CBL & Associates Properties, Inc. (CBL) 2003 Q2 法說會逐字稿

Good day everyone and welcome to the CBL and Associates properties Inc. conference call. Today's call is being recorded and will be available for replay starting today at 2 PM Eastern daylight time and running through July 30th at 8 PM Eastern daylight time by dialing 719-457-0820 and entering confirmation code 416591. At this time for opening remarks and introductions, I would like to turn the call over to the President of the Company, Mr. Stephen Lebovitz.

Thank you and good morning. We appreciate your participation in today's conference call to discuss our results for the second quarter of 2003. With me today are John Foy, the company's 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 the Federal Securities laws. Such statements are subject to risks 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 events and results discussed in the forward-looking statements. During our discretion today, reference is made to per-share are based upon fully diluted converted shares. 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 10-K and management's discussion and analysis of financial conditions and results of operations incorporated by reference therein for a discussion of such risks and uncertainties. I would like to note that a transcript of today's call's comments, including its preliminary balance sheet and additional schedules, along with the earnings release, will be furnished to the SEC as a form 8-K and will be available on our website. This call is also available for a replay on the Internet through a link on our website at CBLproperties.com. This conference call is the property of CBL and Associates Properties, Inc. Any redistribution, retransmission or rebroadcast of this call without the express written consent of CBL is strictly prohibited.

During the call, the company may discuss non-GAAP financial measures as defined by SEC regulation G. An explanation of each non-GAAP financial measure discussed and a reconciliation of each non-GAAP financial measure to the comparable GAAP financial measure will be included in the form 8-K.

Thank you, Kelly. The second quarter was another successful one for CBL. Highlights include -- FFO for the quarter increased 10.2 percent to $1.19 per share; same-center NOI for the portfolio increased 6.1 percent; the acquisition of Sunrise Mall and its associated center Sunrise Commons in Brownsville, Texas; the announcement of plans to develop Imperial Valley Mall located in El Centro, California; the opening of a new community center and an associated center development in May; the agreement to acquire four regional malls located in Virginia, North Carolina from Faison totaling #3.26 million square feet for total consideration of $340 million.

This week, we announced plans for development of a new regional mall in the Imperial Valley region of California. This 60 percent/40 percent joint venture with MG Herring Group brings CBL to the West Coast for the first time. The new project fits perfectly with our strategy of owning the dominant mall in middle markets with the nearest regional mall competition being located 90 miles away in Palm Desert, California. The project will serve a total trade area of more than 1.2 million people, including the border town of Mexicali. The mall will contain 768,000 square feet and will be anchored by Dillard's, JC Penney, Robinson Mays and Sears. Sears and JC Penney will be relocating to this development from existing locations in the area and closing their existing stores. Coastal Grand (ph) in Myrtle Beach, S.C. is currently under construction with Phase I containing 900,000 square feet and scheduled to open in March, 2004. This regional mall is a 50-50 joint venture with Burrows and Shapen (ph). The leasing is going very well with 76 percent of the non-anchor space leased and committed, even though the mall opening is over eight months away.

In May, we held two grand opening events. On May 7, we officially opened Cobblestone Village, a 305,000 square foot community center development in St. Augustine, Florida. And on May 14, we opened the Shops at Hamilton Place, a 130,000 square foot associated center located next our flagship mall, Hamilton Place in Chattanooga, Tennessee. Under construction and scheduled to open this fall is Waterford Commons, a 350,000 square foot community center in Waterford, Conn. It is located by Best Buy, Dick's Sporting Goods, Linen's 'N' Things, Borders and Ray Moore and Flanagan (ph) and includes the popular specialty retailers Talbots and Chico's.

The second community center under construction is Wiklesbury (ph) Township Marketplace, a 281,000 square foot Wal-Mart-anchored center in Wilkesbury Township, Pennsylvania. It is scheduled to open in the spring of 2004. In July, we began construction on the Shops at Panama City, a 57,000 square foot associated center adjacent to our Panama City mall in Florida. A 35,000 square foot Best Buy will anchor the center, which also include an additional 27,000 square feet of small shops. This past quarter, we also added several big boxes to our mall portfolio, including Linen's 'N' Things at both Rivergate Mall in Nashville, Tennessee and Parkdale Mall, Beaumont, Texas; and Stephen Barry's (ph), a collegiate apparel store at both Eastgate Mall in Cincinnati, Ohio and East Town Mall in Madison, Wisconsin.

The centers currently under construction represent a total investment of $204 million, of which $164 million is our share. Construction loans and credit facilities are in place to fund the cost of these projects. Initial unleveraged yields on these developments are expected to range from 9-10 percent after management and development fees with stabilized yields ranging from 10-11 percent. We also have several other projects in various phases of predevelopment.

Expanding and updating anchor stores continues to be a priority for us. Dillard's at Northwoods Mall in Charleston, South Carolina will be expanding by 30,000 square feet. This newly expanded 130,000 square foot store that will open, along with the overall renovation of the mall that will be completed in 2004. Upgrading and renovating our malls is the key component to their continued dominance within their markets. In addition to bringing new big boxes and department stores at several of our malls, this year, we will complete six mall renovations. These renovations include East and West Town malls, Jefferson Mall, Eastgate Mall, Parkdale Mall and St. Claire Square at a projected cost of approximately $61 million, excluding deferred maintenance cost of $19.8 million.

In June, we held Connection 2003, an annual event for retailers at our headquarters in Chattanooga. We had over 120 retail representatives attending. The event was very successful in solidifying deals discussed at the May ICSC Convention, as well as working on future leasing opportunities.

At the end of the second quarter, total portfolio occupancy was 92.4 percent. Occupancy for the total mall portfolio was 91.7 percent, an increase of 230 basis points over the same period one year ago. In the former Jacobs Malls, occupancy improved substantially by 410 basis points to 91.3 percent from 87.2 percent one year ago. During the second quarter, occupancy for the associated centers was 91.7 percent. This figure is negatively impacted by the former Ames store vacancy of 68,000 square feet at Westmoreland Crossing. Excluding this center, which was acquired in the fourth quarter of last year, associated center occupancy would have been 95.3 percent.

During the quarter, we entered into approximately 1.2 million square feet of leases, compared to 600,000 square feet in 2002. Approximately 530,000 square feet were attributable to development properties. The balance of 670,000 square feet was leased in our existing portfolio of which 268,000 square feet represented new leases and 402,000 square feet was from renewals of existing tenants. We believe that a highly occupied center will generate traffic and customers to our centers and in turn, drive sales and other revenues. It will also allow us the opportunity over time to selectively replace less productive tenants with more exciting stores. Leasing results of all of these vary from quarter to quarter and we do not feel that conclusions should be drawn for the results of any one quarter. In the second quarter, leasing spreads in our stabilized mall portfolio decreased .9 percent based on initial rents and increased 2.2 percent based on average, or straight-line rents. In the associated centers, leasing spreads decreased 7.9 percent on initial rents and decreased 5.9 percent on the average. In the community centers, rents increase .8 percent on initial rents and 1.5 percent on average rents. For the six months, initial rent increased 7.4 percent for stabilized malls, decreased 1.7 percent for associated centers and increased 6.8 percent for community centers.

Most retailers have had a challenging year-to-date. The slow economy and rising unemployment have significantly impacted sales. Forecasters are predicting an improved second half of 2003. To contend with struggling sales, CBL's marketing programs have intensified to include discount offerings from key retailers during all major merchandising seasons, expanded advertising to secondary and tertiary markets, direct mailings, customer incentives and destination events, such as the MTV Real World tour.

For mall stores of 10,000 square feet or less, same-store sales year-to-date decreased 1.5 percent for those tenants that have reported. However, we are encouraged that sales for the quarter were up slightly by .3 percent and that specialty retailers have started to report positive sales trends. Occupancy cost as a percentage of sales at our malls was 14.5 percent for the second quarter of 2003, compared to 14.1 percent for the same period one year ago. Occupancy cost as a percentage of sales has increased primarily due to the decreased sales reported by retailers and an increase in tenant recoveries. Year-to-date bankruptcies have resulted in 35 stores closing, containing 70,500 square feet and representing $2.9 million in annual rentals. This compares to 60,800 square feet of bankruptcies in the first half of 2002, representing $1.8 million in annual revenues.

During the second quarter, we acquired Sunrise Mall and its associated center in Brownsville, Texas. This acquisition occurred on May 1 for a purchase price of $81 million at a 9 percent cap rate. Sunrise is the fifth Texas regional mall in our portfolio. With occupancy at 83 percent, this acquisition affords us the opportunity to create value by increasing the mall's occupancy.

This morning, we announced plans to acquire four regional malls from partnerships managed by Faison Enterprises. The total consideration is $340 million, including cash and the assumption of non-recourse fixed-rate debt of $170 million with an average interest rate of 7.71 percent. We plan to close these acquisitions in stages before year-end. The acquisition of these four regional malls is expected to generate an initial yield of 8.56 percent based upon current income after management fees. With this acquisition, we will gain our first regional mall in the state of Virginia, further enhancing our dominance in the southeastern region, as well as diversifying our portfolio into a new state. The four regional malls are -- Cross Creek Mall in Fayetteville, North Carolina; River Ridge Mall in Lynchburg, Virginia; Southpark Mall in Colonial Heights, Virginia and Valley View Mall located in Roanoke, Virginia. These are four solid malls with average sales per square foot of $319 per square foot. All four malls present us with upside potential to improve leasing and specialty leasing. All four of the malls have been well maintained and will not require significant capital expenditures for renovations. We expect the transaction to close in at least two separate transactions beginning in the third quarter. Upon the closing of the first mall, we will begin managing and leasing all four of the properties.

Even though no property dispositions occurred during the quarter, the disposition of community center assets continued to be a focus for us in the current cap rate environment. I will now turn the call over to John Foy to discuss our financial results.

Thank you, Stephen. During the second quarter, operating performance improved, resulting in FFO per share growth of 10.2 percent. Of this increase, 78 percent was represented by external growth. The external growth resulted from one new mall opening, the acquisition of the remaining partnership interest in 4 properties and the acquisition of four regional malls. The internal growth was 22 percent of this increase, attributable to increased occupancy levels, increases in rental revenue and tenant reimbursements and a reduction in interest expense at our existing properties. Our cost-recovery ratio was 101 percent for the quarter, compared to 92.5 percent for the same period a year ago. For the six month period, it was 97.8 percent versus 91.8 percent one year ago. Our cost recovery ratio improved in the second quarter, partially due to the renovations and remodelings of our malls and increases in occupancy. We expect that our cost recovery ratio will be in the range of the mid-high 90s for the full year 2003.

As we stated in our earnings release, same center NOI growth was 6.1 percent for the total portfolio, driven by increases in occupancy levels, tenant reimbursements and specialty leasing. The breakdown by property types is as follows. Same-center mall NOI increased 5.3 percent, primarily driven by the gains in occupancy levels. Associated centers experienced an 11.9 percent decrease, which amounts to only $500,000 and was attributable to some vacancies and bad debt expense. Community center NOI improved by 6.5 percent. Our category of others NOI includes mortgages, our corporate headquarters and the taxable REIT subsidiary.

During the second quarter, the company spent $10.5 million for tenant allowances, which will generate increased rents from tenants over the term of their leases. Renovation expenditures, which includes some deferred maintenance items, were $28.8 million for the quarter, a portion of which is recovered from tenants. Deferred maintenance expenditures, the vast majority of which is recovered over a 5-15 year period, were $6.6 million during the quarter. This year, we project to spend a total of $30 million on tenant allowances, $25 million on deferred maintenance and $61 million on renovation expenditures. Deferred maintenance capital expenditures are billed to the tenants as common area maintenance expense. Renovation capital expenditures are for remodeling and upgrades of our malls of which we estimate approximately 30 percent is recoverable from tenants.

Based upon our second quarter results and barring any significant disruptions to the economy, management is comfortable with the upper ranges of First Call's per-share estimates for 2003.

Before we open the call for Q&A, I would like to share our thoughts and our outlook. Our development pipeline continues to expand. Retailer referrals and joint venture opportunities lead to new projects will continue to fuel our growth. We think that there are continuing opportunities for acquisitions, such as our announcement today of the Faison acquisition. Our relationships and abilities to react quickly will continue to provide us with these types of continued opportunities. Our decentralized structure for management and marketing provides us with flexibility to facilitate geographical diversification and enhance our successful growth strategy. Good things continue to happen at CBL with our new acquisitions, our busy development program and our occupants in our portfolio, we are continuing to build an ever-stronger base to sustain our growth and enhance shareholder value. Even with these outstanding results, our team of professionals is never satisfied and we are committed to finding new and better ways to maximize our results. We appreciate your confidence and support. Thank you again for joining us today, and we welcome the opportunity to show you any of our newly renovated properties. Stephen and I will be happy to answer any questions that you might have.

(Caller Instructions). Michael Billerman, Goldman Sachs & Co.

I'm here with Kerry Callahan as well. I was wondering -- Charles commented in the press release about the improved outlook on the part of retailers and possible expansion plans for the year and going forward. I was just wondering if you can provide some color on the types of retailers that are expanding, perhaps setting some examples?

Okay. Well, really, we have come off two major retailer events in the past 60 days -- ICSC in Las Vegas -- and then we had our big retailer connection event here in Chattanooga that we talked about. So we have had the chance to have a lot of good contacts with the retailers. And I think what we are seeing is just continued expansion by companies like Abercrombie with their Hollister concept and some of the other juniors, like American Eagle. Even though their sales have not been as great as they had been, they are continuing to do new stores and they're going into several of our malls in our portfolio in the middle markets where they are having great results. And then Pac Sun is another example in that category. And then also, we are seeing in the housewares, stores like Kirkland's, are doing well and are expanding. They went public not that long ago. They're expanding into new parts of the country. Christopher and Banks, who is a lady's apparel store who has a couple of different concepts; we're doing a lot of business with them and we are just continuing to see good results. And then the other thing that is encouraging is that what is happening with the boxes. We are working -- we have Linens 'N' Things. Like I said, they have opened a couple of malls and then Barnes & Noble and Borders and some of the bookstores are continuing to work with us in coming into malls. So the retailer outlook is very positive and we're pleased with that.

Okay, thanks. On the transaction that was announced this morning, where are your financing plans for the remaining piece? I know you have a preferred, also callable in September, so I don't know if there was a bigger plan on the financing front. I was wondering if you can comment on that?

Michael, I think we have a full menu of opportunities with regard to our lines of credit. We have bridge loans that are available for this particular transaction and our capital plan envisions that we have more than adequate resources to handle that particular situation. So we are extremely pleased with the acquisition and think it is a great acquisition for the company and the capital for it is basically in place and there are opportunities for us to generate additional capital at very good and low bases.

Will you be thinking about issuing equity?

I don't think that equity is one of the things that we see today. Our stock price has been good, but I think it is a reaction to how good our company is performing and the outlook that we have our company, and I don't think we would envision that we need to issue any equity. Our debt-to-market capitalization is at the 53 percent level and we think that that will continue to come down. We can continue to sell community centers, as well as use our lines of credit. So there are a number of ways within which we will finance this $170 million approximately of equity for the Faison transaction.

On the preferred in September, you thinking about redeeming that?

I think that the preferred A, we can call it on 30 days notice, and I think part of the capital plan is being reviewed as to the best situation for our shareholders. So we will come to that conclusion very shortly and have made no announcements with regard to that at this time. But there are great opportunities and the preferred market is very, very receptive to our stock as we have seen in the past.

Two other questions. On the out parcel gains, it was obviously a big contributor this quarter and (indiscernible) around 1-3 cents. What should we be expecting for the remainder of the year? I know you have a desire to do more ground leases. I was wondering if you can help us reconcile that?

As we develop new properties, our inventory continues to expand as such with successful developments and we will continue to see out parcels. It is hard to basically model from your prospective how those sales will occur and we will continue to try to generate more ground leases in those types of situations. So as a result of our having to increase -- sorry -- include out parcel sales in our FFO definition, or our calculations, you will see some lumpiness there. So as far as projections and prognostications as to those sales, I think they will occur as quickly as we see them occurring.

Okay. Just following on the tenant reimbursement percentage, John, what is really driving that above 100 percent this quarter? Was there some specific catch-up or specific reimbursement that drove it?

No. I think that, basically, occupancy as we referred to, I think that occupancy levels will drive it very significantly. And as we have seen a good increase in our occupancy levels, that helps us tremendously. And also, the renovations and the remodelings and the deferred maintenance items are basically resulting in that. So I think that helps us from that standpoint, and that is what drives those recoveries.

How much came into that number that was not actual an expense (ph) on income statement? How much would you have recovered from the renovations or deferred maintenance?

I don't know that I have the answer to that question. Let us get back to you with regards to that one.

All right, thanks.

John Roberts, Stifel Nicholas.

Good morning, John and Steve. Actually, most of my questions were just asked. But on the cost recovery ratio, what are you anticipating going forward? Do you expecting some catch-up there? You said sort of mid to high 90s. Is that an average for the entire year, or should we expect mid to high 90s in Q3 and Q4.

Yes, I think it will average that for the year, probably, average high 90s, John.

So we should anticipate a drip down in Q3, Q4?

Just some slight drop-down.

That's it, thanks.

Thank you.

Jim Sullivan, Prudential Securities.

Thank you, good morning. A question regarding the guidance that you're comfortable with for 2003. Your same center NOI growth rate overall of 6.1 percent this quarter was strong. Are you assuming that that moderates a little bit in the second half?

Yes, somewhat. And I think one of the things that we see is that we are still in the markets with regard to some permanent financing, and things such as that will have some adverse -- not adverse impact -- it will have some impact with regard to the FFO growth.

Will the same store NOI growth rate you expect to continue to be reasonably strong, but to moderate somewhat from this 6 percent level?

Yes.

Do you have any dispositions in your assumptions for the guidance for the second half of this year?

No, we do not have any acquisitions or dispositions in those assumptions as such.

So the Faison deal that was announced today us not in there, either?

I'm sorry -- the Faison deal was. We took that into consideration when we gave you our outlook or our projections with regard to the outlook for the year. The Faison was in it, dispositions was not in that outlook. Dispositions normally will have a slight adverse impact on your FFO until you redeploy those assets.

John, when you talked about the financing alternatives for the 170 million, you mentioned a bridge facility. Can you remind us what the size of that facility is and what the rate is on it?

Well, the bridge facilities basically are negotiated as we start conversations with our lenders when we identify property we're going to acquire, and the pricing on those bridge loans is anywhere from 150-200 basis points over LIBOR pricing.

Okay. One question regarding permanent financing. Obviously, we have seen the 10-year bonds sell off dramatically here over the last month. That presumably has had a pretty much a pro rata impact on 10-year financing cost. What is your understanding of the impact that it has had in the preferred market, if any?

Conversations we have had, Jim, is basically the quality of the issuer is very, very important and that in turn, the escalation in Treasury rates has not impacted the yield on the preferred is what we're hearing as such. There's still quite a demand for that, although there is quite a bit of preferred being offered. But we are not hearing any escalations of any significance with regard to preferred issuance, depending upon the issuer and the attractiveness of that issuer in the market.

A final question. In the release on the acquisition today, reference was made to some expansion opportunities. Are any of those new term? For example, would you expect to get started on something next year, and if so, (MULTIPLE SPEAKERS)

There are some good expansion opportunities, Jim. I don't think they're near-term. It will probably be a couple of years. There is some expansion opportunities to add either an anchor or a lifestyle wing at a couple of the malls, and -- but they are not things that are approved and ready to go.

Okay, very good. Thanks, guys.

Jonathan Litt, Smith Barney.

Good morning, guys. A couple of questions. What is your plans for permanent financing on the Faison Enterprises acquisitions?

The Faison acquisition basically has in place some loans already in place.

I got that, but for the 170, you're going to do the bridge. Do you think you're going to do some permanent longer-term debt, you think you're going to do some more preferred issuance?

I think our portfolio is such that we've structured it so that we could put some permanent loans on some of our other properties to pay off that 170 million if we go with the bridge loan, or if we see that the preferred markets are good, we can access the preferred markets today.

What is your sense of what the rate is if you were to issue a preferred today?

What would we like that rate to be, or what do we think -- what do we think our bogey is on that?

What do you think the market if, based on what you're hearing? Stephen Lebovitz: I think that the market we're hearing is -- for us or for - For you.

Is in the range of 7-1/4 to 7-3/4, probably more in the 7-1/2 range.

And what would you do -- and if you financed it with debt by leveraging up some of your other properties, that's probably, what, in the 5 for 7-year (MULTIPLE SPEAKERS)?

Yes, I think that's probably an appropriate number.

And where would you guide us, in terms of how we should be thinking about permanent financing on this? John Foy: I think we have some permanent financing that we're looking at the present time and we have really not locked into those. I would think -- we're analyzing and evaluating all of those aspects and possibly disposition of assets has some impact on that as well. As to exactly what we're going to do and as the guidance on it I think you know, we are basically not in a position to tell you exactly what we're going to do at this time.

Do you think that there is another dispositions that would cover the 170 million equity that you're putting into this?

Not at this time. But over a period of time as we work through those assets and the cap rates on those assets are good too today, so it is consistent with what we've said all along is that we're going to redeploy our capital into higher earning assets as the opportunities avail themselves.

I guess you have this preferred that is redeemable in the fall -- is that right?

Well, it's redeemable on 30 days notice now. It was July was when it was redeemable, and we have to give 30 days notice on it.

What is the dollar amount of that?

Is approximately $67-$68 million outstanding today.

And the rate?

The rate on it is 9 percent.

And if you were to redeem that, proceeds would be similar to what we just talked about for the acquisition?

Yes.

The source of capital?

Yes. I think the markets or lines of credit or refinancing on our existing assets.

Again, you don't think common stock issuance is something that you would need to do to handle this acquisition and the redemption of the preferred?

No. I don't think we envision -- we do not see any common offering on the radar screen at this time. We basically have structured our company whereby we don't have to go into common markets to keep our debt to market capitalization numbers in the range that we like to see the comfort range.

What is your expectation -- let me back up -- can you prepay this debt that is on the portfolio?

No. It is locked them for period of time, maturities basically over the next seven years or so.

What is the opportunity in that portfolio, if you could talk about occupancy our NOI growth or retenanting. Is there any, or is this going to basically be equivalent to a CBL mall that is well-managed, well-run, you're going to get some regular type of increases out of it?

I think that the Faison organization is an outstanding organization and did a great job on remodeling these malls and so and so forth, and I think that as is the case on any mall when somebody comes in and a new set of eyes and ears and a new management team comes in, they will always find some opportunities, and Stephen can discuss some of those out with you.

Jim had asked about -- there's some expansion opportunity at the malls in terms of both anchors, boxes and lifestyle which we are going to be pursuing. We feel like we can do better on temporary and specialty leasing, which will flow right to the bottom line. Occupancy is an average of 90.3 percent, so we feel like if we can bring it up to the level of our portfolio, there is upside. The occupancy cost as a percent of sales is 10.3 percent, and so there is upside there on renewals. And like John said, we will work these malls really hard. And we are not -- we will not do an acquisition if we don't see good upside. It is just not our business to do that and we really feel it is not only a great fit, but that there is good upside and opportunity for us throughout the four malls.

Okay. Changing gears a little bit on your tenant reimbursement, they came in well ahead of our expectations and well ahead of your first quarter level, while your property operating expenses were relatively flat. I was wondering if you could give us a sense -- and I know the question was asked before, I don't know if I got the right sense -- of what drove that and should we expect that the second-quarter run rate will continue?

As John said, we're basically feeling that those rates will be in the high 90s for the year. Second quarter of 101 percent. We're still looking at that and analyzing it for this quarter, but it is going to be in the high 90s as such for your modeling purposes.

So what you're saying is that is property operating expense continue to be at the current level, reimbursements will probably drop back down to the first quarter levels?

I don't think they will drop down that low, but it's going to stay in that 90s percent range as such, because those occupancy levels help tremendously as far as recouping the returns. And the expenses are basically fairly solid. They're down somewhat for this quarter, but will they stay down? We hope that they will and we're focused on that.

Following up on the prior question on this point. What would be good for us to know is how much of that increase is related to capital events versus just regular operating events?

I think basically we say that about 30 percent of the remodeling and renovation costs are basically billed back to those tenants. As far as a dollar's incense numbers, it is something that we can analyze and look at. But those remodeling and renovation costs, we recaptured those over a 10-year period of time on an amortization basis.

So there would be no reason to expect that that would contribute to the big jump in the second quarter? That would just be in there before and it will be in there going forward?

I think that had some impact, but I think the significant thing is occupancy levels really, really help drive those recoveries and lower the expenses to all of the tenants across the board. And I think, not only does it do that, it helps us generate revenues, especially income and other resources, and ultimately drives our revenues. So occupancy levels, we focus on, we think that that is a key, key ingredient to the success of malls, not only from a revenue standpoint, but from tenants and from driving traffic to those malls. We cannot emphasize to our folks enough the fact that occupancy, occupancy, occupancy is very important.

Great. Thanks guys.

Tony Howard, Hilliard Lyons.

Good morning. Congratulations on a good quarter. I was hoping that John would leave me some questions. My question -- I have one more question on the acquisition, and I apologize for it. But the 8.5 percent initial yield, it seems like one of the lowest that you have had for the last several years, at least?

It is lower than some of the ones in the last 18 months, but several of the malls that we purchased in 1998 and 1999 were in the mid-8 cap rate range. It is definitely a function of the market and the market cap rates have changed and the market has been competitive. And Tony, realize that this is after management fees too, and structural reserves, and that is income in place today. So we continue to basically use the same formula in announcing these things as we have in the past. So these are great models, the Faison organization did an outstanding job on remodeling these malls and we feel good that we made a great acquisition for our shareholders, and I think you will see results out of these malls from us.

DO you see a second-year or third year or kind of like a 10 percent kind of range?

It is difficult to say, but our history has basically been over 12-24 months, we've been able to increase about 100 basis points over the acquisition cap rate. So an 8, 5, 6 unleveraged (ph) return on this asset and the ability to do some of the things that we anticipate being able to do, we think that that 100 basis points over the 12-24 months range is achievable.

Okay, good. Second question is -- G&A was up 21 percent year-over-year and it was also up sequentially. Can you give some highlights on why, and also where you kind of see like a run rate going forward on the G&A? And is this going to be a function as you build up your asset base?

We have added some staff and some people, Tony, and also some of it is timing, like the expenses for the ICSC convention and some of these other marketing events basically have an impact on it. It's timing, but as we grow the company, we've established a good foundation. We will continue to add professionals to the staff and see those types of things that will cause some increase in G&A.

And a run rate going forward?

About the same, about the same current run rate that you are seeing.

Okay, thank you.

Craig Schmidt, Merrill Lynch & Co.

Good morning. My questions are pretty much on the four acquisitions. Of the four malls, how many have movie theater complexes, and are they stadium seating, and do you know how many screens they have?

None have stadium seating, and I don't think we have any theaters. In the one mall which we -- the occupancy level is around 82 or 83 percent. That is a result of a theater that has vacated and we are working on plans as to how we redevelop that area as such.

And there are no other theater complexes?

No other theater complexes.

Okay, great. What was your underwriting for the potential impact on Short Pump (ph) and Stony Point (ph) on Southpark?

Those malls are over 30 miles away. Colonial Heights is south of Richmond and they're both north. And we really don't anticipate an impact just because of the distance, and also just the way Richmond breaks down geographically with the river running right through the middle of it and how that is a real barrier to people shopping back and forth. There might be some people that go check it out, check the malls out when they open, but we don't feel like it will be an impact to Colonial Heights going forward, either mall.

So no sales loss at all? Your comfortable at the sales level that is at?

That is correct. Minimal, and we feel like the mall will hold its own.

Okay. And then the Valley View Mall, the site plan shows a Wal-Mart and a Target. I assume that is not part of your purchase?

That's correct.

Thanks a lot.

Patrick Bekay (ph), Invesco.

One question -- with regard to the (indiscernible) malls, you didn't (ph) mention that occupancy now is at 91 percent, up 400 basis points year-over-year. Is there much juice left in that portfolio?

Yes. We think that we still have a lot of good leasing momentum. Those malls are really performing well and we are starting to see the results of the renovations. By the end of this year, we will have completed renovations at over -- at about half of those malls and we will really feel like there is a lot going on. The boxes -- we talked about Linens 'N' Things, Steve and Barry's (ph). We have Barnes & Noble opening at Midland Mall, JC Penney coming into Cherryville Mall. So there is a lot of juice still to go.

Okay. Second, with regard to some of your associated centers. Given the continued low cap rate environment, are you guys still working on (indiscernible) solutions there?

I think that the associated centers -- we view those as basically being part of the mall and the management of those is basically handled by our mall staff as such. It likewise plays more into our total overall marketing for the mall, the tenant mix and so on, so we think that the associated centers are more appropriate to be part of our portfolio community centers. On the other hand, we think that those basically in today's environment are such that we will dispose of those at the appropriate cap rates and at the appropriate time when we can reuse that capital or when we see great opportunities.

Okay, thank you.

Thanks, Patrick.

(Caller Instructions). Jay Loop (ph), RBC.

Good morning, John, Steve. Just some follow-up questions on the Southern California development. Could you give us feel for -- once the project is completed, where do you feel the stabilized yield will come in on that mall. But in addition to that, given where cap rates of malls are trading in California, what you actually think that mall will trade for on a cap rate basis post-stabilization and how seriously you would consider selling it if the mall market remains as strong as it is today in California?

Well, we think it is a great market. I don't think we would compare it to Stanford Shopping Center. I don't know if it would trade in 5s (ph). Cap rates in California are in their known ZIP code, so we think there is a lot of upside. On the return stabilized, it will be in the 10.5-11 percent range. So the return should be attractive and there will be a lot of potential profit for us to consider. Once the mall reaches that point, we really haven't, we're just trying to get the mall under construction, so it is a little premature to I think-- think about what we would do once it opens.

Also, Stephen, could you give just a little bit more color -- you commented briefly on leasing spreads. But given the expirations that you're looking at in '03 and '04 and the markets that those particular leases are in, what we can expect in terms of leasing spreads over the next couple of quarters?

Well, I think we are pushing real hard on leasing spreads. The first quarter was stronger than this quarter. It is hard to look quarter to quarter. I think that 5 percent we feel is a good number to use. That is not something we're satisfied with, but to try to be conservative about where things stand. Definitely the sales results from retailers over the past few years is a challenge in releasing. But the good thing is that with the malls at the occupancy levels that they are, there just is not a lot of space and retailers recognize that. So that helps the negotiating dynamic from our point of view. We are pretty far along ' 03. Most of the leasing and renewals are done and we really are focused on '04. And we are about 20 percent signed for '04 expirations and negotiating another 65 percent. So I think we feel like there is -- it is a good leasing environment and we're going to push to get those spreads out.

John, just one follow-up. You talked about your preferred, but turning to the debt markets for just a minute and in your own debt strategy, given where the bond market has traded in the last few weeks, could you give us any color as to what your borrowing strategy is going to look like, or if it has changed much in the last couple of weeks going forward over the next couple of quarters?

Well, we would have preferred the rates probably three or four weeks ago as such when the treasuries were down significantly. But I think our strategy has always been is that it is not our business to guess or take risks with regard to interest rates. And as we see opportunities to fix rates and to put permanent loans in place, we will do so. As to the duration of those loans, we want to flatten out and ladder all of our maturities so that we don't get clipped in any one particular cycle. So basically what we see is the opportunity to fix some rates and so on and the market is still very, very attractive from that standpoint. It is not as attractive as it was at one point, but it is still very attractive and we will continue to pursue the fact that we're not a company that take risks with regard to interest rates.

Thank you.

Rich Moore, McDonald Investments.

Hi guys, good morning. I would like to add my congratulations on an outstanding quarter. To follow-up on Jay's question real quick, John, how much more debt do you think you would fix this year, even in percentage terms or absolute?

I think a lot depends upon what we see, dispositions and things such as that. We presently anticipate that we will fix $196 million that we have in a position where we can fix it, depending upon what we see as our needs and the total overall strategy with regard to debt to market capitalization.

Okay, good, thanks. And looking briefly at lease termination fees, which were down significantly, does this bode well for bankruptcies this year? Is that some indication that you think -- or do you think that's some indication bankruptcies may mitigate throughout the rest of the year?

Well, they have crept a little over last year's, and I think that is just a natural thing of our business. It's probably going to stay in about that same range as such. There's probably going to be a few more, but there are new concepts and people coming back into the business as such. And so I think it would not be hard (technical difficulty) in what we announced in the bankruptcies should stay about in that range. We're going to see some more occur but I think it is basically in that area.

Okay. Looking at the acquisitions, do you have any built into your guidance any of the FAS 141-142 mark-to-market type income?

I think that the problem, Rich, is that everybody is struggling to try to figure out what it is. I think the SEC has not really told everybody what 141 and how it is to be done and such and it really involves depreciation only as such, so -- and therefore it is should be minimal impacting to any FFO. And I think if we can get a range -- if we could get a range -- if we could get the SEC to basically tell us how they want it done I think everybody could do that and as you know depreciation doesn't impact FFO.

Okay, okay. Just briefly in looking at that expense recovery ratio, expenses you know real estate taxes, maintenance -- those were down, it seems fairly substantially. Are the run rates you see there or the numbers we see in the second quarter -- are those indicative of what you're seeing going forward on the expense side on those two line items in particular?

I think you should add the two quarters together basically, Rich, would give you a better modeling for that. I think there is timing that goes into those things. So if you take the first six months and add those together, it will probably give you a better run rate for your model.

Thinking about occupancy, where do you think the year ends for occupancy in the regional mall portfolio?

From a year ago, up about 100 basis points.

Okay. I noticed that Faison has a number of other malls that they are associated with. Are any of those of interest to you guys, John? Have you looked at any of those? Is the sort of the first tranche of maybe some more of the Faison properties?

I think that the Faison properties, a lot of those he manages as an asset manager for folks and such. And I think that the direction that the Faison company is going in, Henry and Phil Norwood (ph) have done an outstanding job of running that company and the direction that their company is going in. I think that they basically see the regional mall business as a business of size to a certain extent and one where they could not get necessarily the size that gave them some of the efficiencies that we are seeing at our size. And therefore, I think that he is exiting that business and I think the other malls that he has, he basic basically asset manages those or things such as that. So we've not had any further discussions with Henry or Phil Norwood as to any further acquisitions that they might have. But they are great people, we have enjoyed the relationship with them and we hope that if there are other opportunities for us that our relationship with them will provide us with those opportunities as well.

Okay. When I look at the Valley View mall, and you guys mentioned, is the issue there, the 82 percent, is that just the movie theater?

Yes, that is what it is.

Last thing for me. Could you give us a little color on the MG Herring joint venture in El Centro, in terms of why they're doing the leasing and how confident you are that they would lease the property to the same level that you guys might do it?

It is a little different situation, Rich, then say the way Parkway worked with Colonial, and it is like closer take a co-leasing arrangement to the point where our leasing people are working hand in hand with his leasing group. And really, we wanted to take advantage of Buddy Herring's experience in not only starting this project and working on it for several years before we got involved and the contacts he had made with the retailers and the leasing he had done to date, and also on his experience in doing other projects along the border which he has done over a lot of his career. So the leasing is very closely worked between us. CBL is actually -- we're doing the documentation through our in-house legal and it is working out very well, in terms of the partnership. He is finishing up departmenting and then we will take over the rest of the development and the building of the project. The department stores -- everything is in place with the four department stores and the project is really looking good at this point.

Okay, great. Thanks guys.

Jim Sullivan, Prudential Securities.

A couple of follow-up questions here. Regarding the acquisition climate, I know when I met with you guys and several others out at the ICSC in Las Vegas in May, there was a pretty active pipeline of product available for sale. Of course, some of those transactions have since closed. And I just wanted to get your sense for whether that pipeline has been reduced following the rise in the ten-year rates. Has it had any impact as far as you know?

I don't think it has yet in the pipeline. It will be interesting to see if it impacts pricing. I don't think there has really been any deals that have gotten that far along to see whether there is an impact.

Secondly, regarding the outparcel activity -- do you maintain an inventory of outparcels that are available for sale, as opposed to ground lease? And if you do, can you tell us what the amount of that would be, the value would be?

As we said, the ground rate lease is basically the first preference. And as you add new developments, a part and parcel of those is the addition of outparcels. But when you combine properties at very reasonable rates and then do the site work and so on, and with the mall being there, the ability to triple those rates or triple that price that we have in it is pretty significant valuations. As to the size of the inventory we have, it varies from day to day and from project to project.

So you cannot give us a number like 60 acres or 100 acres or something like that?

I can get back to you with that answer, but I don't have it off the top of my head. I would be happy to try to get back to you on that.

I would appreciate that. One final question. The insurance issue at the malls. As I understand it, you use a captive insurer for part of the risk. And correct me if I'm wrong on that, but if you make a profit on that part of the cover, would that be reflected in a higher operating cost recovery rate or not?

No, it would not appear in the cost recovery ratio as such.

Where would it appear?

It would basically be a deduct against some of the expenses. As far as a GAAP item, it would basically -- could show up in others or some of those areas, such as that.

Thanks, guys.

(Caller Instructions) Nam Marenovich (ph), Reef (ph).

Good morning, guys. Most of my questions have been answered; just one quick one. John, if we look at your same store NOI growth and we look at the mall portfolio, which is up 5.3 percent and we examine the key drivers of NOI growth, we look at occupancy, which was up 2.5 percent in the mall portfolio, spreads were up .9 percent. And if we assume just off the top of my head, a 1.5 percent increase on your in-place rents, and also we assign a 10 percent renewal rate, I get a same store NOI growth of about 3.9 percent, a very quick and dirty analysis. Are you including redevelopment revenues when you compute your NOI growth?

No, we are not. And I think your calculation is pretty close, at 3.9. We've basically been saying it is in the 4 percent range.

And specialty leasing will help us a little bit as well. But the 3-4 percent range is what we been saying is what we're looking at for a run rate.

The four acquisitions, 8.56 cap rate, how long was that on the market?

I don't think it was on the market as such. I think you know through the relationships, basically, we were able to come in and negotiate a transaction. I don't know that there was any competitive situation as such. The relationship with Henry and Charles has been one over a number of years and I think that helped us from that standpoint. That is not to say that it was an easy negotiation.

To get a sense of how cap rates have moved in those types of malls and those types of markets, how much do you think or what kind of cap rate do you think you would have got this far, let's last year, or how far do you think cap rates have (inaudible)?

Who knows, but I think if you look at most of our acquisitions last year, they were in the 9-9.5 percent range. So I think 50-100 basis points is probably as good a number to use as any.

Great. Thank you, guys.

Thank you.

John Roberts, Stifel Nicholas.

Hi, guys. I don't know if you can answer this. You say that this transaction is going to close in two separate transactions, beginning basically this quarter. Any thoughts on timing there for modeling purposes?

I think it is toward the latter part of this quarter.

Both parts, John?

No, I think that one will be late, late this year. One of the malls will be a later closing date.

So 1, 3, maybe the latter half of this quarter, 1 latter half of the year?

I think the latter part of this quarter, not the latter half of this quarter.

So really don't expect any impact from this transaction until the fourth quarter?

That's probably appropriate.

Thanks John.

Thanks.

Gentleman, we have no other questions at this time. I'll turn it back to you, Mr. Liebowitz, for final remarks.

We would like to thank everyone for taking the time this morning. We're really excited about our results for this quarter and we look forward to catching up with you soon and thank you again.

Ladies and gentlemen, this does conclude our conference for today. We thank you for your participation and you may disconnect at this time.

(CONFERENCE CALL CONCLUDED)