to use the abbreviated, and less costly, SEC Form S-3 registration statement to register our securities for sale. This means we will be required to use a registration statement on Form S-1 to register additional securities for sale with theSEC , which we expect to hinder our ability to act quickly in relation to, and raise our costs incurred in, future capital raising activities. This preferred dividend arrearage (and theOperating Partnership's related arrearage in distributions to its preferred units of limited partnership underlying our outstanding preferred shares) also will require that we not resume any payment of dividends on our common stock unless full cumulative dividends accrued with respect to our preferred stock (and such underlying preferred units) for all past quarters and the then-current quarter are first declared and paid in cash, or declared with a sum sufficient for the payment thereof having been set apart for such payment in cash. In addition, for so long as this distribution suspension results in the existence of a distribution shortfall (as described in the Partnership Agreement of theOperating Partnership ) with respect to any of the S-SCUs, the L-SCUs or the K-SCUs (an "SCU Distribution Shortfall"), we (i) may not cause theOperating Partnership to resume distributions to holders of its outstanding common units of limited partnership until all holders of SCUs have received distributions sufficient to satisfy the SCU Distribution Shortfall for all prior quarters and the then-current quarter (which effectively also prevents the resumption of common stock dividends, since our common stock dividends are funded by distributions the Company receives on the underlying common units it holds in theOperating Partnership ) and (ii) may not elect to settle any exchange requested by a holder of common units of theOperating Partnership in cash, and may only settle any such exchange through the issuance of shares of common stock or other units of theOperating Partnership ranking junior to any such units as to which a distribution shortfall exists. Our board of directors has prospectively approved that, to the extent any partners exercise any or all of their exchange rights while the existence of the SCU Distribution Shortfall requires an exchange to be settled through the issuance of shares of common stock or other units of theOperating Partnership , the consideration paid shall be in the form of shares of common stock. We will review taxable income on a regular basis and take measures, if necessary, to ensure that we meet the minimum distribution requirements to maintain our status as a REIT. See Listing Criteria in Note 1 to the condensed consolidated financial statements for additional information regarding a notice we received from the NYSE regarding our non-compliance with the NYSE Listing Standards and our plans to address this non-compliance. As a publicly traded company, and as a subsidiary of a publicly traded company, we previously have accessed capital through both the public equity and debt markets. We have a shelf registration statement on Form S-3 on file with theSEC that previously authorized us to publicly issue unspecified amounts of senior and/or subordinated debt securities, shares of preferred stock (or depositary shares representing fractional interests therein), shares of common stock, warrants or rights to purchase any of the foregoing securities, and units consisting of two or more of these classes or series of securities and limited guarantees of debt securities issued by theOperating Partnership . This shelf registration statement also authorized theOperating Partnership to publicly issue unsubordinated debt securities. This shelf registration statement was due to expire inJuly 2021 . However, as a result of both (i) the fact that the Company no longer qualifies as a well-known seasoned issuer underSEC rules and (ii) our loss of eligibility to use Form S-3 to register offers and sales of securities as described above, we are unable to use this shelf registration statement. Additionally, while we had previously suspended quarterly dividend payments on our common stock during 2019, a very small amount of monthly "cash option" investments in shares continued intoMay 2020 , pursuant to the terms of the Company's dividend reinvestment plan ("DRIP"). Due in part to impacts on the Company's operations and staffing resulting from ongoing efforts to address the COVID-19 pandemic, we inadvertently failed to suspend the operation of these "cash option" investments during the months of March, April andMay 2020 , after we lost the ability to use the Form S-3 registration statement for the DRIP, effective with the filing of our Annual Report on Form 10-K in March, due to the dividend arrearage with respect to our preferred stock. We have now fully suspended the operation of our DRIP, including the cash option feature but, as a result of this oversight, we issued a total of 6,134 shares of common stock that were not registered under the Securities Act of 1933, as amended (the "Securities Act") for aggregate consideration of$1,346.94 prior to such suspension. The purchasers of these shares, issued pursuant to our DRIP when we were not eligible to issue shares on Form S-3, could bring claims against us for rescission and other damages under federal or state securities laws. 57
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Market Capitalization
Our total-market capitalization as of
Shares Stock
Outstanding Price (1)
Common stock and operating partnership units 201,691 $ 0.27
7.375% Series D Cumulative Redeemable Preferred Stock 1,815
250.00
6.625% Series E Cumulative Redeemable Preferred Stock 690 250.00
(1) Stock price for common stock and
closing price of CBL's common stock on
the preferred stock represent the liquidation preference of each respective
series of preferred stock.
Capital Expenditures
Deferred maintenance expenditures are generally included in the determination of CAM expense that is billed to tenants in accordance with their lease agreements. These expenditures are generally recovered over a 5 to 15-year period. Renovation expenditures are primarily for remodeling and upgrades of malls, of which a portion is recovered from tenants over a 5 to 15-year period. We recover these costs through fixed amounts with annual increases or pro rata cost reimbursements based on the tenant's occupied space. The following table, which excludes expenditures for developments, redevelopments and expansions, summarizes these capital expenditures, including our share of unconsolidated affiliates' capital expenditures, for the three and six month periods endedJune 30, 2020 compared to the same periods in 2019 (in thousands): Three Months EndedJune 30 ,
Six Months Ended
2020 2019 2020 2019
Tenant allowances (1) $ 1,360 $ 8,796 $ 8,578 $ 11,050
Deferred maintenance:
Parking area and parking area lighting 15 126 270 214
Roof repairs and replacements 1,748 2,612 1,899 2,674
Other capital expenditures 645 5,898 3,841 9,484
Total deferred maintenance 2,408 8,636 6,010 12,372
Capitalized overhead 100 425 731 1,372
Capitalized interest 366 619 1,092 1,182
Total capital expenditures $ 4,234 $ 18,476 $ 16,411 $ 25,976 (1) Tenant allowances primarily relate to new leases. Tenant allowances related
to renewal leases were not material for the periods presented.
Annual capital expenditures budgets are prepared for each of our properties that are intended to provide for all necessary recurring and non-recurring capital expenditures. As noted above, in response to the impact from COVID-19 we have deferred or suspended capital expenditures, including redevelopment expenditures, in the range of$60.0 million to$80.0 million . We believe that property operating cash flows, which include reimbursements from tenants for certain expenses, and readily available cash on hand will provide the necessary funding for these expenditures.
Developments, Expansions and Redevelopments
The following tables summarize our development, expansion and redevelopment
projects as of
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Properties Opened During the Six Months Ended
(Dollars in thousands)
CBL's Share of
CBL Total Initial
Ownership Project Total Cost to 2019 Opening Unleveraged
Property Location Interest Square Feet
Cost (1) Date (2) Cost Date
12,467 $ 1,919 $ 1,553 $ 100 May-20 9.2 %
Old Navy
Parkdale Mall - Beaumont, TX 50% 69,341 4,435 3,543 1,039 Apr-20 10.2 %
Self-storage (3)(4)
Total Outparcel
Development Completed 81,808 $ 6,354 $ 5,096 $ 1,139 (1) Total Cost is presented net of reimbursements to be received.
(2) Cost to Date does not reflect reimbursements until they are received.
(3) Yield is based on expected yield upon stabilization.
(4) Total cost includes an allocated value for the Company's land contribution.
Redevelopments Completed During the Six Months Ended
(Dollars in thousands)
CBL's Share of
CBL Total Initial
Ownership Project Total Cost to 2020 Opening Unleveraged
Property Location Interest Square Feet Cost (1) Date (2) Cost Date Yield
Mall Redevelopments:
CherryVale Mall - Sears Rockford, IL 100% 114,118 $ 3,508 $ 2,981 $ 78 Jun-20 8.3 %
Redevelopment (Tilt)
Dakota Square Mall -
Herbergers Redevelopment Minot, ND 100% 30,096 6,410 4,537 188 Jan-20 7.2 %
(Ross/shops)
Hamilton Place - Sears
Redevelopment (Cheesecake
Factory/Dicks Sporting Chattanooga, TN 100% 195,166 38,715 28,327 2,471 Mar-20 7.8 %
Goods/Dave &
Buster's/Office) (3)
Mall del Norte - Forever
21 Redevelopment (Main Laredo, TX 100% 81,242 10,514 6,674 1,016 Sep-19/Feb-20 9.3 %
Event)
The Promenade - (Five D'Iberville, MS 100% 14,007 2,832 2,263 251 Feb-20/Apr-20 11.4 %
Below/Carter's)
Total Redevelopments 434,629 $ 61,979 $ 44,782 $ 4,004
Completed
(1) Total Cost is presented net of reimbursements to be received.
(2) Cost to Date does not reflect reimbursements until they are received.
(3) The return reflected represents a pro forma incremental return as Total Cost
excludes the cost related to the acquisition of the Sears building in 2017.
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(Dollars in thousands)
CBL's Share of
CBL Total Expected Initial
Ownership Project Total Cost to 2020 Opening Unleveraged
Property Location Interest Square Feet Cost (1) Date (2) Cost Date (3) Yield
Outparcel Developments:
Hamilton Place - Self Chattanooga, TN 60% 68,875 $ 5,824 $ 3,639 $ 2,520 Q3 '20 8.7 %
Storage (4)(5)
Hamilton Place
Development - Aloft Hotel Chattanooga, TN 50% Q1 '21 9.2 %
(5) 89,674 12,000 4,742 4,099
Mayfaire Town Center - Wilmington, NC 100% 6,300 2,267 1,437 1,071 Q3 '20 10.1 %
First Watch
Pearland Town Center - Pearland, TX 100% 48,416 14,186 3,148 2,291 Q1 '21 11.8 %
HCA Offices
213,265 $ 34,277 $ 12,966 $ 9,981
Mall Redevelopments:
Coastal Grand - Dick's
Sporting Goods/Golf Myrtle Beach, SC 50% 132,727 $ 7,050 $ 4,452 $ 3,386 Q3 '20 11.6 %
Galaxy
Westmoreland Mall - JC
Penney Redevelopment Greensburg, PA 100% 2,300 1,017 1,085 840 Q3 '20 9.4 %
(Chipotle)
135,027 $ 8,067 $ 5,537 $ 4,226
Total Properties Under 348,292 $ 42,344 $ 18,503 $ 14,207
Development
(1) Total Cost is presented net of reimbursements to be received.
(2) Cost to Date does not reflect reimbursements until they are received.
(3) As a result of government mandated construction halts due to the COVID-19
pandemic, opening dates may change from what is currently reflected.
(4) Yield is based on expected yield once project stabilizes.
(5) Total cost includes an allocated value for the Company's land contribution.
Off-Balance Sheet Arrangements
Unconsolidated Affiliates
We have ownership interests in 28 unconsolidated affiliates as ofJune 30, 2020 that are described in Note 7 to the condensed consolidated financial statements. The unconsolidated affiliates are accounted for using the equity method of accounting and are reflected in the condensed consolidated balance sheets as investments in unconsolidated affiliates.
The following are circumstances when we may consider entering into a joint venture with a third party:
• Third parties may approach us with opportunities in which they have
obtained land and performed some pre-development activities, but they
may not have sufficient access to the capital resources or thedevelopment and leasing expertise to bring the project to fruition. We
enter into such arrangements when we determine such a project is viable
and we can achieve a satisfactory return on our investment. We typically
earn development fees from the joint venture and provide management and
leasing services to the property for a fee once the property is placed
in operation.
• We determine that we may have the opportunity to capitalize on the value
we have created in a property by selling an interest in the property to
a third party. This provides us with an additional source of capital
that can be used to develop or acquire additional real estate assets
that we believe will provide greater potential forgrowth. When we retain
an interest in an asset rather than selling a 100% interest, it is
typically because this allows us to continue to manage the property,
which provides us the ability to earn fees for management, leasing,
development and financing services provided to the joint venture.
Guarantees
We may guarantee the debt of a joint venture primarily because it allows the joint venture to obtain funding at a lower cost than could be obtained otherwise. This results in a higher return for the joint venture on its investment, and a higher return on our investment in the joint venture. We may receive a fee from the joint venture for providing the guaranty. Additionally, when we issue a guaranty, the terms of the joint venture agreement typically provide that we may receive indemnification from the joint venture or have the ability to increase our ownership interest. See Note 12 to the condensed consolidated statements for information related to our guarantees of unconsolidated affiliates' debt as ofJune 30, 2020 andDecember 31, 2019 . 60
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CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the financial statements and disclosures. Some of these estimates and assumptions require application of difficult, subjective, and/or complex judgment about the effect of matters that are inherently uncertain and that may change in subsequent periods. We evaluate our estimates and assumptions on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our Annual Report on Form 10-K, as amended, for the year endedDecember 31, 2019 contains a discussion of our critical accounting policies and estimates in the Management's Discussion and Analysis of Financial Condition and Results of Operations section. Uncertainty in the current economic environment due to the effects of the COVID-19 pandemic has and may continue to significantly impact management's judgments regarding estimates and assumptions. In addition to the critical accounting policies and estimates discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K, as amended, we are adding the following due to significant changes in judgements related to the COVID-19 pandemic.
Revenue Recognition and Accounts Receivable
Receivables include amounts billed and currently due from tenants pursuant to lease agreements and receivables attributable to straight-line rents associated with those lease agreements. Individual leases where the collection of rents is in dispute are assessed for collectability based on management's best estimate of collection considering the anticipated outcome of the dispute. Individual leases that are not in dispute are assessed for collectability and upon the determination that the collection of rents over the remaining lease term is not probable, accounts receivable are reduced as an adjustment to rental revenues. Revenue from leases where collection is deemed to be less than probable is recorded on a cash basis until collectability is determined to be probable. Further, management assesses whether operating lease receivables, at a portfolio level, are appropriately valued based upon an analysis of balances outstanding, historical collection levels and current economic trends. An allowance for the uncollectible portion of the portfolio is recorded as an adjustment to rental revenues. Management's estimate of the collectability of accounts receivable from tenants is based on the best information available to management at the time of evaluation. We review current economic considerations each reporting period, including the effects of tenant bankruptcies. Additionally, with the uncertainties regarding COVID-19, our assessment also took into consideration the type of tenant and current discussions with the tenants, as well as recent rent collection experience. Evaluating and estimating uncollectible lease payments and related receivables requires a significant amount of judgment by management and is based on the best information available to management at the time of evaluation. For the three and six months endedJune 30, 2020 , we reduced rental revenue by$36.9 million and$40.7 million , respectively, due to lease-related reserves and write-offs, which includes$1.1 million and$2.6 million , respectively, for straight-line rent receivables. Actual results could differ from these estimates and such differences could be material to our consolidated financial statements.
Lease Modifications
InApril 2020 , the FASB issued a question-and-answer document (the "Lease Modification Q&A") focused on the application of lease accounting guidance related to lease concessions provided as a result of COVID-19. Under existing lease guidance, we would have to determine, on a lease by lease basis, if a lease concession was the result of a new arrangement reached with the tenant (treated within the lease modification accounting framework) or if a lease concession was under the enforceable rights and obligations within the existing lease agreement (precluded from applying the lease modification accounting framework). The Lease Modification Q&A clarifies that entities may elect to not evaluate whether lease-related relief that lessors provide to mitigate the economic effects of COVID-19 on lessees is a lease modification under Topic 842, Leases. Instead, an entity that elects not to evaluate whether a concession directly related to COVID-19 is a modification can then elect whether to apply the modification guidance (i.e. assume the relief was always contemplated by the contract or assume the relief was not contemplated by the contract). Both lessees and lessors may make this election. We have elected to apply the relief provided under the Lease Modification Q&A and will avail ourselves of the election to avoid performing a lease by lease analysis for the lease concessions that were (1) granted as relief due to the COVID-19 pandemic and (2) result in the cash flows remaining substantially the same or less than the original contract. The Lease Modification Q&A had a material impact on our consolidated financial statements as of and for the three and six months endedJune 30, 2020 . However, its future impact to us is dependent upon the extent of lease concessions granted to tenants as a result of the COVID-19 pandemic in future periods and the elections made by us at the time of entering such concessions. 61
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The Lease Modification Q&A allows us to determine accounting policy elections at a disaggregated level, and the elections should be applied consistently by either the type of concession, underlying asset class or on another reasonable basis. As a result, we have made the following policy elections based on the type of concession agreed to with the respective tenant.
Rent Deferrals
The Company will account for rental deferrals using the receivables model as described within the Lease Modification Q&A. Under the receivables model, the Company will continue to recognize lease revenue in a manner that is unchanged from the original lease agreement and continue to recognize lease receivables and rental revenue during deferral period.
Rent Abatements
The Company will account for rental abatements using the negative variable income model as described within the Lease Modification Q&A. Under the negative variable income model, the Company will recognize negative variable rent for the current period reduction of rental revenue associated with any lease concessions we provide. AtJune 30, 2020 , our receivables include$9.1 million related to receivables that have been deferred and are to be repaid over periods generally starting in late 2020 and extending for some portion of 2021. We granted abatements of$1.8 million for the three and six months endedJune 30, 2020 . As of earlyAugust 2020 , we estimate that we will defer$15.5 million of rents that were billed for April, May andJune 2020 based on agreements that have been executed or are in active negotiation. We continue to assess rent relief requests from our tenants but are unable to predict the resolution or impact of these discussions.
Recent Accounting Pronouncements
See Note 2 to the condensed consolidated financial statements for information on recently issued accounting pronouncements.
Impact of Inflation and Deflation
Deflation can result in a decline in general price levels, often caused by a decrease in the supply of money or credit. The predominant effects of deflation are high unemployment, credit contraction and weakened consumer demand. Restricted lending practices could impact our ability to obtain financings or refinancings for our properties and our tenants' ability to obtain credit. Decreases in consumer demand can have a direct impact on our tenants and the rents we receive. During inflationary periods, substantially all of our tenant leases contain provisions designed to mitigate the impact of inflation. These provisions include clauses enabling us to receive percentage rent based on tenants' gross sales, which generally increase as prices rise, and/or escalation clauses, which generally increase rental rates during the terms of the leases. In addition, many of the leases are for terms of less than 10 years, which may provide us the opportunity to replace existing leases with new leases at higher base and/or percentage rent if rents of the existing leases are below the then existing market rate. Most of the leases require the tenants to pay a fixed amount, subject to annual increases, for their share of operating expenses, including CAM, real estate taxes, insurance and certain capital expenditures, which reduces our exposure to increases in costs and operating expenses resulting from inflation. Non-GAAP Measure Funds from Operations FFO is a widely used non-GAAP measure of the operating performance of real estate companies that supplements net income (loss) determined in accordance with GAAP. NAREIT defines FFO as net income (loss) (computed in accordance with GAAP) excluding gains or losses on sales of depreciable operating properties and impairment losses of depreciable properties, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures and noncontrolling interests. Adjustments for unconsolidated partnerships, joint ventures and noncontrolling interests are calculated on the same basis. We define FFO as defined above by NAREIT less dividends on preferred stock of the Company or distributions on preferred units of theOperating Partnership , as applicable. Our method of calculating FFO may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs. We believe that FFO provides an additional indicator of the operating performance of our properties without giving effect to real estate depreciation and amortization, which assumes the value of real estate assets declines predictably over time. Since values of real estate assets have historically risen or fallen with market conditions, we believe that FFO, which excludes historical cost depreciation and amortization, enhances investors' understanding of our operating performance. 62
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The use of FFO as an indicator of financial performance is influenced not only by the operations of our properties and interest rates, but also by our capital structure. We present both FFO allocable toOperating Partnership common unitholders and FFO allocable to common shareholders, as we believe that both are useful performance measures. We believe FFO allocable toOperating Partnership common unitholders is a useful performance measure since we conduct substantially all of our business through ourOperating Partnership and, therefore, it reflects the performance of the properties in absolute terms regardless of the ratio of ownership interests of our common shareholders and the noncontrolling interest in ourOperating Partnership . We believe FFO allocable to common shareholders is a useful performance measure because it is the performance measure that is most directly comparable to net income (loss) attributable to common shareholders. In our reconciliation of net income (loss) attributable to common shareholders to FFO allocable toOperating Partnership common unitholders that is presented below, we make an adjustment to add back noncontrolling interest in income (loss) of ourOperating Partnership in order to arrive at FFO of theOperating Partnership common unitholders. We then apply a percentage to FFO of theOperating Partnership common unitholders to arrive at FFO allocable to common shareholders. The percentage is computed by taking the weighted-average number of common shares outstanding for the period and dividing it by the sum of the weighted-average number of common shares and the weighted-average number ofOperating Partnership units held by noncontrolling interests during the period. FFO does not represent cash flows from operations as defined by GAAP, is not necessarily indicative of cash available to fund all cash flow needs and should not be considered as an alternative to net income (loss) for purposes of evaluating our operating performance or to cash flow as a measure of liquidity. The Company believes that it is important to identify the impact of certain significant items on its FFO measures for a reader to have a complete understanding of the Company's results of operations. Therefore, the Company has also presented adjusted FFO measures excluding these significant items from the applicable periods. Please refer to the reconciliation of net income (loss) attributable to common shareholders to FFO allocable toOperating Partnership common unitholders below for a description of these adjustments. FFO of theOperating Partnership declined to$(5.2) million for the three months endedJune 30, 2020 from$68.5 million for the prior-year period and declined to$45.8 million for the six months endedJune 30, 2020 from$112.6 million for the prior-year period. Excluding the adjustments noted below, FFO of theOperating Partnership , as adjusted, declined to$4.9 million for the three months endedJune 30, 2020 from$68.5 million for the same period in 2019, and declined to$56.5 million for the six months endedJune 30, 2020 from$129.1 million for the same period in 2019. The decreases in FFO, as adjusted, for the three- and six- month periods were primarily driven by lower property-level NOI, which includes the estimate for uncollectable rental revenues and rent abatements due to the mandated property closures a result of the COVID-19 pandemic. The reduction in rental revenues was partially offset by the program we put in place to eliminate all non-essential expenditures and the company-wide furlough and salary reduction program. 63
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The reconciliation of net loss attributable to common shareholders to FFO
allocable to
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