CBL & Associates Properties, Inc. (CBL) 2002 Q4 法說會逐字稿

Good day, everyone. And welcome to the CBL & Associates Properties, Inc. conference call. Today's call is being recorded and will be available for replay starting today at 2 p.m. eastern time, and running through February 10th at 8 p.m. eastern time by dialing 719-457-0820 and entering the confirmation code 625843.

At this time, for opening remarks I'd like to turn the call over to the President, Mr. Stephen Lebovitz. Mr. Lebovitz, please go ahead, sir.

Thank you, and good morning. We appreciate your participation in today's conference call to discuss our results for the fourth quarter and the year ended December 31, 2002.

With me today are John Foy, our Vice Chairman and Chief Financial Officer, and Kelly Sargent, Director of Investor Relations who will first read our safe harbor disclosure.

This conference call contains forward-looking statements within the meaning of federal security laws. Such statements are inherently subject to risk and uncertainties, many of which cannot be predicted with accuracy and some of which may not even be anticipated. Future events and actual results, financial and otherwise, may differ materially from the events and results discussed in the forward-looking statements.

During our discussion today, reverence made to per share are based upon a fully diluted converted share. We direct you to the company's various filings with the Securities and Exchange Commission, including without limitation the company's annual report on Form 10K and the management's discussion and analysis of financial conditions and the result of operations. A corporate by reference therein for a discussion in such risks and uncertainties.

I would like to note that a transcript of today's comments, including the preliminary balance sheet and additional schedules will be filed today as Form 8K and will be available upon request. This call is also available for replay on the Internet through a link on our web site at cblproperties.com. This conference call is the property of CBL & Associates Properties, Inc.. Any redistribution, retransmission or rebroadcast of this call without the express written consent of CBL is strictly prohibited.

Thank you, Kelly.

2002 proved to be a productive and successful year for the company and for our shareholders. Some significant accomplishments were: For the third consecutive year, the company's total return to shareholders exceeded 30 percent, producing a three year average total return in excess of 33 percent. We achieved FFO per share for the year of $4.34, a 10.2 percent increase. This is our fifth consecutive year of double digit FFO growth.

The board of directors increased the annual common dividend by 18 percent to $2.62 per share. We completed a follow on offering of 3.3 million common shares raising approximately $115 million. The company issued 2 million shares of 8.75 percent series B preferred shares raising $100 million.

We opened over 870,000 square feet of new developments. We acquired 3 malls for approximately $208 million with a blended cap rate of 9.8 percent on income in place. We acquired the remaining ownership interest in three malls and one associated center for a total purchase price of $112.9 million. We closed nonrecourse CNBS financings of $407 million for a ten-year term at a combined interest rate of 6.51 percent for nonindividual properties.

I will now review the specifics of our performance and results for 2002. In 2002, we opened approximately 870,000 square feet of new developments. Our largest development was Parkway Place, a 630,000 square foot regional mall in Huntsville, Alabama, that opened in October with great success. Shoppers eagerly awaited the opening of the doors and as a result, many of the retailers achieved record sales.

The grand opening week was filled with activities for shoppers and in November several additional stores, including Abercrombie and Fitch, Abercrombie Hollister and Express opened for the holidays.

During the fourth quarter we also opened Parkdale Crossing, an associated center located in Beaumont, Texas. This was the first new developments at one of the former Jacobs Malls that we acquired in 2001.

We also opened expansions at Meridian Mall Lansing, Michigan, Springdale Mall Mobile, Alabama, Kentucky Oaks Mall Paducah, Kentucky, and Bonita Lakes Crossing Meridian, Mississippi. We commenced construction on Wilkesbury Township Marketplace a 312,00 square foot community center located in Wilkesbury Township, Pennsylvania that will be anchored by Wal-Mart. These developments in total represent an investment of $66.4 million.

Our largest project currently under construction is the Mall of South Carolina in Myrtle Beach, South Carolina, a 1.5 million square foot regional mall that is a 50/50 joint venture with Burrows and Chapin. Retailers have responded enthusiastically to this project and 67 percent of the nonanchored square footage is committed even though the mall is not scheduled to open until March of 2004. Of the 300,000 square feet committed, 135,000 square feet represent new tenants to the market, and the mall will mark Dillard's entry into the market. Myrtle Beach is an exciting tourist destination, attracting over 13 million visitors annually.

Including the Myrtle Beach project, we currently have a total of 2.5 million square feet under construction. The projects also include one associated center and three community centers. For projects under construction, approximately $164 million has been committed of which $59.7 million has been invested as of December 31, 2002. Construction loans at credit facilities are in place for the remaining costs. Initial unleveraged yields on those developments are expected to range from 9 to 2 percent after management and development fees with stabilized yields ranging from 10 to 11 percent. We also have several other projects in various phases of predevelopment.

Strengthening our existing properties is a major focus of ours and as part of this effort during 2002 we accomplished a number of notable anchor additions to our properties. Rich's, a division of Federated, announced they will become the fifth department store at Arbor Place in Atlanta George in the fall of 2004. Belks opened at College Square Morristown, Tennessee replacing a closed Wal-Mart. At Parkdale Mall Beaumont, Texas Foley's opened a 170,000 square foot department store in August replacing a closed Montgomery Wards and a 26,000 square foot Linens n Things will open in the summer of 2003.

At Meridian Mall in Lansing, Michigan Galyons's opened their new 80,000 square foot store and Yonkers will open next spring in the closed Jacobson store. Dillard's opened new department stores at Randolph Mall Asheboro, North Carolina and Asheville Mall Asheville, North Carolina. Both stores replaced closed department stores. Dillard's also expanded and remodeled their store at Jefferson Mall in Louisville, Kentucky.

Upgrading and renovating our malls is the key to their dominance in the market. In 2002 we completed the remodeling of five malls, as well as one associated center. This year we have six renovations scheduled for a total cost of approximately $68 million excluding deferred maintenance.

At the end of the fourth quarter, our total portfolio occupancy was 93.8 percent. Occupancy for the mall portfolio was 93.3 percent, an improvement of 150 basis points over the third quarter's occupancy and a 110 basis point improvement over the same period one year ago. In the former Jacobs malls we increased occupancy 230 basis points over one year ago.

During 2002, we entered into approximately 3.9 million square feet of leases compared to 2.6 million square feet in 2001. The 3.9 million square feet includes 1.4 million square feet of new leases, approximately 1.2 million square feet of renewals of existing tenants, and approximately 1.3 million square feet in the development properties.

During the fourth quarter, we received approximately $258,000 from lease buyouts compared to $1.9 million the same quarter one year ago. We expect that spreads on lease renewals will increase by 3 to 5 percent for 2003. Our 8 K filing includes a schedule detailing the leasing spreads for new and renewal tenants.

In 2003, the company has about 1.6 million square feet rolling over and has completed approximately 60 percent of this leasing. We believe that occupancy levels for 2003 will remain stable, but we expect store closings to continue to be a factor as a result of the current economic climate.

During 2002, retailer bankruptcies resulted in the loss of 169,000 square feet of space compared to the loss of 393,000 square feet of space for 2001. The revenues lost from bankruptcies in 2002 were $3.8 million in gross annual rents compared to a loss of $8.1 million in 2001. As of January 31 of this year, we have been notified of almost 50,000 square feet of store closings, primarily in the music store sector.

Specialty leasing revenues were a major highlight in 2002, increasing 23 percent over 2001 to $38 million. Improvements from updating carts with more functional designs and placing them in the newly acquired and remodeled malls resulted in attracting more tenants. Additionally, we have improved occupancy levels with our carts throughout the year rather than just for the holiday season.

Total mall shop sales volume increased 0.4 percent to 3.02 billion for 2002 compared to 3 billion for the same period in 2001. Based upon the criteria of including only stores of 10,000 square feet and less from all stores same-store sales for calendar year 2002 decreased 1.6 percent for those tenants reporting.

Occupancy costs as a percentage of sales at our malls were 12 percent for the 12 months ending December 31, 2002, compared to 11.3 percent for the same period one year ago. Occupancy cost as a percentage of sales have increased due to the slightly decreased sales reported by the retailers.

During 2002, we completed the disposition of six properties for total proceeds of $36.8 million. The properties sold were Red at Remount, La Grange Commons, One Park Place, Chesterfield Crossing, Gerbin Plaza, and Salem Crossing. The disposition of these six centers resulted in short-term dilution to FFO, while the funds were deployed into the acquisition and development programs.

During the year, we acquired the remaining third party interest in three malls and one associated center. In December of 2002 we acquired from a pension fund Westmoreland Mall and its associated center, Westmoreland Crossing in Greensburg, Pennsylvania located one hour from downtown Pittsburgh. This mall was acquired for its dominant position and the potential to increase occupancy of specialty leasing income.

We continue to look at acquisition opportunities where we can enhance the value of the properties through our aggressive hands-on approach to leasing specialty leasing and management.

I will now turn the call over to John Foy to discuss our financial results.

Thank you, Stephen.

During 2002 we strengthened our balance sheet. We issued $271.2 million in equity, including the previously mentioned $115 million follow on offering of common stock, the $100 million preferred offering and issuance of $1.6 million operating partnership units to acquire assets and additional partnership interest.

We deleveraged several properties through the early retirement of debt, which is consistent with our philosophy of maximizing leverage on certain assets while increasing our pool of unencumbered assets. We refinanced nine assets through a CMBS financing converting variable rate debt to nonrecourse long term fixed rate debt.

Although some of these financial transactions were dilutive we were able to improve our EBITDA coverage ratios and reduce our debt to market capitalization. Improved operating performance resulted in an FFO increase per share of 10.2 percent over the prior year period. Of this increase 66 percent of our growth was attributable to increases in occupancy, specialty leasing income, and reductions in interest expense.

The balance was a result of improved performance and the addition of new developments such as Parkway Place Huntsville, Alabama, The Lakes Mall in Muskegon, Michigan the acquisition of the remaining partnership interest in Columbia Place Mall Columbia, South Carolina, East and West Town Malls and West Town Crossing in Madison, Wisconsin and the acquisition of two malls, Panama City Mall Panama City, Florida, and Richland Mall Waco, Texas.

Our $4.34 FFO calculation did not include outparcel sales of 5 cents per share. Before consideration of outparcel sales our dividend payout ratio for the year was 53.5 percent based on a fully diluted converted share count. Including outparcel sales the payout ratio was 52.8 percent. Our cost recovery ratio was 91.7 percent for the 12 months compared to 93 percent for the same period a year ago. We anticipate our cost recovery ratio will be in the range of 91 to 93 percent for the full year 2003.

Please note that we have reclassified certain financial information in the prior period financial statements to conform to current period presentation. A portion of our taxable subsidiaries results of operations in the past was reported on a net basis in prior periods financial information. However, due to the growth of those operations, we have presented its results on a gross basis with revenues included in interest and other revenues and related expenses in the other expense category. This change in presentation had no impact on net income or FFO.

Our G&A increased by 42 percent for the quarter. That was a result of additional state tax reserves and professional fees. These fees included legal fees in conjunction with the Sarvanes-Oxley (phonetic) acts and reaudit fees.

We have applied the provisions of FASB statement 141 to our property acquisition and as a result, we have recorded a net liability of $1.3 million. As our largest acquisition for the year occurred on December 30, 2002, the impact on our 2002 results of operations were immaterial.

As we stated in our news release, same center NOI growth was a positive 3.1 percent for the total portfolio, driven by the increased specialty leasing income and higher occupancy levels at the malls, especially the former Jacobs properties. The breakdown for the 2002 NOI by property types is as follows: The same center malls NOI increased 2.7 percent. Associated centers experienced a 17.3 percent increase primarily as a result of retenanting space previously occupied from bankrupt tenants at The Terrace and Hamilton Corner, both located in Chattanooga, Tennessee. We also saw improved leasing activity at The Landings Atlanta, Georgia, and Westgate Crossing Spartanburg, South Carolina.

Same center community NOI decreased 10 basis points for the year. Large vacancies at Kingston Overlook in Knoxville, Tennessee and Satler Square in Big Rapids, Michigan contributed significantly to this. At both Satler Square and Kingston Overlook leases have been executed for the vacant anchor spaces with tenants expected to open during the first half of the year 2003.

During 2002, we spent $31.6 million on tenant allowances, $1.6 million on deferred leasing costs, $19.3 million on revenue neutral capital expenditures, and $57.4 million on revenue enhancing capital expenditures. The revenue neutral expenditures for 2002 included $10.2 million spent on resurfacing and improved lighting of parking lots, $8.1 million for roof repairs and replacements, and a portion of this amount was included in the renovation costs.

Revenue neutral capital expenditure is billed to the tenants as common area maintenance expense and the vast majorities is recovered over a 5 to 15 year period. Revenue enhancing capital expenditures are for remodeling and upgrading of our malls, of which approximately 30 percent are recoverable from tenants.

In 2003, for the total portfolio, we are projected to spend $30 million on tenant allowances, $25 million in revenue neutral, and $60 million on revenue enhancing capital expenditures. Based on our year end and fourth quarter results, and barring any further disruptions for unforeseen events, we are comfortable with an FFO estimate range of $4.57 to $4.60 for 2003.

Our growth estimates for 2003 is based upon our expectations for a 3 to 4 percent NOI growth, stable occupancy across the portfolio and $88.1 million of new developments completed during the year.

Before we open the call for Q and A, I would like to share our thoughts on the following: Despite retail sales having been flat or slightly down, retail margins continue to show improvements. Also, retailers have confirmed their plans for 2003 and 2004 to continue to expand and create new concepts for our malls.

As we have said over the years, retailers are continually evolving and recreating themselves. They are improving their product lines and mix just as we work to improve our properties. Prime examples of this are J.C. Penney and several of the major movie theater operators who have successfully demonstrated the ability to turn around their business in 2002.

We continue to see solid results in our malls and believe that their updated look is a big part of the success that these malls and retailers are enjoying. We invite you to visit our newly renovated properties such as Hickory Hollow and Columbia Place where you can see how the recently completed renovations have led to improved leasing activities.

We appreciate the confidence and support. Thank you again for joining us today. And we welcome the opportunity to show you any of our newly renovated properties.

Steven and I will be happy to answer any questions you might have.

Thank you, sir. Our question and answer session will be conducted electronically. If you would like to ask a question, firmly press the star key followed by the digit 1 on your touch tone telephone. We will come to you in the order that you signal. If you find that your question has been asked and answered before you can ask it and you would like to remove yourself from the roster firmly press the pound key. If you are on a speaker phone, please make sure that your mute button is disengaged so that your signal can reach our equipment. Again, if you would like to ask a question, press the star key followed by the digit 1.

For our first question we go to Ian Weissman with UBS Warburg.

Good morning, guys. How are you?

Hi Ian. How you doing?

Okay, not too bad. I just have a couple of quick questions. How much did you book in lease termination fees for the fourth quarter?

$289,000.

$289,000. And where is that compared to last year?

The previous year was like $1.9 million.

And is that number included in your same-store NOI growth?

Yes.

It is.

Yes, it is.

If you were to strip it out it really wouldn't make much difference?

Correct.

What is the expected yield on the mall in South Carolina?

It's roughly 10 percent.

When stabilized.

When stabilized. Okay.

Right.

Where do you think you guys will open -- you are 67 percent committed right now, where do you guys think you will open in '04, at what occupancy?

Well, I think -- you know, our target is to open in the 85 to 90 percent range. We hope we will do better and we are encouraged by what we've seen so far.

Okay. One quick question on Delhaizes. They announced they are going to be closing 41 Food Lion stores. Have they notified you about which stores they will be closing?

Yes. Three additional ones.

Three additional stores. And have you already lined up anchors for that space or that's currently in the process?

Well, what we have attempted to do when we work with Food Lions on those stores, is to find new tenants for those. They hire people outside to do it and oftentimes find people. We are very proactive with regard to finding people. We are actively trying to find those people. And it's -- the stores are fairly well located and we think ultimately with those rent schedules that are in place it should be something we can accomplish.

And most of them have a significant amount of term left. So even though they are closing, they are still paying their rent.

Okay. And of this 50,000 square feet you had in store closings through January '03, I guess you said most of that was out of the music store business. Would that be your Transworld Entertainment guys like FYE?

FYE hasn't announced any store closings. It's Warehouse Entertainment who filed chapter 11. There are four of them with that group. And then Central South Music Sales, who we have three throughout the portfolio. And then there were three Musicland stores owned by Best Buy, although we -- they announced, you know, they were closing 110 stores. Three of those were ours. And we knew about those so we were able to work those into our budgets.

Are you expecting to see continued weakness through this year from the music group?

Yeah. I think it's definitely a sector that is trying to find their way. And we're going to continue to see weakness. And even over the past years we've been doing renewals and extensions with the music stores, it's been a factor in our releasing spreads that, you know, the music business has suffered a lot because of the big boxes and the competition.

Right. And one final question on rent spreads. Where are your rent spreads on new and renewal leases running through the mall portfolio?

For the fourth quarter, the increase was 2 percent for all the malls. For the full year, it was a 4 percent increase across the malls.

Ian, what we've basically made a conscious decision is, is to work with tenants to keep the tenant mix there and keep our occupancy levels up, as well as to drive traffic for the mall. We have the right to take back those spaces in most instances wherein a tenant is not performing well, but we've given some rollover concession to the impact in those rollover leasing spreads. But that's a conscious decision we've made. We think that a store occupied by a retailer who attracts people to the malls, helps the total overall tenant mix. And as we find new substitute tenants we'll see better results.

Okay, great. Thank you very much.

Thank you.

We go next to Paul Morgan with Thomas Weisel Partners.

Good morning.

Hey, Paul.

I'm sorry, I missed it. Could you go through specialty leasing income in 2002 and then in the prior year?

In 2002, it was roughly 38 -- 37.96 -- $38 million of specialty leasing income. And that was at 23 percent over the level in 2001. 23.1 -- 23 percent increase.

Okay. And was that increase primarily generated through the addition of programs into new malls or just the expansion of programs that are in existing malls already?

It was really both. It was -- we added carts at the malls that we acquired from Jacobs. And we had a full year of that kicking in. And we've also put in new carts at a number of our malls. As we remodel the malls, we'll put in electrical outlets and we'll have flexibility to put in locations that are attractive from a leasing point of view. So it's across the board.

Looking forward, I guess, do you think the years of double digit increases are sustainable for very long?

It's definitely going to be tougher to get double digit increases going forward. I mean, we've had tremendous growth in the past three or four years in this area. And I think in 2002 we got the benefit from a lot of the pickup from the new malls. We're going to push for double digit growth. And hopefully we can continue to generate it.

Great. Do you have a number for the occupancy change excluding the Jacobs malls?

One second. For the malls, excluding the Jacobs malls, it was a 110 basis point increase in occupancy. The whole -- the total portfolio was flat.

Right, but then the malls themselves were up what, 170 basis points, the stabilized malls?

The stabilized malls was up 100 basis points. The Jacobs malls were 230 basis points. One of the factors in the occupancy was Parkway Place which just opened in October and opened at 69 percent. So that pulled down the average for the new malls.

Right. And then finally, looking at the acquisitions for 2003, what is your strategy with respect to geography? Are you still constraining yourself to some extent, in at least the eastern half of the country, or would you consider pretty much any acquisition that came to market?

I think we are open minded. We don't feel like geography is a constraint on us. The further away we get, then the more of a portfolio we would look at to get critical mass. But we looked last year at west core, you know, out west, and that -- we didn't feel constrained by geography for that.

And I think continuing in '03 if we can -- I think we are more focused on finding the right type of properties where we can generate growth going forward and where they have the dominance in their markets and it's compatible our type of portfolio. And the geography is probably less of a factor.

Great. Thank you.

Thank you.

We go next to Michael Villerman with Goldman Sachs.

Hi, Michael.

Hey, good morning. I was wondering if you could comment on the tenant reimbursement percentage and if there was any other factors other than seasonality that may have caused a decrease?

I think that's basically the reason, Michael, is basically seasonality and things such as that impacted it. There is no significant thing, as such, that impacted it.

It fell short a little bit of the guidance you provided last quarter for the year.

Yeah. I think that maybe there was some expenses that came in that we didn't pass through at that particular point in time. And we'll basically see those occur back. But we think we are pretty good with that 91 to 93 percent.

Great. The second question was in terms of watch list tenants, and who you had on there right now and if there is any major people that you are nervous about?

I think it's primarily the music stores. I mean, we -- you know, we are looking at Transworld and they are the major one out there. There is going to be some smaller, you know, regional change where, you know, there is going to be one or two store closings. But I think music is the biggest one we are concerned about from a bankruptcy point of view or closing point of view as the year goes on.

We think also, Michael, that books are going to be a little difficult from the standpoint that they're probably the big stores like we are attempting to do, bringing Barnes & Noble into our malls and Borders, and bringing those into our malls. That should have a positive impact. But in turn the smaller bookstores are having a tough go of it.

And then I think you've got to focus on toys somewhat in that Toys "R" Us and those folks are difficult guys. But we have no FAO Schwartz in our portfolio, but we think that those are basically the concerns we have, in those areas.

Do you know how much more space you have exposed to the music business, and specifically to Transworld?

We can get that answer for you.

That's fine.

Trans World is roughly 213,000 square feet throughout the whole portfolio. And it's about $7 million of gross rents.

Great. Thanks, gentlemen.

Thanks, Michael.

We go next to Tony Howard with Hilliard Lyons.

Hey, Tony.

Good morning, and congratulations on a good quarter and a good year, especially given how difficult the market was.

Thank you.

Clarification on a previous question. On the unstabilized mall portfolio there was an increase of one sequentially from the third quarter. Was that to Parkway Place?

Can you repeat that again? I'm sorry, Tony.

On the nonstabilized malls there was an increase from 3 to 4 sequentially from the third quarter. And I'm wondering what mall that was.

Yeah. That was Parkway Place. You're correct.

And then the occupancy went down from 87 percent down to 83.5. Was that strictly due to the 63 percent occupancy at Parkway Place?

It opened 69 percent. And that was the reason for that decrease. That's correct.

Okay. And what are you doing this for, not so much the Parkway Place, but for the other ones so far as improving the occupancy of those?

The malls that are in there, actually, they all have a good amount of leasing activity. Arbor Place, which opened about two and a half years ago, we've got the former decor building, we've got J.C. Penney which is going to be opening later this year there, and then the Rich's has been announced for 2004. And so those anchors will give us a good boost there. The Lakes Mall in Muskegon, we've got a deal pending for the largest vacancy there, it's about 10,000 square feet that we hope to have signed very shortly and opening in the first half of '03. And Parkway Place has some real good leasing activity going on for the first half of '03 as well. So we -- we are hopeful that that number will get up closer to 90 percent as the year goes on.

Okay. Good. Second and last question is in the press release you talked about variable rate debt, I guess a little bit over $500 million bucks. What is the outlook as far as interest rates for you guys in terms of fixing some of this debt as we go forward in 2003?

Tony, we are a firm, firm believer in nonrecourse long-term fixed reate debt. We don't think it's our business to take the interest rate risk and we will probably be refinancing that. We will be refinancing the Westmoreland Mall this quarter.

Notwithstanding the fact that the floating rates debt pricing over LIBOR is a significant good thing from the standby in the short-term run. It basically is something that we just don't feel very comfortable with. It's not our business, as I said, to take interest rate risk. 18 percent of our total debt is variable rate debt. We'll continue to pare that down some.

A portion of in that is construction loans on projects that are being finished and we'll refinance those as well. Our philosophy and outlook is, is that we're going to take advantage of these low interest rates. And we're not going to be interest rate -- we're not going to be interest rate -- I was about to say interest rate hogs, but we're going to be risk adverse with regard to that. And that's our strategy with regard to that.

How much for your modeling, for your FFO estimate are you using, as far as increase [ INAUDIBLE ] because you are going to be fixing some debt?

We're using 6 percent interest rates for the permanent debt which we feel is achievable and hopefully conservative, depending on the timing. And then for the floating rate debt we are using 3 percent for '03. So we've got -- for LIBOR. That's conservative number now given where LIBOR is.

Thank you, again, congratulations.

Thanks, Tony.

We go next to Greg Andrews with Green Street Advisors.

Good morning.

Hi, Greg.

Couple little things. Management development and leasing fees were up pretty nicely for the year. Doesn't seem like there is any reason to think you won't be able to maintain that pace, but just looking for a little guidance there.

We should, Greg -- Myrtle Beach was part of it and Huntsville Parkway Place was part of those development fees. As you know, Parkway Place is gone, but Myrtle Beach will open in '04. So that will continue. And you know, as we develop some other properties in joint ventures and so on, we think that those development fees should hold in about where they are running today.

And then on the management fee, since we bought out our partners in Madison in East and West Town, then that will reduce the third party management fees there somewhat.

Okay.

But we'll capture that, you know, in other parts of the income statement.

Right. Right. Okay. And then in terms of the guidance for '03, it seems like the acquisition market is still probably fairly decent. You are probably affording some opportunities. Do you have any acquisitions baked into the guidance or no?

No. You know, as we've done in the past, we don't project acquisitions into our numbers. And we haven't done that in '03. And we are hopeful that we'll find some good acquisitions this year. But we think the worst thing would be for us to be in a position of being forced to do acquisitions if they didn't make sense. And there is opportunity out there, but cap rates have gone down and there is competition. And we want to continue to be selective as we look at acquisitions going forward.

Okay. Great. Thanks.

Thank you.

Next we go to Ross Nussbaum with Salomon Smith Barney.

Hey. Good morning, guys.

Hey, Ross.

John, I want to circle back, I think, to something you said on the rent spread front for '03. You were expecting an acceleration to 3 to 5 percent spread. Did I hear you correctly?

That's right. Although, for '02 it was 4 percent. So I think what we are saying is we're going to be continuing -- we're going to continue in that same range going forward is what we are projecting. We are pushing to do better. And we are pushing hard on our leasing people. But we feel like that's conservative in our projections.

Okay. Also wanted to make sure I heard this correctly. It sounded like it's not necessarily lower based rents, but you are giving away free rent, or you're giving away some form of concession. Can you elaborate on that?

We're absolutely not giving away free rent. Let me dissuade that idea even from your mind. That would get Charles's blood pressure to such a boiling point that I couldn't stand to be in the office with him. But, no, there is no free rent.

What we are basically doing in certain situations is that we're giving some lower rents, and sometimes we're doing percentage rents. But there is no free rent from that standpoint. We think that keeping those tenants in place and the occupancies at our malls is important, but we think that the tenant needs to pay rent.

Okay. I don't want to get Charles upset.

Thanks, Ross.

Okay.

Much easier.

I guess a related question, on FAS 141, you said that you actually did implement that during the quarter. Where did it show up on the income statement?

It was negligible and it didn't really show up on the balance sheet. As we said, it was about -- on the income statement, that is. We did show about a $1.3 million negative.

Okay, so am I to assume inside of FFO there would be no mark to market on the acquisitions you have completed since '99? Is that how I should interpret that?

That's correct.

Okay. Specialty leasing, also a related question, where it shows up in minimum rents and other rents on the income statement; is that correct?

That's correct.

Okay, and then final question is, I'm trying to get an understanding of where your same center and LOI growth is going to come from next year. I think I heard you say it was going to be in the 3 to 4 percent range? If you are doing flat occupancy and low to single digit rent spreads, to me that drives the number below 3 to 4 percent same center NOI growth.

I think it is a combination of factors. I think we'll continue to get the higher specialty leasing income. Maybe not the same level but we'll get growth there. We're going to get the full year of the leasing improvement that we made this year where we only got a partial year on that. And then if we're getting 5 percent rent increases, then that will help us as well. So, you know, it's bits and pieces in different places, but, you know, we feel that it's very achievable.

Makes sense. Final question. On the acquisitions, can you discuss what's being marketed currently in terms of what you think the pipeline could be, you know, relative to where it was, say 3, 6, 12 months ago?

You know, I don't really think that we can talk about it. I mean, there is a lot of properties that we are looking at that are being marketed and there are some that we are looking at that are not being marketed. And there is a lot of sellers that have sat on the sidelines in the past few years that now are putting their properties on the market because of what has happened with cap rates. But there is -- I don't think there's any shortage of opportunities out there. And I think you are going to continue to see the mall rates being active in '03. Probably not to the extent of '02, but I think it is a trend that's going to continue in our business, the consolidation.

Great. That's all I have. Thanks very much.

Thanks, Ross.

We go next to Robert Belser with Prudential Securities.

Hey, Robert.

Few questions today. Could you comment on the preleasing activity in the associated and community projects?

The main thing that has impacted the leasing in those two types of centers, we had -- I think as we said in the conference call, we had a couple of vacant anchors, Kingston Overlook is one. And one of the shopping centers up in Michigan. Those had brought down the occupancy. This year we've got leases signed and the stores for those will be opening next year. So we see those going back up to the levels that they have been historically.

And you know, also, we've got a couple new associated centers and new community centers. You know, we have an associated center at Westmoreland where there is a vacant Ames. And we see that as an opportunity because they were closed when we bought it. So we are working on retenanting that. Although it takes time. We'll probably split it into two boxes. So the occupancy levels should stay good in both the associated centers and the community centers.

And in the new developments we have, Robert, we're seeing some very good preleasing there. St. Augustine is going to open very, very strong. And we think that Waterford and those others are. So we are seeing a good mix, new product development in those markets where there are selective opportunities, to either replace an existing development, or to bring in new retailers. So I think there is no question that there is a lot of players for these market areas where we are.

Okay. Then moving on. You mentioned a $68 million number for the six properties that you will remodel. Did I hear you correctly in your saying that excluded deferred maintenance?

That's correct.

And what kind of a deferred maintenance number can you attribute to those projects?

Roughly 15, $16 million of deferred maintenance for those malls.

Okay. And then a follow-up question on the remodeling project such as Haynes Mall. You had a cost in that of approximately $18 million. Can you kind of give us an indication of what kind of yield you may be expecting out of that project or projects like that that you completed in 2002?

Yeah. We don't -- we don't calculate a yield on the renovation costs because it's basically -- we are getting benefit from different places over time but we are not getting a current return on the money like if we are doing a tenant allowance and the tenant is paying us additional rent for it.

And we think that we see -- well, like we said, about 30 percent of that we recapture through CAM, and that happens over time and then we're looking to accelerated NOI growth, specialty leasing, leaseup of vacant space, just across the board improvements, higher sales that will generate percentage rents that the renovations will result in.

Okay. And then one final question on your recovery rate. You mentioned that your expenses went up and you didn't pass them through. Is that what is pressuring this rate? Do you expect that to continue in 2003?

Yeah. I think that what we basically are seeing is that some of those costs are not being passed through. But we think that as, next year we've said -- our recovery ratio should be in that 91 to 93 percent range. And then there is some pressure somewhat from some tenants to go to a gross lease. We are attempting to avoid that as much as possible. But there are some tenants who have gone to gross leases.

And as our occupancy levels hold at those levels, we are able to keep away from those gross leases. But in certain instances, where we want to attract a special tenant that would go and be the impetus for another center in that market area, we basically conceded some as to gross leases. And that's basically it. We still think we are on track to accomplish that 91 to 93 percent cost recovery.

Great. That's all my questions today. Thanks.

Thanks, Robert.

We go next to Matthew Ostrougher (phonetic) with Morgan Stanley.

Hey Matt.

Good morning, guys, it's Alan Kalron (phonetic) for Matt. Most of my questions have been asked and answered already. One, it seems like there is about 275 million of floating [INAUDIBLE] due all [INAUDIBLE] from June on, could we be seeing a fixed rate refinancing in the near term or could there be extensions on those floating rate closures.

All of those loans have extensions in place. I think as we see the opportunities to hit the interest rate market where we want to hit it that we'll refinance off most of those. A lot of that is construction loans. Those will continue to be floating. And we will look at fixing or swapping those.

Right. Second question, on the Westmoreland acquisition, how is that financed?

We used our lines of credit for -- to acquire that. And we'll probably in this first quarter refinance that with a long term conventional nonrecourse loan.

Right. And my final question. I guess your guidance is implying 5 to 6 percent growth next year following double digit growth in the last couple of years. And you cited some good statistics for this coming year like 3 to 4 percent NOI growth and the 5 percent spread. $88 million in new developments coming on line and the $112 million Westmoreland acquisition that happened at the end of last year. What are some of the offsetting factors -- I guess interest expense could be one of them -- some of the offsetting factors that might bring your growth rate closer to that 5 to 6 percent rate?

I think the refinancing will definitely have an impact from that standpoint on FFO. We think there will be more store closings this year. As we pointed out, the music business is very soft and that could impact us, somewhat.

In addition to that we didn't have a full year with regard to the preferred. And also it was like in the first quarter where we did the common offering. All of those basically go in to impact that. And then we issued those units to buy out some partners in the existing portfolio. We think to the extend we can own 100 per of those malls that we gave the units for, that we are much much better off. And that's why we did the transactions. And those types of things and in light of the uncertainty in the economy. That's why we think our guidance is the right guidance to be given at this time.

Okay. Thank you very much for your time.

Thanks, Allen.

We go next to Jay Haberman with Credit Suisse First Boston.

Hi, Jay.

Hi, Stephen. Hi John. Just a question on the Jacobs centers. Could you break out occupancy, what it was at year end? I know you mentioned the roughly 230 basis point increase year-over-year.

It was 92.7 percent at the end of '02 and 90.4 percent at the end of '01.

Thank you. And second question, do you have any comment on asset sales for '03?

Yeah, I think we will continue to look at those, Jay, in light of the strong market that's out there. We don't -- as we don't budget to do acquisitions, we really don't budget to do sales as such. And as people come along and offer some good cap rates and things such as that, we can redeploy that capital.

Okay. Great. Thank you.

Thank you.

We go next to Rich Moore with McDonald Investments.

Hey, guys. Congratulations on a great 2002.

Thanks, Rich.

Do you have any thoughts -- first quarter is always a big quarter for you guys in terms of percentage rents. Do you have any thoughts for Q1 '03 percentage rents?

I think we feel that they are going to be slightly down. Probably in the 5 to 10 percent range this year just because of what has happened with sales. And again, like we usually say, we're pushing to convert as much percentage rent to fixed rent and keep that down as much as we can. But I think that's our projection for this year.

Okay. Great. Thanks. And to Jay's question on dispositions, I assume community centers would be the primary target?

Yeah, we think our malls are really strategically well placed and they are the dominant malls in those areas. Yeah it would be the community centers consistent with what we've done in the past.

And last thing is -- you know, at this payout ratio, you guys raised your dividend pretty substantially last year. Should we consider this pretty much the minimum payout ratio at this level and maybe expect a similar kind of increase in 2003 for the dividend?

As you know, our board of directors sets the dividend rate and we're comfortable with what that dividend rate is today. But you know, FFO growth is important to us. And making our shareholders happy with these types of returns. So I think our board will look at all of those situations, and the dividend is definitely, you know, something that's there.

Okay, is this kind of the minimum payout ratio, John, do you think?

I'm sorry Rich?

In this range, the 57 percent payout ratio,is that sort of the bottom before you are forced to raise the dividend?

It was 53.

Or 53, sorry.

53 percent. It could creep up just a little or it could come down a little depending upon what we do as far as outparcel sales and sales of assets.

Okay, great, thanks, guys.

We go next to Sandy Cho with Liquid Partners.

Hi, Sandy. Good morning. Could you give me the number for the Jacobs portfolio again? I didn't quite hear that. The occupancy numbers.

The occupancy levels at the end of '02 is 92.7 percent. And at the end of '01 it had been 90.4 percent.

Okay and also, what is your current bad debt reserve?

It's in the range of around $2.8 million or so.

Did you take any reserves this quarter?

We had increased our reserves last year so we did not take any this year. And we are very aggressive with regard to stopping accruals. So we feel very comfortable with that number.

You gave music, books and toys as your top three watch list tenants. Could you give me like a quick percentage exposure in terms of annual gross rents for each?

I think that it's not a huge number. It's less than 1 percent across the board in each of those categories from those tenants as we point out in many of our presentations. Diversity in our portfolio is the thing that we've really worked at. And the Transworld music is probably the biggest that we're going to have and it's just 1 percent. It is a not a significant number as such.

We think those particular areas are being impacted. Toys and books -- we are replacing books with new, bigger bookstores in a lot of our malls. We don't think the category is in trouble, we just think the size of those stores in our particular malls at this time are the questions. Therefore, if we can get the new, bigger stores to locate into our malls, we are that much better off.

And the big bookstores are much more competitive than the smaller units. And they also attract a different type -- they attract people to the malls and they are good entertainment portion of our malls. So the addition of those big bookstores should be a benefit to us. We didn't mean to imply in any way that the book industry is in any kind of trouble, as such.

The music industry is struggling to refine and recreate themselves. But as Steven pointed out, or as we pointed out, J.C. Penney and the movie theater industry has done an extraordinarily good job of recreating themselves and we think these tenants will do likewise.

Thank you.

Thank you.

Gentlemen, we have no further questions on our roster at this time. I'll throw the conference back over to you foreclosing remarks.

Thank you very much for listening to our call today, and all the questions. And we look forward to visiting with many of you, and as we always do, the invitation and the red carpet is out for everyone to visit with us. Thanks again for being with us.

Ladies and gentlemen, this does conclude the CBL & Associates Properties, Inc. conference call. We do appreciate your participation. You may disconnect at this time.