CBL & Associates Properties, Inc. (CBL) 2006 Q4 法說會逐字稿

Good day and welcome to the CBL and Associates Properties Inc. conference call. Today's call is being recorded and will be available for replay beginning today at 1 PM Eastern time and running through February 16, 2007, at 11:59 PM Eastern time by dialing 719-457-0820 and entering the passcode 7842885.

At this time for opening remarks I would like to turn the call over to the President, Stephen Lebovitz. Please go ahead, Sir.

Thank you and good morning. We appreciate your participation in the CBL and Associates Properties Inc. conference call to discuss fourth quarter and year end results. Joining me today is John Foy, 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 meanings of the federal securities laws. Such statements are inherently to subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events, 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 on a fully diluted converted share. We direct you to the Company's various filings with the Securities and Exchange Commission including, without limitation, the Company's annual report on Form 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.

A transcript of today's comments, earnings release and additional supplemental schedules will be furnished to the SEC on Form 8-K and will be available on our web site. This call will also be available for replay on the Internet through a link on our web site at cblproperties.com.

This conference call is the property of CBL and Associates Properties Inc. and the 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 Reg G. A description of each non GAAP measure and a reconciliation of these non GAAP financial measures to the comparable GAAP financial measures will be included in the earnings release that is furnished on the Form 8-K.

Thank you, Katie.

2006 was an actual (technical difficulties) and productive year for CBL. Our goal was to continue to attain the high-performance standards we have set for ourselves. Through careful execution of our market dominant shopper savvy strategy, we successfully met our goal of double-digit growth and FFO per share which we accomplished for the 10th consecutive year. We also posted healthy results at our properties including same-store sales growth of 3.3%.

Our leasing results improved in the latter part of the year as well, including higher leasing spreads. In light of the ramp-up of our new development program we streamlined our development team to maximize productivity.

In 2007 we will further enhance the strength of our portfolio through renovation, expansion and a continued focus on aggressive leasing. In addition, 2007 will be a banner year at CBL for new development. We have more than $500 million of development projects and process today, more than we have ever had in the past. A number of these projects will be coming online later in 2007 and we expect to begin seeing the benefits of this rampup meaningfully impact our results in 2008 and beyond.

We completed a number of development projects in the fourth quarter of last year that I want to briefly review. These include The Shops at Pineda Ridge -- a community center in Melbourne FL, shadow anchored by Home Depot which opened earlier this year -- and containing 30,000 square feet of shop space which is 90% leased and committed.

At Cary Towne Center in Cary, North Carolina, we completed the redevelopment of existing mall space into an exterior oriented lifestyle element with front end parking and a streetscape atmosphere. Coldwater Creek, Chico's and Soma -- Chico's new concept store -- opened in the redeveloped space.

In 2007, we are expanding and enhancing our portfolio with several exciting ground-up developments, expansion and redevelopment. With over 3 million square feet currently under construction and over 2.3 million square feet of projects set to open this year we have a lot to look forward to.

On March 15th we will celebrate the grand opening of the second phase of Gulf Coast Town Center in Fort Myers, Florida, our 50-50 joint venture with the Jacobs Group. With this opening Gulf Coast will offer shoppers nearly a million square feet of shopping including many new retailers to this fast-growing market.

Bass Pro Shops, Belk, JCPenney and Best Buy opened in the fourth quarter and 225,000 square feet of shops and restaurants will open this spring along with several junior anchors and Costco. Phase 2 is currently 91% leased and committed. Plans for the 87,000 square foot third phase of Gulf Coast are being finalized.

In Burlington, North Carolina, construction is continuing on the 626,000 square foot first phase of Alamance Crossing. This development will be anchored by Dillards, Belks, JCPenney, Barnes & Noble and a 16 screen West End Carousel Cinema and will offer shoppers approximately 170,000 square feet of small shops and a restaurant village. The project is over it 85% leased and committed and will open in fall 2007. The 195,000 square foot phase 2 is scheduled to open in 2009.

We also have a number of lifestyle centers that will open throughout 2007 including The Shoppes at St. Clair Square, located adjacent to our 1.1 million square foot St. Clair Square Mall in Fairview Heights, Illinois. The 84,000 square foot project includes Barnes & Noble, Ann Taylor Loft, Aveda, Banana Republic, Chico's, Coldwater Creek, J. Jill, Joseph A. Bank and Talbots. The development is approximately 94% leased and committed and will open this spring.

In Milford, Connecticut construction is progressing on Milford Marketplace, our 111,000 square foot lifestyle centers. The project is anchored by a 30,000 square foot [Wild Oats] and will feature Ann Taylor Loft, Coldwater Creek, Chico's, White House/Black Market, and others. The project is 80% leased and committed and is scheduled to open in September of this year.

We have two new community centers opening this year, including a development in Palm Coast, Florida. Cobblestone Village at Palm Coast is a 280,000 square foot project that will be anchored by Belks and a home improvement store. The project is already 88% leased and committed and is expected to open in October.

York Town Center, a 272,000 square foot community center located in York, Pennsylvania will open this September. This project is a 50-50 joint venture with high real estate group. York Town Center is anchored by Dicks Sporting Goods, Best Buy, Ross Dress for Less, Staples and Bed Bath and Beyond, and will include 50,000 square feet of shops and restaurants. This project is approximately 94% leased and committed.

We are enhancing a number of our malls by adding expansions and redevelopments that bring new, in-demand retailers and restaurants to the centers.

At Hartford Mall in Bel Air, Maryland, we have started construction on a 39,000 square foot expansion and redevelopment. The project will add to and convert existing food court space into an exterior-oriented lifestyle wing with additional retail and restaurant offerings. The project is 60% leased and committed and is scheduled for completion in the fall.

At Valleyview Mall in Roanoke, Virginia, we opened Carraba's and [Abela's] in the fourth quarter. The two restaurants are part of the new 75,000 square foot district at Valleyview Lifestyle expansion that is under construction. The remainder of the project will include Barnes & Noble plus fashion retailers and additional restaurants. This project is currently 70% leased and committed and will open this June.

The District at CherryVale, our new 85,000 square foot lifestyle expansion at CherryVale Mall in Rockford, Illinois, is also under construction. The expansion will include Coldwater Creek, Granite City Food and Brewery, Barnes & Noble along with 10 additional stores and restaurants. This project is scheduled for completion in late fall 2007 and is currently 88% leased and committed.

At Brookfield Square in Milwaukee, Wisconsin, we are adding a number of exciting new operations. Mitchell's Fishmarket and Claim Jumpers Restaurant will be added to the front of the mall joining during the recently opened Barnes & Noble and Bravo! restaurant. In addition we are in the process of adding a freestanding fresh market and a corner outparcel development anchored by Abelo's and Fleming Steakhouse plus 20,000 square feet of additional retail.

For 2008, our development program of new projects is active as well. We have already broken ground at Pearland Town Center, our new mixed-use development located 20 miles south of Houston in Pearland, Texas. The project will include over 717,000 square feet of retail space, a Courtyard by Marriott Hotel, office space and residential. This center will feature Dillards and Macy's as anchors, Barnes & Noble, several junior anchors and approximately 300,000 square feet of small shops. Pearland currently has more than 60% of the retail portion leased and committed and is scheduled to open in fall of 2008.

We also recently broke ground on our new office building in Chattanooga. The building will be located adjacent to our current office building. CBL employees will maintain offices in our current building and some of the existing non CBL tenants will move to the new building, which has a total building area of 76,000 square feet. Construction is scheduled for completion early 2008. The new building is currently 61% leased and committed.

Mall renovations and anchor redevelopments continue to give us great opportunity to improve the shopping experience at our properties. We completed seven mall renovations in 2006 for a total cost of $68 million. For 2007 we have mall renovations planned for four malls. Brookfield Square in Brookfield, Wisconsin; Honey Creek Mall in Terre Haute, Indiana; Mall del Norte in Laredo, Texas; and Georgia Square at Athens, Georgia.

The total estimated investments for the renovations is approximately $50 million. Anchor redevelopments allow us to bring an expanded selection of retailers to our centers.

At Mall del Norte in Laredo, Texas, we opened a Circuit City last year (technical difficulties) that will open in the spring. At Westgate Mall in Spartanburg, South Carolina we are adding a new Costco on the periphery of a former [profit] parcel. At Columbia Place in Columbia, South Carolina, we are replacing a former JCPenney location with a Stephen Barrys and Burlington Coat Factory.

At Citadel Mall in Charleston, South Carolina, we are replacing a former Parisian location with JCPenney. At Hamilton Place in Chattanooga, Tennessee, Dillards -- currently an anchor at the Mall -- purchased the Parisian location from Belk and we utilized the second building to expand its lines of merchandise.

Despite a mediocre holiday sales season, the leasing environment remains positive. And we are expecting to improve our occupancy levels throughout the year.

For 2006, we signed a total of approximately 4.8 million square feet of leases including approximately 2.7 million square feet of leases in our operating portfolio. The 2.7 million square feet was comprised of 1.1 million square feet of new leases and 1.6 million square feet of renewal leases. This compares with 2.7 million square feet, completed in the operating portfolio in 2005 of which 1.1 million square feet were new leases and 1.6 million square feet were renewals. We also completed approximately 2.1 million square feet of leasing for development projects in 2006.

For total leasing in 2006, we achieved an average increase of 9.6% over the average base rent per square foot of expiring leases in the year. For 2006 for same space leasing of 20,000 square feet and less, we achieved an average increase of 8.7% over the average base rent for square foot in the prior leases.

Total mall occupancy at the end of the year was 94.4% flat from the prior year. Stabilized mall occupancy declined 20 basis points to 94.5% from 94.7% in the prior year. Total portfolio occupancy at December 31, 2006 declined 40 basis points in the prior year period to 94.1%. Occupancy in the associated centers declined 50 basis points to 93.6% at quarter end. Community Center occupancy declined to 85.6% from 95.3%. The Community Center portfolio only represents approximately 2.6% of our portfolio's leasable square footage.

In the fourth quarter, we were impacted by two store closures to to bankruptcies bringing total bankruptcies for 2006 to 48 stores, representing 315,000 square feet and $5 million in gross rents. This compares with 23 stores comprising 97,000 square feet and less than $2 million in annual gross ramp for the prior year period. In 2007 we expect to see bankruptcy levels more in line with 2005.

We were pleased to achieve a 3.3% increase in same-store sales in 2006 to an average of $341 per square foot for reporting tenants 10,000 square feet or less in stabilized malls. Occupancy costs as a percentage of sales was 12.1% for 2006 compared with the prior year period of 11.8%.

As we announced earlier this week, we recently made our first international investment in China with Bain Capital as our partner. We: vested in subsidiaries of Jinsheng Group, a managing China based operator and real estate development company. Our original investment was $15 million and we had the option to acquire additional ownership with Bain for a combined investment of $7.5 million of which CBL would invest approximately $1.9 million.

We believe that this new partnership will lead to future investment opportunities in China where the growth in retail in the coming years will be phenomenal. We also will continue to explore additional international investment opportunities which may come to our attention.

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

Thank you, Stephen.

During the fourth quarter, we refinanced the construction loan at South Haven Town Center, our open-air center located just outside of Memphis in South Haven, Mississippi. The new loan is $46 million, a ten-year nonrecourse loan with a fixed interest rate of 5.5%. This loan replaces a $27.7 million construction loan which had a floating interest rate of 110 basis points over LIBOR, and was scheduled to mature in June of 2007.

During the fourth quarter 2006, FFO per share increased 14.6% to $1.02 per share from $0.89 per share in the prior year period. For 2006, FFO per share increased 10.1% to $3.39 per share from $3.08 per share in the prior year period after adjustments for a onetime gain and the income of $0.26 per share related to the Galileo transaction that occurred in the third quarter 2005.

FFO per share for the full year included a $0.14 per share of gains on outparcel sales and $0.12 per share in lease termination fees. This compares with $0.11 per share of gains on outparcel sales and $0.05 per share in lease termination fees included in the prior year period. Of the increase in FFO for the quarter, approximately 27.9% was attributable to internal sources and 72.1% attributable to external sources.

Approximately 28.8% of the increase in 2006 FFO was attributable to internal sources and 71.2% of the increase was attributable to external sources.

Additional highlights included same center NOI increased 20 basis points during the quarter and increased 1.9% for the year. Excluding lease termination fees for the fourth quarter of 2006 and 2005 of $443,000 and $1.9 million, same center NOI growth increased 1.1% for the fourth quarter 2006 over the fourth quarter 2005.

G&A represented approximately 4.2% and 3.9% of total revenues in the fourth quarter 2006 and 2005, respectively. For the year ended December 31, 2006 and 2005, G&A represented 4% and 4.3%, respectively, of total revenues. Our cost recovery ratio for the quarter and year ended December 31, 2006 was 104.2% and 104%, compared with 101.8% and 103.2%, respectively, in the prior year periods.

Our debt to total market capitalization ratio was 46.7% at the end of December compared with 47.8% at the end of the prior year period. Variable debt rate represented approximately 10.6% of the total market capitalization at the end of December and 22.6% of total debt. Our EBITDA to interest coverage ratio for the year ended December 31, 2006, was 2.6 times compared with 2.87 times for the prior year period.

As indicated in our press release we are providing a guidance range for 2007 FFO per share of $3.49 to $3.55 per share which assumes the same center NOI growth of 1.5 to 2.5%. The new guidance now incorporates an estimate for outparcel sales and the estimated impact to FFO and same center NOI from lease terminations and lease termination fees.

Previously we had excluded these items from our guidance due to their unpredictability. However as they are and will continue to be an important part of our business, we believe it is prudent to include these estimates. The 2007 guidance includes an estimate of $0.10 per share for gains on outparcel sales and a net impact of $0.03 per share for lease termination fees.

The lease termination estimate is net of the lost rent from terminated leases. These amounts are estimated based on current market conditions and historical performance, and represents our best estimate at this time. The guidance will continue to exclude the impact of any acquisitions.

Although our 2007 guidance represents more muted growth expectations than we have produced over the past few years, double-digit FFO growth in FFO remains our goal. We believe that our continued focus on reinvesting in our current platform along with our expanded development program will enhance our future growth profile.

We have many exciting things occurring today and more prospects on the horizon. You will continue to see us take advantage of the opportunities within our existing portfolio, to both expand and create new revenue generating space from underutilized parking fields, outparcels, innovative sponsorships and other new sources. 2007 marks the ground breaking of our fixed -- first mixed use development and our highest single year of development investment, currently totaling $336 million.

Although the acquisition environment remains constrained, we will continue to evaluate opportunities as they present themselves. This year promises to be a busy one for CBL on all fronts, and we remain focused on maintaining the integrity of our growth through solid investments in preeminent properties and developments.

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

(OPERATOR INSTRUCTIONS) Michael Mueller at J.P. Morgan Securities.

Just a quick guidance question here. John, I know you said $0.03 for lease term net of loss rents. Can you give us an idea of what the gross lease term number is and just kind of the follow-up on the guidance? Can you tell us whether or not the same-store growth expectations of 1.5 to 2.5% that does have the impact of lease term in there, correct? So it does factor in what happened in '06 in terms of lease term versus '07 as well?

Yes, it does. It does and the gross number is $0.05, Michael.

Thank you.

Jonathan Litt at Citigroup.

This is [M.B.] (inaudible) with Jon. Can you give an update on the progress for Casual Corner (inaudible). Basically what is the total square footage that has been leased so far and (inaudible)?

Sure, I will take that one. On the Casual Corner space, they closed just under 150,000 square feet of stores last year and we currently re-leased 70% of that which is a little over 90,000 square feet and our rent increases are 17% on that.

On Musicland, they closed about 120,000 square feet of stores; and we've leased a little more than half, about 62,000 square feet of that. And the rent spreads are flat on those.

And when is the rest of the leasing expected to take place?

I think it will happen over the course of this year. We feel confident, hopefully, in the center part of the year than the latter but by the year we are confident we will be past that. Like I said in my comments we are expecting to make headway on our occupancy this year and see increases compared to what we had this year or last year.

So what does guidance assume for occupancy ending at the end of '07?

We think we will be about 100 basis points higher at the end of '07 versus the end of '06.

Then going to G&A. G&A ticked up in the fourth quarter. Could you go over the drivers of that increase?

It was basically a number of items went into the G&A number that caused it to go up. Health insurance was up by about $300,000. Interest expense was up -- I'm sorry, not interest expense but bonuses and things such as that since we achieved the double-digit FFO growth was up as well.

Would you assume that there would be the same G&A for next year or 5 or 10% increase?

Using this year's, you would increase by about 5% -- G&A increase because of various things that are going on in the normal situation.

And then moving to China could you give some color on why CBL decided to go to China when you have so many developments going on in the U.S.?

Sure. Well, I think it's a couple of reasons. I think looking out into the future, we want to find new ways to drive our growth and we feel like we've got a real solid organization on the development front here in the U.S. that can handle the program there. I think looking out, that this is seeding and setting the stage for an additional platform for growth for us in the future.

The opportunity came to us through Bain Capital which is very highly regarded and respected; and we felt very confident that, in making an international investment with that kind of partner, it was a smart thing to do. That will lead to other opportunities hopefully with Bain and with other groups internationally.

So it was a combination of the opportunity coming to us and also us being open-minded and willing to look in that direction.

Christeen Kim at Deutsche Bank.

Just a follow-up on the question about China and Asia, in general, I guess. Is there any sort of infrastructure you are going to have to develop to explore these other opportunities out there?

Yes. One of the great things about this deal is it doesn't require us to set up our own infrastructure over there. We are going to monitor it. We have one seat on the Board of the company over there. But this is a fully functioning company with integrated capabilities in leasing and management and development. And that was one of the big attractions that we are really impressed with the company that we were invested in.

And what are the sorts of international opportunities are you looking at? Is it primarily Asia? Are you looking at maybe South America or elsewhere?

Yes. I can't really say anything specific at this point. It's interesting because since we made this announcement, we have gotten a lot of people calling and asking us what else we are interested in doing and throwing opportunities our way. But we are going to see what's out there and if something makes a lot of sense and has a real good financial outlook like this investment then we will pursue it.

Thank you.

Matt Ostrower at Morgan Stanley.

Just a question for you and then a follow-up on '07. But in terms of the quarter so your reported results trailed your guidance. right? If you sort of do all the math, you were guiding effectively to $0.96 to $1.01 in the quarter ex term fees and gains. And then you reported $0.95. If you agree with that, can you give me the quick and dirty?

I guess it seems surprising to me that lease term fees would be the cause of that miss, because your NOI for the year basically came in within your expectations. So I guess I was sort of wondering what the cause of underperforming your guidance was?

I think that we really hit the bottom line of that guidance without those outparcel sales and the additional lease termination fees, but basically abandoned projects as we gear up our development program and as we mentioned, we've got over $300 million of new developments under construction today you are going to have more abandoned projects and that was about $600,000 of it.

And then there was an impairment on the loss of the outparcel sale. There was a couple hundred thousand of it. Then the higher -- we had some higher interest expense of about $600,000 and the G&A was up about $300,000 which was a result of health insurance costs and claims on the health insurance policy.

So if you take all of those into consideration we hit the number, even without the outparcel sales.

And the G&A interest with those numbers you're giving were above and beyond -- that margin was above and beyond your expectations is what you are saying, right?

Yes. Health insurance is basically becoming a huge huge issue I think with everybody in the country today and we have focused on that and we've exerted new efforts with regard to containing and controlling those costs and that's one way we are watching that G&A and trying to bring that down as well. So that was an unexpected about $300,000 in additional claims and things that we paid out on that.

My follow-up on '07 just to understand. It's obviously lower guidance for growth than we are used to receiving. You never usually -- you've never, in the past, put acquisitions in your guidance so I will leave that out as part of your -- as a factor therefore it being lower.

Is it safe to say that simply lower net lease term fees is the driver of the lower guidance? I know that same-store growth of 1.5 to 2.5 is a little lower than you usually guide to but not -- doesn't seem like that is enough to explain the whole difference?

Yes, that's correct. The lease term termination fees that we projected for '07 is lower and we also think that interest expense will be higher as well. So, taking those into consideration and also taking into consideration the fact that our G&A will be higher, and also that we have a development program that, historically, as your pipeline or your construction of new developments goes up you're able to predict a little more precisely what the outparcel sales will be as well.

So taking all this into consideration and the fact that we abused you guys over the years by not giving you those numbers, we thought that we would change and become nice guys in that respect.

Thank you.

Christine McElroy at Banc of America.

I'm here with Ross Nussbaum as well. Can you comment in general about what you are seeing in the private market from all, just in terms of level of competition for deals and volume of activity, cap rates, etc.?

Sure. There's not a lot of activity of sales on the mall front that we have been looking at. There's a couple of properties that are on the market that are lower sales per square foot and low 200s that we haven't been pursuing and the other thing that we've seen is, that a couple of properties that we have looked at, the owners have opted to refinance versus sell, because the financing markets have been so strong, the loan to values that someone could secure are higher. And just when an owner runs the math, even with cap rates where they are, the refinancing is a more attractive option.

So it's not on a property level basis. It's not that active a market. I think there still are private buyers and lots of money out there. If something attractive did come on the market, then that would be a big source of competition for us if we were looking at something.

Where are you seeing cap rates?

I don't think cap rates have really moved. If anything they probably have moved down or stayed flat from where they were. Notwithstanding the fact that interest rates have picked up, it seems like hard assets are basically very, very much in vogue. I think that the situation with equity office what you've seen there is basically further evidence of it and then you add to that the mills and other things such as this and you just don't see anything that is going to change these cap rates in the foreseeable future.

Yes I think if anything, there's no transactions but expectations will be for lower cap rates going forward, just because of some of the transactions John was just talking about.

Would you consider selling any assets in this environment?

I think we would look to see how we could maximize returns to our shareholders and return on equity is always going to be a very important element of our business. As an example in South Haven, Mississippi, we mentioned that where we would refinance that, we were able to finance 100% of our costs on that project and would still have approximately $700,000 in cash flow. So our returns on equity are superb there and that is what we are focused on, is to maximize the return on equity because that is going to drop right to the bottom line to our shareholders.

So if the right opportunity comes along we definitely would be sellers and we are sellers every day on the New York Stock Exchange, as well. So it is an interesting business today and maximizing returns has always got to be our focus.

We are also, we are looking at certain assets and we are looking at redeveloping them. Selling is an option that we sometimes consider. So we don't close off any options and we are just like John said, trying to look at each property, look out into the future and position it for the best growth it can achieve.

Thank you.

Thank you.

Dennis Maloney at Goldman Sachs.

Good morning. Hey, John, just wondering in terms of your development pipeline beyond the products that you've announced, do you think over time it's more likely to be focused on redevelopment or how do you see the breakout or the mix between development and redevelopment longer-term?

I think that the new development, it has increased and is going to continue to increase. The redevelopment projects even though a lot of them, the dollars of them aren't as significant as the new development. So when you're looking at total dollars I think the bulk of the dollars probably 60, 70% are coming from new developments versus redevelopments.

The redevelopments are really a big focus for us and important for the properties. Just as an example, last year we added 18 restaurants and eight boxes as part of redevelopments of the malls and we've really pushed that because from the existing malls' point of view it's important competitively. All the districts, the lifestyle expansions that I've talked at the five different malls in my comments so, I mean that's a big push, but the dollars aren't as significant in that area as they are for the new projects.

And just as a follow-up to that could you talk a little bit about hurdle rates? I mean redevelopment, what makes sense in a new development? I'm just wondering what is behind the low yields at Columbia Place in Hartford. Are those purely defensive plays?

Well, Columbia, we are splitting an older JCPenney building and you get into a lot of cost in splitting a building. We would rather just be able to build from scratch but we've got to take out the center core, split the utilities. There was environmental remediation.

So there's a lot of just costs that, going to that, that drive down that return and, yes, I mean I think it's fair to say it was defensive because we don't want to have a vacant anchor in a project. So we felt like it was important to bring in two new new retailers that are going to do good business. They are going to help to improve the performance of that center and, Hartford, similarly the project is, it doesn't have as much scale. It's a smaller project so it's hard to generate the higher returns, given the GLA that we are adding.

We are also taking part of the food court and creating the exterior-facing lifestyle retailers as part of that. So again it drives down the cost.

For those projects I mean we definitely look at the returns, we load in all the fees that we usually load into a development project. So those returns that we give you include the development fees and management fees and full costs like it was a stand-alone project. Then we look at in the overall scheme of the project that will help the value and the cap rates. So I think it really makes sense when you look at it from that perspective.

And then more broadly from the hurdle rates, how much incremental spread pickup do you want new development versus redevelopment? And what makes sense for redevelopment?

I think that we -- we don't differentiate. We are trying to get double-digit returns although those are difficult with the higher construction costs and land costs that we have seen. And we are seeing it on a few of the projects but not as many as we would like but I think high single digits is what we are shooting for on every project, whether it's a redevelopment or a new development we don't differentiate.

My thought just was that redevelopment perhaps is lower risk therefore you are willing to take on lower rewards so to speak. So thanks.

Paul Morgan at FBR.

Just thinking about the tenant situation. You said you expected 2007 to be more like 2005. Are you saying that there's really not that many retailers on your watchlist for closings in the first half and then related to that, do you have -- have you seen whether you have much exposure to the demo closings?

I think we figured there's about eight stores that we have exposure to with Pacsun and Demo -- from a closing, we had 17 total and that's really hot off the press in the last couple of days. So we are not really sure where we are going to head with that.

But just in terms of saying it's more like '05. We don't have any major companies out there. Like last year, we knew Musicland was going to happen and Casual Corner, even though it went into bankruptcy we knew that was going to happen at this time.

This year we don't see anyone out there who is teetering on the brink and I think it will be more a couple of stores here, a couple of stores there. So we see that level closer to what it was a couple of years ago.

To follow up on that development question in terms of yield, I mean you sort of addressed just a second ago but we are seeing some of these initial yields in the low 7% range. I mean is that what we can expect or is there something because of land depreciation and construction cost for future announcements? Or is there something particular about these projects that are in the 7 range?

I think, yes, you are right. There are a few of them that are in the 7's but there are more that are in the 8's and the 9's. And I think that the 7's are going to be the exceptions. And it's a factor of, I mean, it definitely is impacted by the higher cost of land and construction. But some of these projects also -- we are looking at the ultimate growth that we are going to experience over time and the ultimate value that we are creating. We view that it's insignificant because of where the cap rates are these days and where we think they're heading.

Thanks.

Jeffrey Spector at UPS.

Good morning. Can you comment on the sales per square foot growth in the fourth quarter? It slowed down from 3Q and I guess what your guidance assumes for '07?

One of the factors that impacted us in the fourth quarter was the malls that were in the Gulf Coast area and in Florida in the first part of the year, they were having big sales increases compared to the prior period. But in the fourth quarter they were going up against real high comparables so they were flat to even down. Some of them were down back to more normalized levels. So that actually brought our sales growth for the fourth quarter down to 1.2% increase which -- for the year it was 3.3% and that brought that level down.

We were hoping that would be a little bit higher but we still think that was pretty good all things considered.

For this year, I think we are looking at 3 to 4% sales growth. It's a little early to say. The January sales that came out yesterday were pretty good for most of the retailers and so I think from everything we see this year it's going to be a solid year as well.

Just a follow-up. Did the renovations have an impact at all in '06 on your sales?

The renovations, it's interesting, during the year the renovation we actually usually see an increase because of the curiosity factor and people like to go out and kind of watch the construction. So the renovations definitely help us, but it's more over time as the renovation comes online and we're able to bring in new stores and upgrade the tenancy there. That is really where the renovations help us is over the long-term growth.

Thank you.

Rich Moore. RBC Capital Markets.

Good morning. You know when I look at fourth quarter NOI it grew actually 7% not same store but just NOI. The year grew 10%. Occupancy was flat. Gross margins were actually the second best for the quarter for the fourth quarter in any time in your history. ROIC return on invested capital was good. Can you help me understand why you think same-store growth was so small for both the quarter and the year where the basic metrics are all seem to be pretty good?

Well, we are coming off of a tough year last year which was really pretty high. So if you compare those that probably had an impact there. But I think, as you pointed out, it was a good quarter notwithstanding the fact that a lot of people felt that we did it through our personal sales and lease termination fees. I think the fact is, is that we've got a good solid growth program that was in place in '06 and it is even stronger in '07 and when you look into '08 and beyond with the growth in the development business it's phenomenal.

And so I think as a result of that, I think we are very positive in our outlook notwithstanding the fact that our guidance for '07 is a little lower than what we normally would have. But it's a building year and we feel very comfortable and confident with what we're doing.

John, is there something about same store? How much of your overall NOI is same store? It just strikes me odd that NOI would do so well on the base basis, but same store wasn't that good. Is there something we are missing I guess in same store that makes same store not look as good as the overall performance looks?

Rich, I will go back and look at that and get back you on that but I'm not so sure I understand the question fully and -- .

How much of your NOI is same store? How much of your portfolio I guess is same store?

It's about 86%.

86%. So it sounds like the other 14% did very, very well and so same store wasn't all that great. But actually the total was great. We can certainly chat about that later too.

As a follow-up to this, can you talk about the demand by tenants for space in your markets which tend to be more middle market-oriented? I mean what are you seeing from tenants with regard to the middle market? Simon made the comment on their conference call that they were going to focus on the middle markets because they thought retailers were headed in that direction. What are you guys seeing?

I think that they basically see that as an opportunity for growth. I think that they don't want to cannibalize some of those major markets where they are today. And I think as Stephen pointed out some went into one of our developments and we're going to see more opportunities with those types of tenants.

Yes, we are doing a lot of Chico's and Coldwaters and Ann Taylor Lofts. Now what we're seeing is we had a portfolio review with Apple on Monday and Coach and we've done -- we did our first PF Changs last year and we are going to be doing more of those.

So what we see is that some of the retailers typically start in the larger markets and then, as they succeed, they come to the middle market and it's a pattern that is nothing new. And now we are seeing it with a new generation of retailers. We have got our first Apple deal opening at Westtown Mall in a couple of months. And that type of retailer is terrific and we're hoping to do more of them.

Sephora, we opened in Kansas City at Oak Park. And now we are working with them in a number of locations throughout the portfolio. I think that we are in a very good leasing environment for the middle malls. There's been some shakeout with weaker retailers but we feel like we are past that and we've got good new names coming into the properties.

Thanks. I will queue back in for a couple of small questions.

Nathan [Isabey] at Stifel Nicolaus.

Good morning. Just looking at your portfolio. Your $341 average sale per square foot. Can you give me a sense of what your range in the portfolio is?

Our highest sales was $508 for the year. And we had about a dozen malls that we are doing north of $400 a foot and then our lowest is just south of $200 a foot.

So it is a pretty wide range but the percent of revenues are coming out of the higher sales per square foot, is definitely growing, and some of the malls that have lower sales per square foot, their occupancy costs are in line. Over the years our lowest sales per square foot mall has always been DelRio, Texas, and that mall is in the high '90s in terms of present lease. And it has got a good growth profile in terms of the market. It just doesn't do a lot of productivity because of the income level. So it's not fair to totally put a mall in the penalty box for low sales per square foot.

Right and do you have a sense for what percentage of your NOI would be coming from your $400 a foot mall?

We don't break it up like that and publish that information. So I can't tell you.

Just a last question. What are you assuming for CapEx in '07:

It's a little higher than this year, Nate, not significantly higher than this year. So if you took what we did this year, it's not going to be that significantly higher.

Jeff Donnelly at Wachovia Securities.

Good morning. Couple of questions. Do you calculate your same-store occupancy costs? Kind of occupancy costs and so can you tell us what happened there in '06 versus '05?

I don't think we do. We just look at total for the portfolio although probably it would track what we said in the script which is the 12.1% versus 11.8%.

Then you commented earlier, I think to one of Jeff Specter's questions on the Gulf Coast market. That was helpful but I guess to get a little more color on where the strengths and weaknesses were in your same-store NOI and sales growth for Q4, and maybe where you think it would in '07.

Are you able to break it out for us a little bit differently either for stabilized malls? Or someone mentioned earlier about breaking out for malls of various per square foot sales productivity -- what the growth was?

If you could ask that one more time, Jeff. I'm sorry.

I guess I am wondering if we can get some more color on where strengths and weaknesses were for same-store NOI growth and same-store sales growth in your portfolio? Are you able to differentiate it more than just portfolio-wide as opposed to either by region, by mall productivity, or -- ?

We looked at it because we were trying to see some trends and, really, it's not any one region and I think one of the reasons that we said is that the lease term fees in the fourth quarter were so much higher in '05 versus '06. And the malls where the growth wasn't as high in NOI, a lot of cases was driven by that. And the rental growth, obviously, wasn't as high also as we had hoped it would be in a couple of cases.

But it's a property here, a property there, not anything geographic and not even anything that we could say as far as a certain -- like a bigger mall or a smaller mall or anything like that.

One last question. Stephen, I know you had mentioned that you had a lot of confidence in Bain with your thinking on China but there's been such a flood of capital into that market in recent years and real estate prices have certainly been up significantly.

And I think there's been some -- also, some minor concerns out there about risk of corruption at local levels. I guess my question is, how do you feel about your timing in going into China and beyond Bain? What confidence do you have in the local partner you've teamed up with?

Well, we've got a lot of confidence in the partner but we also did our homework and we did thorough due diligence. We hired the numbers were scrubbed by a well-regarded accounting firm. We used our counsel in the U.S. who has an office over there to do our due diligence on the land side of the business.

We did probably a more thorough due diligence than we would do for anything here because of the issues that you raised. I think we share those concerns as well.

We can't disclose the pricing for confidentiality reasons but it's at the level that we -- at the rate that we invested we feel comfortable that there is room even if the returns aren't where we projected them. And we projected them and Bain projected them on a conservative basis.

So I think everything you say is legitimate and we share those concerns.

At the same time you just look at the trends and there's 145 million people moving from rural areas into the cities in China over the next five years. You've got the Olympics coming up and, yes, there's a ton of money going in there, but from a retail perspective the prospects are just incredible. And this company is very well positioned to take advantage of opportunities. They have got a good development pipeline. They've got good management and look we are going to be careful, but we think it's a really good opportunity for us.

Thank you.

Michael Mueller. J.P. Morgan Securities.

Just one quick question. Can you comment on backfilling the '08 development redevelopment pipeline? And how big do you think that could be relative to where you are in '07 with deliveries?

I don't think we can give anything specific but we've staffed up in the area. We talked about the streamlining of the organization with Michael Lebovitz as Chief Development Officer and with the team that we have there. We have got a really strong program of projects that we are pursuing. We've got a lot of joint ventures that we were working on with some really strong partners. WE feel good that we will have more for '08 and '09 and beyond to announce.

Thanks.

Christine McElroy at Banc of America.

Hello everyone.

I've got a conceptual question for you which is, you talked a little bit about at the beginning of the call that you still very much think that this Company can grow at a 10% FFO per share growth rate and I guess I'm conceptually just, on the back of the envelope, trying to figure out how that happens if the Company grows at a 2.5% same-store NOI growth rate maybe that translates to 5% FFO growth and if you are building 500 million a year considering where the cost of capital is today that maybe get you up to 7, 8%.

So I guess my question would be, it would seem like in my mind in order to maintain a 10% growth rate for the Company you would either need to see an acceleration of same-store growth or double your development pace. Can you comment on whether or not it's really realistic to get to that growth level or we should be assuming that 7, 8% is a better run rate going over the long run?

I think you know there was a lot of questions when we started this year as to whether we could achieve double-digit growth and and we did so and I think == and the same thing occurred with regard to '05. I think that a lot of it is based upon the creativity that we've been able to instill and the entrepreneur type of approach that we take to each project. And that, we think, should continue to pay benefits for us going forward.

Yes; and I think acquisitions [wasn't] a factor last year. But we're not out of that market and we are looking for opportunities and given where cap rates have gone, we might do things in ventures to improve the returns like most of the deals and are happening with and there's fee income sources.

So I think, like John said, that there's other sources of income, that we're hopefully going to -- that we're definitely pursuing and will hopefully achieve because we are very focused on that number. We've done it 10 years and we sure don't want this year to break the streak even though we feel that at this point the guidance has to be what we say it is, based on the NOI growth and what we currently have that we have announced.

The other question I have is, can you just remind me where you are in terms of moving over to fixed camp?

We are at 55% as of the end of '06.

And where do you think you're going to be at the end of '07? Basically, as all the leases [roll] so another 10% higher? Something like that?

We think 60 to 65% the end of the year.

Dennis Maloney at Goldman Sachs.

Just a quick question on the balance sheet. Given you have been doing a lot less in the way of acquisitions recently but also recognizing that you are doing more development, will you be whittling down your floating rate debt exposure over the course of '07? I mean, given the shape of the yield curve I think that could be accretive?

There's no question about that, Dennis, that we are in the market today and we will be closing some permanent loans, taking out a lot of these term loans that were put in place for acquisitions. So I appreciate your asking that question because we are definitely focused on that and as you know historically and our trend what we do is, we like to lock down rates. We are not in the business of taking rate risks, so you will see some announcements coming from us in the near-term as to getting rid of a lot of this floating rate debt that will also provide excess funds to pay down our lines of credit and things such as that.

Is any of that backed into the guidance?

Yes. Some of it is baked into the guidance.

Last question. What percent of your leases have CPI escalators?

Minimal. Very minimal. What we like to do is go for just a fixed increase and then you also have the percentage rent number that is in place as well. So we don't -- the CPI approach or negotiations meets with a lot of resistance and also it probably hasn't been as good as trying to get the fixed increases that we are seeing today.

Rich Moore at RBC Capital Markets.

Hi, John, again. A couple of small things. On page 10 the annual base rent table or the average annual base rent table, it looks to be the same as the third quarter table and I'm guessing there's probably a new one that just didn't get in the supplemental. Anyway something (MULTIPLE SPEAKERS)

There is and it's been updated in the supplemental. So if you go back you'll see it is changed. If you go to our web site we've got it on there. We caught that. Thank you for pointing that out.

Sure. Yes. Good. Thanks.

Then a small thing on the land sale gains. You show $8.3 million of land sale gain and then in the income statement the gain on real estate is actually $7.7 million and that's of course excluding the discontinued operations gains. Why the $600,000 difference? I am just curious why that isn't the land sale gain number in there in the income statement?

It goes into the unconsolidated numbers because some of them were venture deals.

Okay.

Nathan [Isabey] from Stifel Nicolaus.

Just curious as you are looking ahead, you are growing your development pipeline quite a bit. Is there more of a focus internally on looking to better markets just looking at Pearland Town Center near Houston, Gulf [Coast] in Fort Myers. Is that something that the Company has been focusing on?

I think we focused on good solid markets in the past as well and I don't think it's anything unique to this year. I think -- I was on our guys to basically because it takes such a long permitting time in Florida especially, that we needed to look elsewhere. But they said if you look at Florida the growth in Florida, as well as the demand by the retailers is there.

To that extent a lot of it is dictated by the retailers who basically see the growth and lead you in that growth direction. The relationships with these retailers have paid off and continues to do so for us.

So I think that that leads us in those directions; and I think the areas of the country where we are in major college towns and things such as that, that helps grow with the pipeline as well and then Stephen alluded to it earlier is, we will be announcing more joint ventures with local developers who need either equity or some help in other respects. And it creates a great working relationship for us so that we are doing the best of the best in those particular partnerships.

So I think that's another growth potential for us that Stephen alluded to earlier.

Jonathan Litt at Citigroup.

This is (indiscernible). Just a quick question on the recovery rate in '07 guidance. What is it?

It is about 101 to 103 I think is the range that we are saying for '07 on the recoveries. Because of the fixed cam steps up (indiscernible) tremendously as well.

Craig Schmidt at Merrill Lynch.

Good morning. I'm focusing on the lifestyle additions at the malls. I wonder if you can tell me, roughly, how many you've completed, how many are under construction and then how many more potentially are out there in your portfolio?

Well, right now we have Hartford under construction, Valleyview under construction CherryVale under construction. So three under construction. Brookfield Square is a little bit -- it's lifestylish, it's mostly the restaurants and we have the supermarket.

So those are the ones that are under construction and that will be completed this year. We did Monroeville, which we completed last year. We also have two others that are right around the mall, St. Clair is under construction opening the next couple months and that's not attached to the mall, it's right out front. Then in Chattanooga, we finished Hamilton Corner last year.

And so we've got those at the malls and, then, in addition we've got a couple of projects that are lifestyle projects that are not related to our existing properties. The Milford, Connecticut project is a lifestyle project with Wild Oats and a number of the real attractive lifestyle center names.

And so that's really the list of the ones that are underway now. As far as going forward, I can't even tell you the number, but we have got a lot of plans, a lot of schematics that we are looking at at different properties to try to add the restaurants. I talked earlier how we added 18 restaurants last year. A lot going to Barnes & Noble. We are working on recapturing a couple of department stores and that will allow us to do lifestyle additions.

So it's happening in a lot of places. I guess that's the most specific I can be.

And is Cary Towne Center a lifestyle addition or --?

Yes. Cary is one I left off. Cary, we took some existing space that was part of the mall GLA and we turned it into outward basing retail and we opened Chico's, Soma and Coldwater Creek just last quarter. So that's one that I left off.

In terms of the minimum rents you get at that space relative to the malls they are attached to, is it the same, higher, or lower?

It really depends, Craig. I think it's just hard to generalize.

It appears we have no further questions at this time. I would like to turn the conference back over to Mr. Lebovitz for any additional or closing remarks.

This is John Foy and I will just make the closing remark of just telling everybody we appreciate their time being spent with us today and look forward to visiting with many of you in the future. Again we always welcome people to come to the Sunny South which is not too sunny today but we would love to have you come visit with us and we cannot express to you how dedicated and enthused we are about what we have going forward and appreciate the time you spent with us today. Thank you.

Thank you and that does conclude today's conference. You may disconnect at this time.