CBL & Associates Properties, Inc. (CBL) 2006 Q2 法說會逐字稿

Good day and welcome to the CBL & Associates Properties Inc. conference call. Today's call is being recorded and will be available for replay started starting today at 1:00 PM Eastern time and running through August 10th at 8:00 PM Eastern time by dialing 719-457-0820 and entering the confirmation code 4049863.

At this time for opening remarks, I would now like to turn the conference over to the President, Mr. Stephen Lebovitz. Please go ahead sir.

Thank you and good morning. We appreciate your participation in the CBL & Associates Properties Inc. conference call to discuss second quarter results. Joining me today is John Foy, the Company's Chief Financial Officer, and Katie Reinsmidt, Director of Investor Relations, who will begin by reading 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 adjusted to account to the two-for-one stock split of the Company's common stock and based on a fully diluted converted share.

Also references made to community centers are only those that are wholly owned or owned in partnership by CBL & Associates Properties Inc.. 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 operation included therein for discussion of such risks and uncertainties.

A transcript of today's comments, including the earnings release and additional supplemental schedules, will be furnished to the SEC on form 8-K and will available on our website. This call will also be available for replay on the Internet through a link in our website at CBLProperties.com. This conference call is the property of CBL & Associates Properties Inc. Any redistribution, retransmission or rebroadcast of this call without the expressed 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 measure and a reconciliation of each non-GAAP Financial measure to the comparable GAAP financial measure will be included in the earnings release on the form 8-K.

Thank you, Katie. Despite the slower growth rate in the economy, higher gas prices, and the concerns over the housing market, our properties performed well in the second quarter. As we stated in our earnings release, we reported FFO growth of 7% for the second quarter, as compared to the prior-year period. Same-store sales increases were healthy at 3.8%, and same-center NOI growth was strong of 4%. We're continuing to see demand from both retailers and consumers and expect to continue our strong performance throughout the remainder of the year.

During the second quarter, we announced a reorganization to consolidate our Development Division and create a dedicated development leasing team. The new structure was implemented to enhance our accelerating new project pipeline. This new team will solely focus on building more new projects and insuring the continued success and quality lease-up of our developments.

We continue to actively seek new opportunities for buyable ground up developments and expansion opportunities. Today our development team is hard at work on an impressive future development pipeline of over 9.5 million square feet of projects opening over the next few years, representing an investment of over $1.2 billion. These projects are in various stages of development or predevelopment and include large open air centers, community centers, joint ventures, associated centers and lifestyle centers. Although some of our more recent growth has been fueled through acquisition, CBL has always been a development-focused company and we are committed to continuing to produce quality retail projects.

We've announced developments totaling approximately 2 million square feet scheduled to open in 2006, representing an investment of $221 million. These include High Point Commons, a 300,000 square foot community center development in Harrisburg, Pennsylvania, scheduled to open in the fourth quarter. This project is a 50/50 joint venture with High Real Estate Group of Lancaster, Pennsylvania and features Target and J.C. Penney as anchors, as well as approximately 73,000 square feet of shop space . This project is 87% leased and committed.

In Stillwater, Oklahoma, construction is well underway on Lakeview Point, a 207,000-square-foot community center. This shopping center will be anchored by Belk, Ross Dress for Less, Linens 'n Things, Petco and Pier 1. The center will offer shoppers over 70,000 square feet of additional shops and is scheduled to open in the fourth quarter. This project is 85% leased and committed.

We have leased and committed over 70% of the space at the shops of Pineta Ridge, our community center in Melbourne, Florida. This development has a 140,000 square foot Home Depot, which opened earlier this year, and 30,000 square feet of shops space. These shops are scheduled to open in October.

We opened the 59,000 sq. ft. 16-screen CineMart theater in June at the Plaza at Fayette Mall, the new 190,000 square foot associated center adjacent to our Fayette Mall in Lexington, Ky. Construction is continuing on the remainder of the center, which will include as anchors a 60,000 square foot Gordman's, Guitar Center, an Old Navy, and approximately 40,000 square feet of small shop space and restaurants. This project is 86% leased and committed and will open in the fourth quarter.

Construction on phase two of Gulf Coast Town Center in Fort Myers, Florida continues to progress with Belk, J.C. Penney, Bass Pro Shops and BestBuy opening this fall. We've recently announced a number of quality restaurants and shops for this project and leasing is continuing to go very well. The first two phases of the project are currently 85% leased and committed. Additional anchors and small shops will open later in the year and in the first quarter 2007.

In addition to our ground-up developments opening in 2006, we have been extremely active in expanding the retail and restaurant mix at our existing mall properties. In April we opened Dillard's and Gordman's at South Haven Town Center in South Haven, Mississippi, as well as Starbucks and Salsarita's Fresh Mex at Cross Creek Mall in Fayette, N.C.. In May, we opened PetSmart at Coastal Grand Crossing in Myrtle Beach, South Carolina. In July we opened Dick's Sporting Goods at Haynes Mall in Winston-Salem, North Carolina. Later this month we'll open Starbucks and [PayWay] diner at Cary Town Center in Cary, North Carolina. At Fayette Mall in Lexington, Kentucky, we added an Abuelo's Restaurant earlier this year and will open PF Chang's in the fall. At Hamilton Place Mall in Chattanooga, we will open a PF Chang's and Big River Grill in the fall.

Adding additional retail and restaurants to our mall properties allows us to meet the growing consumer demand in our markets and solidify our properties' market-dominate position over the long term.

We have two redevelopments under construction. At Cary Town Center in Cary, N.C., we're converting existing mall space into an exterior oriented lifestyle element with front-end parking and a streetscape atmosphere. New high-end retailers such as Chico's and Coldwater Creek will open in the redeveloped section. This project is currently under construction and is slated for completion in the fall of this year. The project is 100% leased and committed.

At Hamilton Crossing, an associated center in Chattanooga, we're redeveloping the center with a lifestyle facade. We opened Guitar Center earlier this year and will open World Market in September.

For 2007 and 2008, we have announced over 2.4 million square feet of development projects, representing a total investment of $368 million. We recently announced and started construction on a new 50/50 joint venture project in York, Pennsylvania, with High Real Estate Group. Yorktown Center is a 291,000 square foot project anchored by Dick's Sporting Goods, BestBuy, Ross Dress for Less, Staples, Bed Bath and Beyond, and an additional junior anchor, and will offer 84,000 square feet of shops and restaurants, including Ulta cosmetics, Chili's and Longhorn Steakhouse. This project is approximately 70% leased and committed and will open in fall, 2007.

We also announced a new lifestyle expansion at CherryVale Mall in Rockford, Illinois. Construction will begin early next year on the 82,000 square foot addition called The District at CherryVale Mall, which will include upscale fashion retailer Coldwater Creek, Granite City Food and Brewery, a national bookstore along with 10 additional first class stores and dining options. The District is scheduled for completion in late fall 2007 and is currently 81% leased and committed.

We have two other lifestyle auditions currently under construction, including the Shops at St. Claire Square, an 84,000 square foot lifestyle centered that will adjoin our 1.1 million square foot St. Claire Square Mall in Fairview Heights, Illinois. The project includes retailers, such as Barnes and Noble, Ann Taylor Loft, Aveda, Banana Republic, Chico's, Coldwater Creek, J.Jill, Jos. A. Bank, and Talbots. The development is approximately 86% leased and committed and is scheduled to open in spring 2007.

The other lifestyle addition is at Valley View Mall in Roanoke, Virginia, which will include a 76,000 square foot lifestyle wing called The District at Valley View. The project will include Barnes and Noble, plus fashion retailers and restaurants, including Carrabba's, Abuela's, Red Robin and Panera Bread. The District is currently 63% leased and committed.

Development projects opening in 2007 include Burlington, North Carolina, where construction continues on Alamance Crossing, an 840,000 square foot open-air lifestyle center. This development will be anchored by Dillard's, Belk, Barnes and Noble, Sportsman's Warehouse, two additional anchors and will offer shoppers approximately 170,000 square feet of small shops, including Ann Taylor Loft, Chico's, Children's Place, Coldwater Creek, New York & Co., and Yankee Candle.

The 622,000 square foot first phase of the project will open in fall 2007 and is currently 67% leased and committed. Phase two is expected to open in 2008.

During the quarter we started construction on Milford Marketplace, a 112,000 square foot lifestyle center anchored by a 30,000 square foot Wild Oats Natural Marketplace. The center is located in Milford, Connecticut, and will feature an outstanding lineup of retailers, including Ann Taylor Loft, Coldwater Creek, Chico's, White House Black Market, J.Jill, Jos. A. Bank, Blue Tulip, Tengda Asian Bistro and others. The project is 70% leased and committed and is scheduled to open in summer 2007.

Leasing is progressing well at Pearland Town Center. This 700,000 square foot lifestyle project is located approximately 20 miles south of Houston in Pearland, Texas. This center will feature Dillard's and Macy's as anchors, Barnes and Noble, several junior anchors, and approximately 300,000 square feet of small shop space. This project will also include office, entertainment, hotel and multifamily components. Construction will begin in the fourth quarter with a scheduled opening of 2008.

As we previously announced, we will spend approximately $69.2 million on eight mall renovations in 2006. Cool Springs Galleria's renovation was completed in May. Six of the other malls their upgrades this fall and one will be completed in early 2007.

In the second quarter, we signed approximately 566,000 square feet of leases in our operating portfolio, including 255,000 square feet of new leases and 312,000 square feet of renewal leases. This compares with 583,000 square feet completed in the second quarter 2005, of which 297,000 square feet were new leases and 286,000 square feet or renewals. We also completed approximately 447,000 square feet of leasing for development projects in the second quarter. This compares with approximately 435,000 square feet of leasing for development projects in the second quarter, 2005.

For total leasing of space at 20,000 square feet and less, we achieved an average increase of 6.3% over the average base rent per square foot of expiring leases in the quarter. For same-space leasing, we achieved an average increase of 9.1% over the average base rent per square foot in the prior leases. During the quarter, rental increases new the leases for average space rents in stabilized malls were very strong, at 24.4% on a same-space basis, and 17.5% on a total leasing basis. Renewal leasing was down 1.5% on total and same-store spaces during the quarter.

The decline in renewals was primarily due to a handful of deals. We completed renewals on approximately 22,000 square feet of Spencer Gifts stores at significantly reduced rents. The new leases were for one and two-year terms. We also completed two bookstore renewals and two music store during the quarter at reduced rates. Excluding the Spencer Gifts, music and bookstore leases, renewals spreads for average base rent on a same-space basis would have increased over 6%, and overall same-space leasing spreads would have been over 14%.

Although these deals have impacted our leasing spread reports, signing these deals on a one or two-year term allows us to keep the space productive until a replacement tenant is secured. Stabilized mall occupancy at the end of the quarter was 91.4%, an 80-basis-point decline over the prior-year period. The decline in mall occupancy during the quarter was primarily due to the store closures from Casual Corner and Music Land. Excluding these vacancies, stabilized mall occupancy would have increased 120 basis points to 92.6% at quarter-end. We have made significant progress on back-filling the 147,000 square feet of vacant Casual Corner's spaces and have over 50% of the space leased in committed. However, the occupancy numbers are still being impacted, as only three stores totaling 7,500 square feet were opened in the second quarter. The remainder of the replacement tenants will open over the next few quarters.

Total portfolio occupancy at June 30th, 2006, declined 50 basis points from the prior-year period, to 91.4%. Occupancy in the associated centers declined 200 basis points to 91.8% at quarter-end. The decline in associated center occupancy was primarily related to one large furniture store leaving at Hartford Annex in Bellaire, Maryland.

New bankruptcies were insignificant, with only -- in the quarter, with only one bankruptcy resulting in a store closure. Year to date, we have been impacted by 41 store closures due to bankruptcies, representing $2.9 million in base rents. In the prior-year period, we had 18 stores close, representing $968,000 in base rents.

Same-store sales for those tenants reporting for the trailing 12 months ended June 30th, 2006, for mall shops 10,000 square feet or less in stabilized malls increased 3.8% over the prior year, to an average of $335 per square foot. Occupancy costs as a percent of sales were flat at 13.7% for the second quarter of 2006, compared with the prior-year period.

I will now turn the call over to John for our financial review.

Thank you, Stephen. In the second quarter, we completed the previously announced sale of five community shopping centers to Galileo for $106.5 million. We recorded a gain of $7.2 million related to the sale, which was included in net income but excluded from FFO. Proceeds from the sale were used in a tax advantageous 1031 like-kind exchange to repay the $102.9 million term loan on Layton Hills Mall in Layton, Utah, acquired by the Company in November, 2005.

Subsequent to the quarter end, we completed $370 million in four individual new financings secured by four malls. The new loans are ten-year non-recourse with a weighted average interest rate of 5.96%. The new loans replaced one fixed-rate loan and three floating-rate term loans, totaling $249.8 million that were scheduled to mature in the first half of 2007. These financings netted $64.7 million of excess financing proceeds that we used to pay down outstanding balances on our lines of credit. After these transactions, the Company's variable rate debt has been reduced to approximately 20% of total debt.

In the third quarter 2006, CBL will incur a one-time expense of approximately $630,000 for prepayment fees and write-offs of unamoritized deferred financing costs, which will be reflected in GAAP, net income and FFO.

During the second quarter 2006 FFO per share increased 7% to $0.76 per share, from $0.71 per share in the prior-year period. In the second quarter, FFO includes approximately $2.4 million, or $0.02 per share from lease termination fees, compared with none in the prior-year period. We recorded approximately $2.9 million, or $0.02 per share in gains on out-parcel sales in the second quarter 2006, compared with $0.05 in the prior-year period.

49% of the quarter's increase in FFO was attributable to internal sources and 51% to external sources. Additional highlights for the quarter included same-center NOI increased 4% for the quarter and 3.6% for the six months ended June 30, 2006. For the quarter, G&A represented approximately 3.8% of total revenues, compared with 4.5% in the prior-year period. Our cost recovery ratio was 105.1%, compared with 104.9% in the prior-year period. The cost recovery ratio for the remainder of the year should be within a range of 100 to 102%.

Our debt to total market capitalization ratio is 48.2% at the close of quarter as compared with 40.3% at the close of the prior-year period. Variable-rate debt represented approximately 12.1% of total market capitalization at quarter-end and 25.1% of total debt.

As I mentioned earlier, the recent refinancings we have completed have reduced our level of variable-rate debt significantly. Our EBITDA-to-interest-coverage ratio at the end of June was 2.4 times compared with 2.72 times for the prior-year period. As indicated in our press release, we are providing guidance for 2006 FFO per share of $3.31 to $3.36 per share, which excludes the impact of any announced acquisitions, future gain on the sale of out-parcels, future lease termination fees, and gains on sales of non-operating properties, and is based on 2006 same-store NOI growth of 2.5 to 3.5%.

Second quarter results met our expectations. We continue to have a positive outlook for the remainder of the year and maintain our focus on maximizing growth opportunities in our portfolio of market-dominant malls. As Stephen mentioned earlier, this year we have made a number of significant improvements to our existing portfolio through renovations, redevelopments and expansions, which will help to drive our internal growth. The stable growth in our markets continually provide us with new opportunities and allow us to bring our shoppers some of the most in-demand retailers and restaurants. We are excited about the future of our company and look forward to continuing to produce strong results.

Thank you again for joining us today. We appreciate your continued support and would now be happy to answer any questions you may have.

[ OPERATOR INSTRUCTIONS ] We'll go first to Paul Morgan with Friedman, Billings, Ramsey.

Good morning. Any comments about the Belk Saks deal and implications in your areas? Since you have a lot of both of those in your malls.

Sure, I could just give you the stats and let you know what we know. At this point, it's very new since it was just announced yesterday, but we have seven Parisians in our portfolio that Belk will acquire. It's a total of 929,000 square feet. Of that, 281,000 square feet they own, and the rest, 647,000 square feet, are lease spaces. And the malls that are affected are Hamilton Place in Chattanooga, Parkway Place, and Madison Square at Huntsville, Arbor Place in Atlanta, Cool Springs in Nashville, Citadel Mall in Charleston, and Laurel Park Place in Livonia, Michigan.

And what Belk has told us is they're going to convert the Parisians flags to Belk in the third quarter of next year and in three of the malls -- Hamilton Place, Madison Square and Citadel -- Belk will end up with two stores because of the acquisition. Actually in Chattanooga, it's three stores and we anticipate working with them to come up with replacements or they'll work with other retailers directly to either sell or lease those stores. So those are all good solid properties and we think there's good demand for the spaces.

And I think, like what we've seen with these other department store acquisitions, that it's an opportunity for us to bring in new retailers, to enhance the properties, and it ends up being a plus for the shopping centers at the end of the day.

In the ones where there's overlap, are those leased or owned?

I'll have to look it up.

OK. You mentioned the renewal spreads, and correct me if I'm wrong, but you seemed to attribute them to Spencer's renewals. You know, this came up last quarter in terms of The Limited and it seemed logical at the time that you would work to keep The Limited in. It's less logical to me why you would work to keep Spencer's in the mall. I mean, it may be going into a little bit of detail but it would suggest to me that there's not a lot of other takers, if you're working to do a short-term deal for a company that doesn't really draw a ton of traffic to the property. Can you explain why you'd be willing to do that for them?

The Spencer Gifts was about 22,000 square feet. It was 11 deals and they were -- their business has really falling off and it pushed their occupancy cost up to, in some cases, 20%. So as the renewals came up1, we looked at each case and depending on the space, we did short-term renewals, in almost all these instances, to give us time to come up with a backfill if we didn't have someone in place to do so. And we looked at each of the deals and made what we thought was the best determination for the property.

One of the things though about the lease spreads that really is almost an unfair type way of looking at it is we did a deal -- I'll just give you an example -- we did a Limited deal that I didn't mention in the conference call, with Limited Express. It was a one-year renewal at one of our malls. We've got a tenant to come in and replace Limited Express at favorable economics. Short-term for the year we took a big hit on our leasing spreads, but we're just keeping -- basically keeping the space occupied for this year so we can work with the timing with the replacement. When we looked at the leasing spreads, on the ones where we had the decreases, there were almost all one or two-year renewals, where it keeps the occupancy and income flowing while we can come of with a better retailer.

So a couple of deals or a couple of situations distort it and create lower spreads. We're very focused on it. Our leasing team is working to really push up the incomes across the board, but a couple of deals can bring the results down.

We'll take our next question from Jonathan Litt with CitiGroup.

Hi this is [Sandy Bigelow] with John Litt. I have a couple of questions. First off, G&A looked low in the quarter. Is there anything in particular that was driven that?

Yes, happened is that the Galileo transaction helped us lower that, and the other thing that occurred was capitalized overhead went up significantly -- went up, but it didn't go up add significantly as the new developments went up. Our new development pipeline went up 128% over the prior-year period, whereas our capitalized overhead only went up around 75%. So those two things drove the lower G&A number. We knew that the Galileo transaction was going to occur and drive that down and when we did the transaction, we announced that as well. We also feel that with our focus on the development pipeline, that the ability to get even more cost-efficient on the development side is reflected by the fact that development pipeline has increased significantly, much, much more so that our capitalized overhead.

So you see the 9 million more of a run rate going for? 9.1 million?

Yes, I think that's probably the correct assumption at this stage.

OK. And that also for interest rates, what is estimated in your guidance for LIBOR for year-end?

I don't think we give that guidance, but we feel comfortable with the guidance and our total overall guidance has taken into that number. So there's a number of factors that go into what we've come up with as far as guidance and that's it -- may be some reason why people maybe felt that our guidance should have been stronger, but we have basically -- maybe the word is baked into our guidance members the fact that we think interest rates are going to increase somewhat.

We'll take our next question from Scott Crowe with UBS.

Morning.

Hey, Scott.

You mentioned, I think, that you've released about 50% of the Casual Corner space. Can you just comment on the rents that you're achieving for the space versus what was in place, please?

Yes, I think we're making good progress, as we said, on a square footage basis. And I think that the interesting thing is that as you see these new retail concepts coming along, that they'll fill up that space. And we also feel that's really one of the reasons we did the short-term thing with Spencer's Gift is that with these new concepts that are coming out from these retailers, these guys want to open those stores in the next year, so that's what's happened there. As far as the exact Chico spreads, Stephen has those.

For Casual Corner, The other deals that are executed, the rental increase is just under 35%. And then for committed deals, where the leases are out for signature, the increases are 34%. So we're getting very strong increases from this the spaces and getting good retailers to come in, as well. So it's coming along. And like I said in the call, the retailers are going to be opening over the course of the rest of the year, so we'll be able to get the occupancy improvements, as well.

OK, thank you. And secondly, I noticed that your tenant allowances are running at about $60 million year-to-date and I think guidance was for 50. Are you still comfortable with the 50 guidance or do you think there's some room to come down a little bit?

Yes, it's in line with last year. It's going to be a little higher in the second half of the year, Scott.

OK, thank you. And lastly, we've seen a lot of I suppose public-to-private sort of transactions in most spaces, except for the mall space. Do you think that that same sort of dynamic exists in the mall space at the moment between sort of the fact that the private market is valuing assets at sort of higher values than the public market?

As you say, it's not occurred in the mall sector and I don't see that there's any time horizon that it's going to occur. I think the interesting thing is that the management team at CBL has increased its ownership over the year by about 232,000 shares, which is about an $9 million investment by us in the Company, so you can see that management is really focused and we're committed to what the Company is doing.

Do you think there is a valuation discrepancy between the private market and the public market for a company?

Yes, no question about it. I think that's viewed by the recent renegotiations with our lines of credit, where lenders have basically recognized that the cap rates on our properties has gone down from the determination of gross asset value, so that's not just our view of it, it's the line banks who are so committed to us that have basically shown that, as well. So I think there's no question the market does not appreciate what's going on within our company. And I think that we'll continue to grow the Company in the same fashion we have done in the past. Maybe acquisitions will play as significant of a role, but as Stephen pointed out, our development pipeline is probably as good as it's ever been and continues to show increased growth there, as well.

And, as in the past, we've found that as interest rates go up, our ability to do developments has really -- gets better because the need for equity and things such as that on smaller developers creates some problems for them that would create more joint-venture opportunities for us, as well as retailers recognizing that we can deliver develop the product on a timely basis to them. So I think that future bodes well for us.

Our next question, Lou Taylor with Deutsche Bank.

Good morning, John. John, can you talk a little bit about your property taxes. They look like they grew year-over-year faster than the other expense items in your revenue. Anything unusual there from a timing or rate perspective?

Yes, Lou, what I think occurred is that if you look at the acquisitions and everything, they probably grew about in line with that. So property taxes have gone up because of acquisitions, but in turn, our recapture and recovery from our tenants continues to go up, as well. So it's not something that's alarming or significant to us in that respect. We do contest and want to keep our occupancy cost as a percentage. We actually want to watch those and really look at it and keep those down as low as possible because it all goes into occupancy costs.

OK. Can you guys also talk about your predevelopment pipeline and give us a sense for dollars and maybe timing of starts over the next 12 to 50 months?

Lou, that's going to buy filed in our supplemental, but Stephen can give you some updates on that. Or we can give you some of the information now.

Well, what I said -- and I don't know if you caught it -- in the conference call script was that we have a pipeline of roughly $1.2 billion of projects that we're working on that we expect to come on line about 9.5 million square feet. So what we put in the supplemental are the projects that we announced, that we've started construction on. And until -- other than Pearland, which I think is the only one that we haven't started construction on that we haven't announced -- well, and CherryVale we announced and that will start construction early next year, as well. The other projects in the pipeline, we haven't announced them. So we can't give you today any specifics as far as the cost or the square footage. But we're looking to bring on this pipeline over the course of the next three years or so. So we expect over the next six months to be able to announce most of these projects.

Our next question, Matt Ostrower with Morgan Stanley.

Morning, Could you just -- on the guidance against just help me understand a little bit. You've basically kept the guidance flat. Not just this quarter, I guess you raised it a penny in the first quarter but you booked a bunch of lease term fees in the first quarter. You booked four pennies of lease term and land sale gains this quarter. Is that -- am my reading that right that, that sort amounts to effectively a guidance decline a little bit? You implied a little bit in your statement that interest rates going up may have been the driver behind you're not willing to raise guidance, but were you really assuming sort of a flat variable rate environment when you first give guidance early in this year? Are there some other assumptions that are changing here that are making you more pessimistic?

No, I don't think so. I think where we are on our guidance is we basically have stayed flat from our initial ones. We've increased that as a result of the lease termination fees and the other things that we've announced, but we basically think what impacts us in the second half of the year is that those transactions, the acquisitions really occurred in that fourth quarter. And in addition to that, we've lost that rental income from those tenants that we took the lease termination fees, which impact us over the rest of the year. I think we're very positive with regard to the outlook. I think that our markets are performing well and we're not negative in any respect and we should continue to see excellent retail demand.

OK, and then without getting into too much detail, I guess, but obviously the releasing that you're doing so far on Casual Corner sounds pretty compelling. Just to reiterate, you expect that to continue, those kind of spreads should be sustainable or something around there for the remainder of that. And the Spencer space that you described, is that also going to be a similar kind of story? There's a little bit of a lag here to get the temporary -- to hold the space for a year or two, I guess, but will you expect to see good spreads on that, as well?

John Foy? Well, the Spencer's stuff, what we did as part of the rent renewals is we were able to negotiate lower breakpoints on percentage rent. So what we're hoping is that their business will come back and that we'll, through percentage rent, be able to get back to levels we were at before and that they'll stay as a viable retailer. They're not Chapter 11 and I think financially they're in good shape. So we're working on backups for the spaces, but we're also hoping that their business will improve in certain locations, as well. So it's a little bit [audio breaks up.] As far as the rest with Casual Corner, their all good spaces right on the 40 to 50 yard line locations in the malls. We've gotten good demand and we expect to see continued success in releasing those.

Matt, I think in a generalization, it's hard to generalize because I think as we see specific retailers come along that we think add to the tenant mix, it's possible that it won't be as strong as we're doing on some of these. But the overall, I think that's what we look at is what it does from the standpoint of increasing the tenant mix -- improving the tenant mix, bringing in new retailers, which we think is very important. That's totally consistent with the money we've spent on upgrading and renovating our malls and that's what's attracting these new retailers, as well as the new concepts. So I think it's tough to generalize and say that what we've done on these previous spaces with Casual Corner will continue through, but we think that our NOI growth is good and we think that we're focused on the bottom line and we're focused on making certain that our malls stay the market-dominant retailing space in the markets they serve.

But the high spread there clearly aren't just the product of the easy stuff first and the most compelling space first?

Well, I think that helps somewhat but I think also Spencer's Gifts has some fairly good locations. I think where you really look at it is in the music stores, those spaces are larger spaces and toward the ends of the malls, so there we think what we do and the concepts that we've come up with can also drive that, as well. I think when you were here in Chattanooga, we had some spaces years and years ago that were really deep spaces at the end of the mall and we were able to bring in excellent retailers on the front and cut off the back and add self-storage, which has generated a lot of revenue for us and driven sales in some of those malls. So I think that creativity is so important in how you maximize these returns.

Our next question, Ross Nussbaum with Banc of America.

Sorry. Good morning, everybody. Couple of questions. First, Stephen, I just want to make sure the 1.2 billion number that you cited for the development pipeline, over what timeframe do you think that all comes on line? Because when I look at the development schedule, even if I put a value on the announced properties, I'm only getting to about half of that 1.2 number. So are we talking like a five-year timeframe?

No, I think we're looking for projects through '09 in that.

And I guess the next question, I don't know if Stephen or John wants to take this, is help me understand where the same-store growth is coming from because conceptually, I just look at the numbers and I see occupancy down year-over-year, releasing spreads combined are in the upper single-digit range. I guess I'm struggling to get to where you're pulling out 3.5% same-store growth from. Is it on the expense side?

Rents are up 9%, percentage rents are up and those things are occurring.

And is that number -- you're putting in the same-store NOI growth. Is that a cash or GAAP number, just remind me?

It's a GAAP number.

It's a GAAP number. Okay. And the other question I have -- this gets back to the releasing spread question I think you've touched on before -- is even if we exclude the couple of items that Stephen walked through in terms of the Spencer and the books and the music, the renewal spreads, I guess you said, were 7%. I guess I'm struggling to understand why that number is so vastly different than the rent spreads you're getting on the new leases. It almost seems, as an outsider, that you're saying to your existing tenants we'll give you a better deal than new tenants are getting if you stick with us. Can you just conceptually help me understand why new and renewal would be so different excluding those one-time items?

A lot of it is that we're taking effective rent and certain retailers won't even pay 100% of effective rent on renewal. As a policy, they'll pay 90%. So we're not necessarily getting 100% of effective rent in the renewals. So that's one item that impacts it. When we look at the list of all the deals, the renewal deals, it's just all over the place. And the negative ones that we focused on, if I give one example of that Express deal, but I could give six or seven examples and really, in those spaces, we're including every deal in our numbers and we're not taking out spaces that had been vacant for only a year or less. And we're not taking out short-term renewals. We're putting everything in the deals and showing really what the full picture is and each of these that have some kind of a low renewal, there's a story behind them. And it's bringing in someone new, it might be where we leverage to get a portfolio of three of four different deals across different centers. There just are scenarios or situations behind each one that impact them. And like I said earlier, we're focused on getting those numbers up and we think we can make improvement. We've made improvement this quarter and we're going to continue to do so.

Our next question, David Fick with Stifel Nicolaus.

Hey, David.

Hi, you've actually answered most of my questions, so I'll go back to an old standby. You guys have more exposure to Mexico than I think anybody else in the mall business, with four projects right there. And a high dependency on cross-border traffic. How is that going this year? Is there any change because of the sentiment issues around immigration? Are the Mexican sales numbers still there?

Yes. I mean, the sales at those malls this year have been strong. And they continue to be. Mall del Norte in Laredo is up 6%. Just kind of going across some of the other -- Imperial Valley, right on the border, has had a really strong results since it opened. Our mall in Del Rio, which is a small mall but it's 97% leased, which is the highest it's ever been. Brownsville up over 5%, so the sales have been really strong at the malls and we haven't seen any impact. Even if you look at Laredo and they've had a lot of problems across the border and it hasn't impacted the mall. We opened Circuit City in the former Montgomery Ward's and we've got a deal for the rest of that space that we'll hopefully be able to announce in the not-too-distant future that will bring additional traffic. There's a lot of strong interest there, so I'd say it's worked out well for us.

OK, and then one other detail in the accounting. I'm not sure if you answered this or not but your reimbursement rate of 105%, what should look for for the rest of the year in terms of modeling that?

We said 100 to 102, David.

I'm sorry I missed that. Thank you.

That's okay. Thank you.

Next to Dave [Osterbaum], with A.G. Edwards.

Good morning. John, you mentioned that [Mansion] has increased their stock ownership over the last several quarters. Given your other investment alternatives -- and I guess at this point it's primarily development centered -- at what point does it make sense to invest the Company's own capital to buy back stock or sell assets at the discounted valuation relative to the public markets and use that capital to buy back stock?

I think we address that question at every one of our board meetings with our directors, as well, so thanks for bringing that up. We just finished the board meeting in which we discussed that, as well. I think that the board and management feels that so long as we feel that we have excellent opportunities to reinvest their capital and show growth in the Company, that we would continue to do that versus a stock buyback or sale of assets. I think we'll continually look at and will evaluate that on at least on a quarterly basis, or even more often than that with our directors, as well as our own projections and what we see as far as the growth of the Company. But we still see, with a very aggressive pipeline, that the use of our capital is pretty good at this time and the returns are fairly significant.

I might point out that if you just looked at the two refinancings we finished on those two acquisitions, we've got about in the range of $9 million of equity and we're getting about a 93% return on that, so our return on capital is very significant because we've been able to push up the rent and therefore we've been able to maximize the loan amounts to cover almost 100% of the cost of acquisition.

So if we can continue to do that, along with the development pipeline, I think that the board views it that that's probably the best use of our capital. But in no way would we say that we're not going to repurchase stock and so on. And in fact we have done some of that. We've redeemed some units throughout the year as some of our unit holders have come to us and said we've -- they wanted to convert, we basically bought back their units because it's been much more cost efficient for us.

Thank you.

Thanks, David.

We'll go next to Dennis Maloney with Goldman Sachs.

Hi, good morning. I was just wondering if you could comment on the acquisitions environment. Is there much of there? And then if you could address pricing. Are you seeing any movement in cap rates for Class B or C products?

Yes, most of the product out there is B/C malls, like you say. I think there has been some movement, although there haven't been a lot of transactions but anecdotally, there's probably been somewhere between 50 and maybe 75 basis points of movement, kind of reflecting what's happened with interest rates. And my sense is that almost all the transactions this year have been private buyers. From our point of view, there's some opportunities out there that we're still looking at, but we're being very selective and careful with pricing where it is, because we want to make sure that we get the right returns on capital that we should be getting.

Thank you for a much.

We'll return to Jonathan Litt with CitiGroup.

Hi this is Sandy. I have a question on the reimbursement rate. Year-to-date it's running at 104 to 105%. What makes you suggest that it's going to decrease to 101, 102%? What's going to change? And also, what's been driving to 104, and 105%?

What's been driving to that number is the fact that we've done these remodels and renovations, have enhanced that fairly substantially. What will change that and why our view and guidance on that is because as we move the portfolio from pro rata CAM to fixed CAM, that has the impact on it somewhat and that's the reason and the logic behind why we think it should shrink some as we get toward the year-end.

And what level are you for fixed CAM as a percentage of the total portfolio?

We're approximately 55%, anywhere from 50 and 60%.

Versus last year of about?

We were probably in the 40% range last year.

Okay, great. Thank you.

You're welcome.

We'll go to Lou Taylor with Deutsche Bank.

Stephen, I just want to go back to that development question. Of that 500 or 600 million that you still have in your pipeline, in predevelopment stage, if you will, ballpark numbers, how much of that do you think you'll actually start in '07?

Yes, I just can't tell you. The thing about these development projects is that we can feel really good about a project and get approved and get appealed by a government entity and get delayed for a year, so we want to be optimistic, but in development projects there are just so many unknowns that you can't control your destiny. So I'd like to give you a more definitive answer on it, but I just can't.

OK, thank you.

And the final question that we have holding is from Rich Moore with RBC Capital Markets.

Good morning, guys. Taking a look at fee income, John, where does that go from here and what's driving that? Is that development fee stuff at this point?

Yes, development joint ventures do that, Rich. It's good from that standpoint, that it does drive that fee income, but you have given up a portion of your project. That's the negative. What we're seeing though is -- and we think it's going to be a continuing trend -- that we'll see more joint ventures occurring over the years because of the need for equity by smaller developers and the rate risks that they see. We see these opportunities.

OK, that 1.7 million for the second quarter, is that a fairly good run rate does it pick up a bit?

It should pick up with the two joint ventures that we have in place, with the high development people, but we do have some of the joint ventures that have fallen off. So maybe the 1.7 -- it could decrease just a little, but it's right in that range.

It could come down just a little but it should perk back up some over the years as we add joint ventures.

OK, and sort of the same thing on land sales. You guys have obviously a big development pipeline. Do you see any change in your thinking about what land sale gains could be as you sell off some of these parcels, maybe over the rest of this year and on into next year?

I think that on each project you look at it and decide if you can force a ground lease, that's what you prefer to do. There's a new trend by developers to basically separate their out-parcels and do more self development on their out-parcels and then sell those maximize their value. I think it's a very transitional area and I think it just depends on each project and each tenant that you're dealing with.

OK, so if we model something similar to the second quarter in terms of land sale gains going forward, for the third and fourth quarter is that fair?

That's a fair number.

OK. And last thing, with all the private money out there chasing -- doing some kind of joint venture and getting landlords like you guys to manage the properties for them, are you contemplating anything like that, where you might JV some of your existing assets or find some other ones to put into a JV?

We've had a lot of people inquired and wanting to do that. At this stage, we've got tremendous amounts of capital. We've got a balance sheet that's well positioned. We have lines of credit that are in position, so the need for capital or the need for equity is not there and we just don't see it occurring. If they had something else to contribute or benefit the Company, then that would be something that we would look at, as well, but we've had discussions but we just didn't see any need for the capital and the right to own 100% of these assets and the upside potential in them has been the reason why we haven't.

And as an example, when we bought the Copaken Mall in Overland Park, Kansas, we had the opportunity to do the joint venture there and with our plans that we were working on there, we felt that we were better off to keep 100% of the mall with expansion and if we later needed to bring in a partner, we would get a better value for it at that time. So our capital, we have more than adequate capital and we'll just continue to explore what gives us the best return on capital and we're very focused on the ability to grow the company.

Great. Thank you, guys.

Thanks, Rich.

With no other questions holding, I'll turn the conference back to management for any additional or closing remarks.

We'd again like to thank you all for joining us this morning. Enjoy the rest of your summer and we look forward to speaking with you and see you soon. Thank you.

Ladies and gentlemen, that will conclude today's teleconference. We do thank you for your participation. We ask that you please disconnect your phone line at this time.