CBL & Associates Properties, Inc. (CBL) 2004 Q2 法說會逐字稿

Good day, everyone, and welcome to the CBL & Associates Properties Incorporated conference call. Today's call is being recorded and will be available for replay starting today at 1 p.m. Eastern Time and running through August 6th, at 8 p.m. Eastern Time by dialing 719-457-0820 and entering confirmation code 349212. At this time, for opening remarks, I would like to turn the call over to the President, Mr. Stephen Lebovitz. Please go ahead, sir.

Thank you. And good morning. We appreciate your participation in today's conference call to discuss our 2004 second-quarter results. With me today is John Foy, the Company's Vice Chairman and Chief Financial Officer; and Charlie Willets, Senior Vice President, Real Estate Finance, 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 inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might 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, references made to "per share" are based upon a fully diluted converted share. Also references made to "community centers" are only those that are not a part of our joint venture with Galileo America. 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 condition and results of operations, included therein, for a discussion of such risks and uncertainties.

I would like to note that a transcript of today's comments, the earnings release, a preliminary balance sheet, and additional supplemental schedules will be furnished to the SEC on Form 8(K) and will be available on our website. This call is also available for replay on the internet through a link on our website at www.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. During this conference call, the Company may discuss non-GAAP financial measures as defined by SEC Regulation G. A description of each non-GAAP financial measure and a reconciliation of each non-GAAP financial measure to the comparable GAAP financial measure was included in the earnings release that will be in the Form 8(K). Our supplemental information was released last evening with our earnings release and was posted to our website.

Thank you, Charlie.

Before we start today's call, we wanted to mention how much we have appreciated the counsel and service that Bill Poorvu, whose retirement we announced yesterday, had rendered to our Company as a member of our Board of Directors. We wish him well in all of his endeavors. We also want to thank Kelly Sargent, our former Director of Investor Relations, for a job well done. We wish her well in her new position at E-TRADE.

At CBL, we have always invested considerable time and resources in developing and perfecting a core strategy that allows us to provide consistent FFO and dividend growth. Our strategy includes maintaining a conservative debt to market -- to total market capitalization ratio, a relatively low percentage of floating-rate debt, active acquisition and development programs, strong occupancy and same-center NOI growth, reinvestments in our properties, and financial discipline in pursuing new growth opportunities. We continue to enjoy an improving retail environment with more retailers experiencing higher sales growth and improving margins. We believe these trends are beginning to have a positive impact on retailers' plans to add new stores and concepts in malls. The second quarter was an active one for us on the development, acquisition, and leasing fronts. One of the highlights for us in the second quarter is the annual ICSC convention. We estimate that we had between 2,000 and 2,500 visitors for the 3 days our suite was open. Overall attendance for the convention was over 36,000, and the attitude of the retailers was as vibrant and positive as we have seen in years. In June, we also held connection 2004, our annual leasing event here in Chattanooga for retailers. This three-day conference had over 130 retailer representatives in attendance.

During the quarter, we purchased the land and began construction of the 407,000 square foot Southaven Towne Center in Southaven, Mississippi, a Memphis suburb. Phase 1 of this open-air center will be anchored by JC Penney, Linens-n-Things, and Circuit City and will open in October 2005. Dillard's will join in phase II in spring 2006. We also began construction on an expansion to Cool Springs Crossing, one of our associated centers, in Nashville. Our other major development currently under construction is Imperial Valley Mall in El Centro, California. This 752,000 square-foot mall is on schedule for its March 2005 grand opening. We are pleased to currently be 75% leased and committed. We also have under construction the 334,000 square-foot Charter Oak Marketplace in Hartford, Connecticut, anchored by Wal-Mart and Marshall's. This project is 97% leased and will be contributed to our Galileo joint venture.

We have four mall expansions in progress, including East Towne and West Towne Malls in Madison, Wisconsin, and the Lakes Mall in Muskegon, Michigan. Each of these 3 projects includes a new Dick's Sporting Goods with the 2 Madison malls including additional mall shop space. All are scheduled to open this November. At Arbor Place Mall, construction is on schedule for the new 140,000 square-foot Rich's-Macy's to open this September. We have 3 mall renovations underway right now, Panama City Mall, which is expected to be completed by the end of August; and Cherry Vale Mall and Northwoods Mall, which are expected to be completed in November. Our total investment, excluding deferred maintenance costs, will be $23 million. During the quarter, we entered into approximately 338,000 square feet of new leases, and renewed approximately 206,000 square feet of existing tenants for total leasing of 544,000 square feet, compared with 495,000 square feet in 2003. Leasing for both periods excludes results achieved in the community center portfolio contributed to the Galileo joint venture. From July 1 of last year through June 30th this year, we lost 438,000 square feet to bankruptcies and store closings. This resulted in the loss of $7.5 million in annual base rents. The pace of bankruptcies slowed in the second quarter, and we have now replaced 153,000 square feet. The annual base rents of $3.1 million achieved on these retenanted spaces represent an increase of 30% in annual base rent.

At the end of the second quarter, total portfolio occupancy was 91.1%, which was 40 basis points below the prior-year period, but 30 basis points higher than the end of the first quarter. We had originally anticipated occupancy to trend down sequentially in the second quarter, but we were pleased to have made progress through our leasing efforts, particularly in the malls. In the mall portfolio, average annual base rents for spaces leased increased by 20.9% compared to the average base rents vacated. The associated centers experienced a decrease of 9.5%, primarily as a result of the redevelopment of Hamilton Corner, an associated center adjacent to Hamilton Place Mall in Chattanooga. For the 14 community centers remaining in our portfolio, we experienced an increase of 19.4%.

We are pleased to report strong retail sales in our portfolio for the fifth consecutive quarter. For mall stores of 10,000 square feet and less, year-to-date same-store sales increased 5.6% for those tenants that have reported. Additionally during the quarter, occupancy costs as a percentage of sales at our malls was 13.7%, compared with 14.5% for the same period one year ago. On Wednesday we announced the acquisition of the 1,129,000 square foot Monroeville Mall in the eastern Pittsburgh suburb of Monroeville, Pennsylvania from Turnberry Associates for total consideration of $231.2 million. The acquisition included the mall, a 230,000 square foot associated center known as the Annex, and an 86,000 square-foot open-air expansion known as the Village. An additional $20.7 million will be invested for the open-air expansion, which will open in phases starting in the latter part of this year and continuing through 2005. The purchase price was comprised of the assumption of a $134 million non-recourse fixed-rate loan, special common units of CBL's operating partnership with a value of $60.95 million, $78.10 per unit at an initial -- at an initial yield of 6.5%, and $36.25 million in cash.

Year-to-date we have completed six mall acquisitions totaling 5.2 million square feet for a total investment of $705 million with an average yield of 7.7% based on income in place. These acquisitions were funded through $263 million of assumed debt, $166 million of term loans, $162 million from lines of credit, $60.9 million in special common units, and $53 million in cash. While we did not budget for acquisitions, preferring to let the true value of the opportunity influence the decision-making process, rather than the immediate need to make the numbers, acquisitions have clearly played an important role in the growth of our Company and will continue to do so. Since 1995, we have acquired 47 regional malls, 9 associated centers, and 2 community centers totaling 42 million square feet and a total investment of $3.5 billion. I highlight these facts for the simple reason that during this time period, we have seen a low cap rate environment come, go, and come again. During this time, we have been rational and disciplined in our underwriting. We have maintained our focus on well-located, dominant malls that generate strong initial returns and provide opportunities to realize upside potential. We have acquired 6 properties this year that fit that mold very well, and we will continue to selectively review both one-off and portfolio acquisitions that become available.

Now I'd like to turn the call over to John Foy for the financial review.

Thank you, Stephen. And good morning.

Some of the financial highlights of the second quarter were: the acquisition of the Chapel Hill Mall and Park Plaza Mall that closed during the second quarter, and the FFO of 1 cent per share. The total accretion in 2004 for these 2 malls and the Monroeville acquired in July is 15 cents per share of FFO. We received 3 cents per share of FFO from lease termination fees. As we have stated, we do not budget for these lease termination fees. Outparcel sales for the second quarter were 4 cents per share lower than the same quarter last year. G & A in the second quarter increased by approximately 2 cents per share or $1.3 million, compared to the second quarter last year. Of this amount, $900,000 was related to higher state taxes with the balance attributable to increased salaries and other overhead. We estimate annual G & A in the range of $34 million for the year. The write-off of abandoned projects was $1.1 million, or 2 cents per share of FFO higher this quarter than compared to the same quarter last year.

During the second quarter, operating performance improved resulting in FFO per-share growth of 1.7%, or 2 cents per share. Of this increase, 96% was generated by external growth. The external growth resulted from the new developments and acquisitions we completed in 2003 and the first 6 months of 2004. The internal growth resulted primarily from the 1.5% same-center NOI growth, which was within our range of 1% to 2%. As we stated in our earnings release, the second quarter same-center NOI growth was 1.5% for the total portfolio, driven by improvements in occupancy over the first quarter of 2004 and the contribution from specialty leasing, sponsorship and brand branding, and our taxable REIT is subsidiary. The breakdown by property types for the quarter is as follows: Same-center mall NOI growth was flat. We believe this is a significant accomplishment, given the 372,000 square feet of vacancies from bankruptcies and store closings we have experienced in the malls during the last 12 months. As Stephen mentioned, we have leased approximately 31% of this space, which will provide a positive NOI impact beginning in the fourth quarter of this year. Associated center NOI decreased by 2.3%, or $119,000. We experienced 66,000 square feet of bankruptcies and store closings during the last 12 months, of which we have re-leased 57%. NOI for the community centers, which are not part of our venture with Galileo, increased 9.3% or $150,000. Our cost recovery ratio was 99.8% for the quarter compared with the 103.7% in the second quarter of 2003. Though higher than the mid-90s target we discussed last quarter, we still expect this ratio to trend back to the mid-90 levels in the second half of this year.

Our debt to total market capitalization at the end of the second quarter was 49.4% compared with 50.3% a year ago, continuing to give us financial flexibility. Our floating-rate debt represented only 13.1% of our total market capitalization and accounted for 26.4% of our total debt. The variable rate debt includes construction loans, lines of credit, and six short-term loans on operating properties. We expect to convert some of these short-term loans to long-term fixed-rate loans during the remainder of this year. The dividend payout ratio was 60% at quarter end. Our financial coverage ratios remain strong with an EBITDA coverage ratio of 2.71 for the second quarter of 2004 compared to 2.81 for the same period in 2003. The decline in the ratio was a result of an increase in interest expense and a comparatively smaller gain from outparcel sales.

In summary, we are pleased with our accomplishments for this quarter and we have a positive outlook going forward based upon the following reasons: the improving retail environment has created more optimism on the part of retailers for expansion plans in 2004 and beyond. While we expect same-center NOI growth to be in the range of 1% to 2% for the remainder of this year, we anticipate stronger NOI performance in 2005. We have exciting new developments coming on-line this year and next, along with a development pipeline that is becoming more active than in the last couple of years. Our new-development program is further enhanced by the success we have enjoyed at Coastal Grand Myrtle Beach, which is off to a spectacular start. We have acquired over $700 million of new malls this year, compared to $494 million for all of 2003. These properties have been acquired at favorable cap rates and are consistent with our disciplined approach to acquisitions. Based upon our operating results and the acquisitions to date, we in increased our guidance to a range of $4.98 to $5.03 per share.

We appreciate your confidence and support and now Stephen and I will be happy to answer any questions you might have.

[Caller Instructions]. We will take our first question from Amy deLone with Banc of America Securities. Please go ahead.

Good morning.

Hi, Amy.

How are you? Can you tell me the rental rates on your recent acquisitions in the quarter versus your current market rates?

I think we're going to have to get back to you on that one, Amy, if we could. I don't think we have those numbers right at the present time.

Just sort of maybe ballpark, we were wondering if they were higher or lower and if you were booking any FAS 141, 142 revenue?

Yes, we are booking some from FASB 140, 141 numbers in the quarter. To date I think on the -- on the leasing side, I think it's about 6 cents a share total for the first -- for the -- for the quarter.

Okay, great. Thank you.

Thank you.

We will take our next question from Paul Morgan with FBR. Please go ahead.

Good morning.

Hi, Paul.

In terms of the plans to fix some of your variable-rate debt, could you be a little bit more specific about -- about maybe commenting on an amount and, you know, how much -- where your comfort zone is? It seems like historically it was a little lower than 26% of your debt. And whether those -- those plans are reflected in the -- the guidance increase that you attribute to the acquisition?

Yes. They -- those -- those plans are basically in the numbers that we anticipate for this year. We will refinance the Myrtle Beach loan, which is approximately $100 million, or about $80 million that's been funded under the construction loan today, so that loan will be probably in the range of $100 million or so. Some of the term loans, as we complete the -- the improvements in the lease up to those properties, those will be refinanced probably later in the year, as such. I think one of the factors that has led to this increase a little bit, as you pointed out, is the fact that a lot of the acquisitions that we've made this year were basically acquired with -- with -- on properties that had loans in place, and as a result of that we've used our lines of credit for that -- for those acquisitions. And as we refinance assets and so on, we will have excess capital out of those to pay that down as well as other places to generate that capital. So I think that's why that has crept up a little. But basically by-and-large we're very comfortable with those numbers. And, also, that does include the construction projects that we have under construction as well. So as -- as those open and mature, those will be fixed rate or be contributed into the Galileo joint venture.

So I mean is your target still more in the 15 % range?

Well, I think in today's world it's hard to set a target, but we'd say probably in the low 20s. I think that because the acquisitions we've made that have debt in place, that results in it being -- being up just a little more.

Okay. Can you talk about what's in this -- in the other NOI that goes into the same-center NOI increase? I guess you said sponsorships or other things, you know, that keeps being a big jump that influences your same-center NOI growth, what contributed to it this time?

Again, sponsorships and specialty income is in there. Our retaxable subsidiary, which does some development stuff, the Galileo management, some of the Galileo fees will go into that category as such. So it's in the -- it's in the REIT taxable subsidiary where we have seen that growth as well as the specialty and sponsorship income. And as we pointed out in our comments, that we did enjoy some nice percentage growth there in those 2 specific areas.

Right. I guess -- my question is, if it's -- if it's specific to a property, wouldn't it be in the property NOI? I mean, if it's sponsorship at a mall, why wouldn't it be in a mall NOI? And why is this really a same-center number at all?

Well, I think in some cases it is. It it depends upon the length and duration of the income as it's coming in, such as the advertising revenues sometimes are reflected in the other income as such. But, you know, by and large, the retaxable subsidiary is performing well, and we think that it will continue to perform well. So I think that's where you'll see -- continue to see this type of production.

Okay. And my last question is about the acquisitions. Do you have any color about what your -- I mean, what is the upside from the ones that you have completed since the end of the first quarter? Is it just -- you know, right markets, you know, right pricing, or I mean is there expansion possibilities? Are you looking to do anything with incremental capital, besides I guess what you said about those recent ones?

Yeah, Paul, there's -- I mean, each of the acquisitions has its own story, and they each have value-added opportunities. I mean, in the case of Monroeville, like I said, there's an expansion, which is actually under construction, that will include a Barnes & Noble, a couple of restaurants, some specialty stores. It's an outdoor area right at the front door to the mall, and it returns just about 8.2%, but it's also going to help build the traffic to the mall, there's a lot happening around that mall in terms of road improvements, it was renovated just in the past couple of years and there's a lot of leasing upside as well. So we -- we feel like Monroeville just has a lot of upside for us. Again, you know, Park Plaza in Little Rock has, not the expansion potential, but it has a lot of leasing potential and there was some -- some vacancy that we bought -- when we bought the mall that we felt is very leasable and can -- and can give us some good upside. So, you know, each of the malls has -- has its own story, but they have -- you know, they have -- they have good upside potential. We're not buying these just for the sake of buying them, we're buying them because we see a real opportunity there, and we've been able to generate the increases in the returns, and we see that continuing as well.

Okay. Great. Thanks. And then I also appreciate that you've put out the supplemental early this time. Thanks.

Thank you, Paul.

We will take our next question from Michael Billerman with Goldman Sachs. Please go ahead.

Hi, Michael.

Hi, John. I just want to follow up on that FAS 141, 142 income. In the supplemental for the 3 months it says 600,000 or a penny, and then a million two, or 2 cents for the debt amortization, so the 6 cents you quoted was for 6 months, then? To Amy's question?

Yeah, it was for the whole year. It really broke down as 3 cents on the leasing and 3 cents on the debt thing. So it's for the 6 mall acquisitions that we've done.

And that's a year-to-date number, or are you talking about full-year impact?

Full-year impact.

Okay. What is your acquisition pipeline look like right now?

There's -- there's some properties out there on the market, there's been some rumors out there that we don't typically comment on, but I don't think it's fair to say that they're all true about some things that we're buying. There's -- there's a lot of properties on the market that we're looking at and -- we really -- you know, like I said, you know, we really don't project, and budget for the acquisitions. We see ourselves continuing to be a player in the business, so I don't know if I'm giving you any specifics, but that's -- that's about all we can say for now.

I understand there's -- there's a level that you don't want to put into your guidance, if you don't make the acquisitions, you don't miss numbers, but are there malls that you have already under contract or in deep negotiation on?

There's nothing under contract.

Okay. Turning to the development pipeline. What is the shadow pipeline look like past the developments you have list listed in the supplemental?

The development pipeline is -- is really strong primarily for projects opening in '06. We've got a lot of projects on the community center side, and then some of the larger open-air projects that are getting to the point where they'll probably -- they probably won't be able to start construction this year, but in the spring '05, summer '05 we've got some projects that we'll be able to announce. A lot of the stuff we were leasing in Las Vegas got a really good response, and so that's gaining a lot of momentum, so we're very encouraged with our prospects there.

So a lot of it's on the community center side, which ideally would be flipped into Galileo?

It's community center side and also some of the larger, open-air projects that would have conventional mall anchors, but we're not building enclosed malls with them. But we were just in meetings in the past 2 weeks with both Sears and JC Penney and they are expansion minded, as I think everyone's read, and then continuing with -- we were with May Company a couple weeks before that, and they're real excited about their acquisition of Marshall Fields, but, you know, the department stores have -- have really had a resurgence this year, which has been one of the best -- best things about the business. And the projects that they're anchoring aren't million square-foot enclosed malls as much as open-air specialty centers kind of like the Southaven-type center, 4, 500, 600,000 square feet and we have a number of those in our pipeline as well.

Okay. And John I think you mentioned abandoned field cost which was $1.1 million higher than last year? What was the gross amount of abandon deal fees?

It was $1.2 million.

And what has that been averaging per quarter?

It's been running a little higher this year than it has in the past. I mean, last year was a little higher, too, but prior to that, we've been able to hold, you know -- it wasn't as high as such. So it'd been running about $800,000 per year.

Most of that's development, or acquisition?

It's basically development.

So development deals that you've passed on.

Yes, that's correct. Where we couldn't see the hurdles or didn't accomplish -- didn't see that the project had the growth potential that -- that we want to put in our portfolio.

And if you had to just take a stab, how many projects would that have been?

Probably around four or five.

Okay. Thank you.

Thanks, Michael.

We will take our next question from Jay Leupp with Royal Bank of Canada. Please go ahead.

Hi, good morning.

Hi, Jay.

Good morning, guys. Here with David Ronco. Could you talk a little bit more about -- give us a nice update on the leasing spreads, but more generally about the -- the tenant health in your portfolio. And also your strategy for growing occupancy over the next couple years and maybe give us, say, a 12 or 24-month occupancy target for the portfolio?

Well, I think that we -- like we said, the pace of the bankruptcies has slowed down, and while there are a couple of retailers out there that could have a real impact on us, we feel better today than we did at the beginning part of the year about the health of the retailers in general. Like we said, the Las Vegas convention was the most positive that we've had in years, and then when we had all the retailers in town in June, there's just a lot of positive news on the retail front. So we're looking to -- to pick up on the occupancy. I'd say, you know, hopefully 100 basis points a year over the next couple years. We've got -- we're making headway, like we said, filling the bankruptcies, but that was roughly a half million square feet of -- of a hit that we had to take, and now we have to dig out of that hole, and we're about a third of the way there, so we still have a lot of work to do, although our results to date on the income side have been good. So I think that -- that we feel like we're going to be able to make some headway over the next 12 to 24 months, and that spreads also are going to continue to -- to be positive, and our spreads were better this quarter than they have been and we -- we look to have that continue as well.

Okay. And just one follow-up. On the prospects for asset sales going forward, do you expect to do much in the way of -- of mall asset sales and, also, what could we expect in terms of the prospects for another joint venture or partial asset sale?

Well, I think that with regard to the mall sales, we -- we are focused on the malls that we have in our portfolio and how to continually improve those NOIs and growth in those. Needless to say, there are some malls that don't produce as much NOI growth as some of the others, or as much sales growth as the others. But in the market areas where they are and our ability to manage those has basically made those the dominant player for those specific market areas as such. We don't foresee selling any malls at this time. From the standpoint of community centers, our venture with Galileo is going extremely well. In the first quarter we will -- we have the 2 projects that we're already committed to do with our friends from Australia and the Galileo transaction, which would be the Hartford project and the Wilkes-Barre project would occur. But as we develop those community centers and as we see their appetite, those acquisitions or sales or dispositions would probably proceed on that basis. But as far as any target or anything such as that, there is no target, there is no -- no use of -- there's no budgeting of that in any of our numbers that we're using to give you those forecasts.

Okay. And then just one last question. What would you estimate to be the approximate cap-rate differential on the acquisitions that you're looking at in your mid-western and southeastern markets compared to, say, the larger metropolitan markets on the east coast and west coast?

Well, that's a tough question, but I think, you know, we're looking at probably 150 basis points, maybe 150 to 200 basis points, you know, ballpark. It's so -- you know, cap rates on the acquisitions, though, are -- are only part of the story. Like -- like, you know, we said. And we're really looking at where we are going to be 18 months out, you know, 2 years out, and see what there is in terms of growth. So that's a big driver of the cap rates as well.

Thank you.

Thanks, Jay.

Thank you.

We will take our next question from Gary Boston with Smith Barney. Please go ahead.

Good morning, guys.

Hi.

John, the lease termination fees have been pretty consistent the last couple quarters, you know, I was wondering if that's something, you know, we -- we think we could look at it as a run rate, or is that sort of an anomaly that's been pretty consistent?

It's -- it's tough to budget that and that's probably one of the reasons why we don't budget it, is because it's -- it totally depends upon circumstances that are really beyond our control as such. It also depends upon bankruptcies versus actual sales that you're seeing in these tenants. As an example, in last year, the Luby's Cafeteria contributed about $1,700,000 to that $3 million to that total year of 2003. So, you know -- as you see bankruptcies occur, lease termination fees are eliminated, as such. One of the injustices of our bankruptcy system, but I don't need to comment on that. That -- so it's -- it's really difficult, Gary, to budget that on a going-forward basis, but that's where we are.

In terms of -- you know, I guess along that line, maybe in terms of any comments you would have on sort of a tenant watch list, people that -- or people are sectors -- segments maybe that you're concerned about or keeping a closer eye on?

Well, I think, you know, I don't know that we'd like to comment in an open forum on people that we think are having financial shortcomings and so on, but I think we all read the same press, that there are some people in the apparel business, as such, that -- in the younger generation apparel-type of business that are having some problems that we've all read about in the press. And some of the other areas of business. But by-and-large, as Stephen has pointed out, bankruptcies have really slowed down. There'll continue to be bankruptcies, but the positive outlook that we're seeing from the retailers is basically overshadowing that. I mean, it's giving them new confidence and new optimism to go forward with new concepts and to take additional space. So we're really positive about that and I think that the ability to -- to lease up 30% of -- in excess of 30% of the bankruptcies that we've sustained so far, it just is further proof that our portfolio is strong as well as the fact that retailers are coming back, retail sales are on the mend and doing much, much better. So we're very positive with regard to the outlook and -- for our company as well as our industry.

And just one last thing. And I apologize if I've miss missed it somewhere in your supplemental. What was the capitalized interest for the quarter?

Approximately $1.1 million.

Great. I appreciate it. Thanks a lot.

Thanks, Gary. Welcome back.

Thanks.

We will take our next question from Craig Schmidt with Merrill Lynch. Please go ahead.

Hi, Craig.

Hi, good morning. You sort of touched on this, but just to explore a little. If I look at your 6 malls that you acquired this year, of the first 5 are kind of consistent in that they're either in smaller markets or it may be in a larger market with a smaller property. Monroeville, it's obviously in a major market and a major property in that market, and obviously got a lower cap rate than your other acquisitions and a slightly, you know, higher price per square foot. I'm just wondering, it sounds like in your comments today that you just look more on opportunity than the actual cap rate, but is there a property, let's say, that would be in the 6s that has an opportunity that would still be considered too pricey for you, are you looking for opportunities throughout the spectrum?

I mean, we -- Craig, we've looked at -- at the properties in the 6s and some of them would have been a good fit. We just haven't been willing to pay up, I guess, is the best way to put it, because we didn't see the growth and we didn't think it was the right way to use our capital. And we've been able to -- to buy in the high 7s on average, so we're getting that good initial return. And, plus, we're seeing the upside. You know, Monroeville was -- was -- you're right, in some respects it was a little different than the other properties, but it's -- it is pretty much has its own market on the east side of Pittsburgh, it's a great fit with Westmoreland Mall which is 45 minutes away that we bought about 2 years ago. It has the expansion going on, it's just got a lot of leasing opportunity. So, you know, we just felt like it was -- it was a great opportunity for us, the way the deal was structured with the SCUs was -- you know, we think helped make -- make the transaction more attractive and the cap rate is based on the $78.10 per share for the SCUs, you know, giving the face value to that. So, you know, we think for all those reasons, it really -- it really made sense and was a good fit for us.

And in your aggregate volume for the year due to acquisitions, does that include the expansions and other investments, or is that just the purchase price at the time?

That's just the initial price that we paid.

Okay. Thanks a lot.

Thank you, Craig.

We will take our next question from Robert Belzer with Prudential Equity Group.

Hi, Robert.

Yes, a couple questions today. Could Monroeville add to FAS 141 rents and also debt amortization?

Yeah, Robert. It's in that number we gave you, that it it'll be 1 cent. It's in that 6 cents for the full year.

Okay. Great. And then just one other question. Regarding any potential new acquisitions. Could -- could we see you fund any of these investments with term loans?

I think it depends to a certain extent on how fast we need to close a transaction, as such. That's really been one of our advantages. I think we -- we enjoy a number of advantages. One of the advantages that's really gotten us some really good assets is our ability to close these transactions fairly quickly, and therefore we have used short-term -- term loans as such on those. And I think that as Stephen pointed out, in our Monroeville transaction, the strength and the growth that we've shown in our stock has basically played well, too, also. So that went into the consideration at that valuation, the $78.10 on those SCUs. So I would think that depending upon how fast we close and things such as that, that -- that we would use some term loans or we'd use our lines of credit for acquisitions.

Is that the primary driver behind using the term loan?

I think there's 2 reasons. One is the speed in closing the transaction, and I think the second is the ability for us to take over and improve the properties and improve the NOIs, and therefore get a better loan on those properties, and therefore have less equity tied up, and therefore less need to go into the capital markets to sell common shares or to -- to do those types of approaches. So I think that the ability and our track record at improving those NOIs and improving the loans that we could get immediately versus the loans that we can get a year or 2 years out substantiates the fact that this approach has really worked well for us.

Okay. Great. That's all my questions, thanks.

Thanks, Robert.

We will take our next question from Rich Moore with KeyBanc/McDonald. Please go ahead.

Hey, Rich.

Actually, it's Chris Chapman here with Rich Moore this morning.

Hi, Chris.

I want to ask you about occupancies, you mentioned your expectation that they might have slipped in the second quarter, obviously they went the other way. I was wondering if you had a target for the rest of the year on occupancies?

Yeah. We think that by the end of the year, we'll be able to get back to roughly 93%, which is about -- pretty close to where we ended up last year, so we're -- we do think that things are -- are better than we had thought earlier in the year on that front.

All right. Good. My other question is about the operating expenses, they came in a little bit lower, I think, than we were expecting. I was just wondering if there was anything unusual in there?

Yeah. I think what we did last quarter was is that we took the -- the -- we increased our reserves if you will recall by a significant number, that's why it reflects a lower expense number this quarter.

All right. Thank you.

Thank you.

Thank you.

I would like to remind everyone, if you would like to ask a question or if you have a follow-up question, please press star one. And we will go next to David Fick with Legg Mason. Please go ahead.

Good morning.

Hi, David.

Good morning.

I apologize if you covered any of this -- in this earnings season, there's multiple calls running simultaneously, so I'm putting them back and forth. Can you comment on what that spike was in your tenant reimbursements, what actually under -- you know, was the underlying reason it went to 99 versus 90 historically?

I think, David, part of it is the fact that we are recovering some of those, the improvements that we've made to those properties and so on and some of it could be a timing element, as such. So I think as we pointed out, we think it's more like the mid-90s range.

Right.

We have -- you know, I think that that probably is some of it and I think that we think that the year-end recoveries have some impact upon it, so it's a number of circumstances that basically build up to that number.

Okay. And on the Monroeville Mall, just following up on Craig Schmidt's questions. The Pittsburgh Mills project is about 15 miles away, I guess it's the closest project that -- that -- of size that will be, you know, competing with that, with Monroeville and for the first time it's got conventional department-store anchors on a Mill's project. How do you handicap that, you know, against Monroeville?

Yeah. It's -- I mean, yeah, it's 15 miles, but you probably know in Pittsburgh, 15 miles can take a long time to get there. And so from a driving time point of view, we feel like it it's really going to have minimal impact on the sales of the mall. Also, the Monroeville Mall, it's well established, it's been there for years, it's in a great trade area, it's been remodeled in the past 24 months. The new expansion really positions it to have a new slate of restaurants, a brand-new Barnes & Noble, and I think that it's -- it's well-positioned to retain its market share and then even to -- to increase its sales going forward. I mean, we think this mall will be a $400 a foot mall or better in the next 12 to 24 months and we think it's got a great future. Notwithstanding the -- you know, the Pittsburgh Mills project, which, you know, should -- should do well as well.

We don't disagree with that. I promise you there won't be any pieces written about it. Thank you.

Thanks, David.

Thanks on both fronts.

We will take our next question from Ian Weissman with UBS. Please go ahead.

Yes, good morning. Most of my questions have been answered, but just -- one quick question on the Monroeville Mall and what the potential impact from Pittsburgh Mills might be, but what do you -- what do the lease expirations look like over the next couple years at Monroeville?

Actually, in 2005 there's about 30,000 square feet expiring, 2006, about 40,000 square feet. So those 2 years total is about 16% of the space. So there's not a huge amount of -- of exposure there.

Okay. And just touching again on the -- talked a lot about the strength that you're seeing from retailers, which really would help drive NOI in '05. Maybe you could just address specifically, you know, which category of retailers are showing strength and specifically which retailers are -- which retailers are expanding in your market?

I think that lady's apparel is basically showing some good signs. I mean, it's hard to generalize because there are some people in -- in the ladies apparel business or the teenage apparel business that aren't doing that well, but basically by-and-large The Limiteds, the Gaps are doing well. I think jewelery likewise is seeing good growth there as well. The areas that, you know, continue to be -- not of concern, but aren't showing that the growth potential that you'd like to see are still the records, although we're seeing some come back as far as records go. The book stores, basically by bringing in the new big book stores like we have done on our projects in Madison, Wisconsin where we brought in the book store and like we're doing now in Monroeville, that should -- that should help as well. So I think by-and-large, we think that -- that the records area is one of the areas that's being hurt somewhat. Cards are having some struggles as such, but hopefully they'll find -- reinvent themselves and do as well as possible. But I think it's -- you need to keep in mind that retailers are the -- are the most-creative guys in the business and we're continuing to upgrade our -- and put in better stores in our malls, and we're making certain that our malls are going to stay competitive and dominant in the market areas that they serve.

Thank you for that. We also have heard a little bit this quarter about, you know, discounters coming to the mall. We've heard Wal-Mart Supercenters open up in Michigan. I've even heard one of your peers talk about Costco coming to the mall. Do you feel like you're in a position where, you know -- in a traditional department stores are just not coming to the mall and you're really looking to expand with Supercenters and Costcos and Targets into your centers?

We've had Wal-Marts attach to our malls in the past, which for the most -- well, which all of them have ended up moving out and going to free-standing Supercenter locations. And while Wal-Mart did a lot of business at the mall, they -- they didn't really encourage much -- much cross-shopping. And we've got Target attached to a couple malls, Kohl's. So it's not really a new thing for us maybe because of the -- you know, the markets that we've operated in. Today we don't have any anchor spaces available at our malls and we do have some pads, but, you know, I think that we -- we've got good working relationships with Wal-Mart and Target and Kohl's and Costco and all the boxes, primarily through our community center work and if there's an opportunity and it made sense in the market, that we would explore it. But I don't see this becoming a huge trend going forward.

Well, let me rephrase my question then. What's your opinion of a Costco and a Wal-Mart Supercenter that sells groceries, what's your opinion of their place in the mall? And is it a benefit to the mall to drive traffic?

I think it -- it would drive traffic to the mall. I don't think it would necessarily drive traffic in the mall, because people coming to the Supercenter are buying food, they're not going to be hanging around. I think that, you know, one of the things that we're really pushing and I'm sure you're hearing this from -- from our peers, are adding restaurants to the mall. And I think that has a lot more value because the restaurants are bringing in people and there's a wait and it encourages shopping and entertainment value and the festive aspect that they create, and I think, you know, that -- that is a lot more of a -- of a priority for us than -- than adding boxes to the mall.

Okay. Thank you very much.

At this time, there are no additional questions. Mr. Lebovitz, I will turn the call over to you, sir, for closing comments.

I'd just like to again thank everyone for their participation this morning, we realize it's been a busy week and it's a busy morning so we appreciate your time. And we look forward to seeing any of you if you're down our way or at any point over the next few weeks. Thank you again.

This will conclude today's conference call. We do thank you for your participation, and you may disconnect at this time.