CBL & Associates Properties, Inc. (CBL) 2007 Q2 法說會逐字稿

Good day, and welcome to the CBL & Associates Properties Incorporated conference call. Today's call is being recorded and will be available for replay beginning today at 1 P.M. eastern time running through August 10th, 2007 at 11:59 P.M. eastern time by dialing 719-457-0820 and entering pass code 6017254. At this time for opening remarks I would like to turn the call to Vice Chairman and Chief Financial Officer, Mr. John Foy. Please go ahead, sir.

Thank you, and good morning. We appreciate your participation in the CBL & Associates Properties Incorporated conference call to discuss second quarter results. Joining me today is Steven Lebovitz, President, 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 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. We direct you to the company's various filings the Securities and Exchange Commission including without limitation the company's annual report on Form 10-K and management's discussion and analysis of financial conditions and results of operations included therein for discussion of such risks and uncertainties. During our discussion today, references made to per share are based on a fully diluted converted share. A transcript of today's comments, the earnings release and additional supplemental schedules will be furnished to the SEC on form 8-K and will be available on our website. This call will also available for replay on the internet through a link on our website at cdlproperties.com. This conference call is a property of CBL & Associates Properties Inc. Any redistribution, retransmission or rebroadcast of this call without the express written consent of CBL is strictly prohibited. The company may discuss non-GAAP financial measures as defined by SEC regulation g. During this conference call, the company may discuss non-GAAP financial measures as defined by SEC regulation G. Description of each non-GAAP measure and a reconciliation of each non-GAAP measure -- financial measure to the comparable GAAP financial measure will be included in the earnings release that is furnished on the form 8-K.

Thank you, Katy. Yesterday our board approved a $100 million 12-month common stock repurchase program. Through this repurchase program, CBL will benefit from the current disconnect between public market valuation levels versus the continued strength in the underlying fundamentals of our business. During the second quarter of 2007, FFO per share excluding the $3.6 million non-cash preferred B redemption charge was $0.77 compared with $0.76 per share in the prior year period. FFO per share for the quarter included $0.05 of gains on outparcel sales and lease termination fees compared with $0.04 in the prior year period. FFO per share for the quarter also included $900,000 or $0.01 per share for the non-cash tax provision compared with none in the prior year period and $600,000 abandoned project expense compared with the recovery of $60,000 in the prior year period. Same center NOI increased 2.4% during the quarter and declined 40 basis points for the six months ended June 30, 2007. Excluding lease termination fees the same center NOI increased 2.6% and 44 basis points for the second quarter and six months ended June 30, 2007 over the prior year periods.

Additional highlights included our cost recovery ratio for the quarter and six months into June 30, 2007 was 102.8% and 100.3% respectively. Compared with 105.2% and 104.8% respectively in the prior year periods. We expect the cost recovery ratio for the full year to be in the 100% range. G&A represented approximately 4.3% and 4.2% of total revenues in the second quarter and six months ended June 30, 2007 compared with 3.9% of revenues for both the prior year periods. We expect G&A as a percentage of revenues to be more in line with historical averages for the remainder of the year. Our debt-to-total market capitalization ratio was 53.2% as of the end of June compared with 48.2% as of the end of the prior year period. As a result of recent refinancing activities, variable rate debt has declined to 9.6% of total market capitalization as of the end of June and 18.1% of total debt compared with 25.1% in the prior year period. Our EBITDA to interest coverage ratio for the quarter ended June 30, 2007 was 2.35 times compared with 2.48 times for the prior year period.

During second quarter we entered into a contract with Panattoni Development Company to sell Twin Peaks Mall in Longmont Colorado for $33.6 million. The sale is expected to close in August and generate an estimated gain on sale of $3.9 million that will be included in the third quarter. The gain will be included in net income but not in FFO. As indicated in our press release, we have adjusted our guidance based on the following items. The preferred B redemption charge of $3.6 million or $0.03 per share included in the second quarter. This will be partially offset by approximately $0.01 of interest savings in the second half of the year resulting from this redemption. The anticipated disposition of Twin Peaks Mall which is expected to produce approximately $0.01 per share in dilution net of interest savings from use of the proceeds. Additionally, we are adjusting the low end of our guidance by $0.01 for increases and interest expense. Finally, we were adjusting the low end of our guidance down by $0.03 for delays in retail openings at certain development projects. We have had co-tenancy rent triggers occur at a couple of the projects where certain stores have had to delay their openings. The reduced rent levels will only stay in effect until the co-tenancy requirements are met.

We are only reducing our guidance on the low side for these items because there is the potential for us to pick up income should opening schedules accelerate at any of our development projects. Including these items, second quarter results and our expectations going forward, we are revising our guidance for 2007 FFO per share to a range of $3.37 to $3.47 per share. Which assumes same center NOI growth of 1.5% to 2.5%. We would like to remind everyone that our 2006 same center and live base includes approximately $13.3 million of lease termination fees, and our assumption for the full year 2007 is roughly $6 million of gross termination fees. Excluding lease termination fees from both periods, our same center NOI guidance for 2007 would be in the range of 2.6 to 3.6%. The guidance will continue to exclude the impact of any future acquisitions. I will now turn the call over to Steven.

Thank you, John. As a follow-up to the May ICSC spring convention, in June we held our 11th annual connections event here in Chattanooga. Over 170 retailer and restaurant representatives spent three days with the CBL leasing team making deals and building relationships. The post event reports from the leasing managers all signal continued healthy growth plans from the retailers as evidenced by our 80 basis points increase in stabilized mall occupancy. At connections and the ICSC spring convention, we have had numerous discussions with retailers that are either new to the CBL portfolio or are interested in significantly expanding their presence with us. Examples include CB, Aldo, LaCoste, Tilly's and Coach.

On August 1, we celebrated the grand opening of Alamance Crossing East. The first phase of our 855,000-square-foot open air center in Burlington, North Carolina. This phase is anchored by Dillards, J.C. Penney, Barnes and Noble and a 16-screen west end Carousel Cinema and offer shoppers approximately 170,000 square feet of small shops and a restaurant village. The project opened nearly 90% leased and committed. The theater and an additional 30,000 square feet of shops will begin construction soon and will join the project in 2008. The power center phase of the project Alamance Crossing West will begin construction next year and is a scheduled to open in fall 2009. During this second quarter we also celebrated several openings of expansions and additions to existing centers including a new 80,000-square-foot Cinemark theater in Mall del Norte in Laredo, Texas and a new 16 screen Regal Cinema at Southpark Mall in Richmond, Virginia.

At Brookfield Square in Milwaukee, Wisconsin, Mitchell's Fish Market opened in the second quarter. Fresh Market is currently under development, scheduled to open later this year. Ethan Allen and Claim Jumpers will join the project in summer 2008. This quarter we commenced construction on new additions to our malls including J.C. Penney and Ulta Cosmetics at Coastal Grand in Myrtle Beach, South Carolina. Those stores are scheduled to open in spring 2008. At Imperial Valley Mall in El Centro, California, we are developing the first phase of a new 611,000-square-foot associated center, Imperial Valley Common. Is that 60/40 joint venture with the MG Herring Group. The project will be anchored by Circuit City, Kohl's and Ashley Furniture expected to open in fall of 2008 and Wal-Mart which will follow with a spring 2009 opening.

We recently announced two new joint venture projects. In the Kansas City, Missouri, suburb of Lee's Summit we are partnering with RED Development on a 550,000-square-foot lifestyle center. The project is currently under construction with a completion date scheduled for summer 2008. We also announced a joint venture with Atkins & Associates and BDR, Inc. to develop the Village of Orchard Hills in Grand Rapids, Michigan. The 335,000-square-foot lifestyle center will be anchored by a national book store and a specialty grocer and will feature a number of retailers and restaurants. The Village of Orchard Hills is scheduled for completion in fall of 2009. More detailed information on development and redevelopment is included in our supplemental.

During the second quarter we signed a total of approximately 1.2 million square feet of leases including approximately 295,000 square feet of development leasing and 914,000 square feet of leases in our operating portfolio. The 914,000 square feet was comprised of 359,000 square feet of new leases and 555,000 square feet of renewal leases. This compares with a total of 1 million square feet of leases signed in the second quarter of 2006, including 447,000 square feet of development leasing and 566,000 square feet completed in the operating portfolio. Of the 566,000 square feet in the operating portfolio, 254,000 square feet were new leases and 312,000 square feet were renewals. This quarter we made improvements to our leasing disclosures. We decided to make the transition to reporting gross lease spreads in lieu of base rent spreads. We have also decided to only disclose on a same space basis for spaces less than 10,000 square feet which is consistent with our peers and we believe the better metric to use than total leasing.

While these metrics provide more meaningful reporting, we were in agreement with some of our peers' comments that aggregate rent spreads are not indicative of actual rent growth. For stabilized mall leasing in the second quarter on a same space basis we achieved an average increase of approximately 9.2% upward of the prior gross rent per-square-foot. Year-to-date for same space stabilized mall leasing we have achieved an average increase of 10.5% over the prior gross ramp per-square-foot. Stabilized mall occupancy rose 80 basis points to 92.2% from 91.4% in the prior year period. Total mall occupancy at the end of the quarter increased 30 basis points to 91.7% from 91.4% in the prior year period. Total portfolio occupancy increased 20 basis points from the prior year period to 91.6%. Occupancy in the associated centers increased 50 basis points to 92.3% at quarter end. Community center occupancy declined to 82.7% from 88.5%.

Bankruptcy activity today has remained muted with negligible new activity in the quarter. As you are probably aware, Foot Locker recently announced they are considering closing 250 stores out of their total of 4,000. In follow-up discussions with Foot Locker, they have told us this could impact stores at only two CBL malls, one of which expires in January 2008. Same store sales increased 2% year-to-date for reporting tenants 10,000 square feet or less in stabilized malls. Rolling 12-month average sales increased 2.4% at of June 30 to $344 per square foot compared with $336 per square foot in the prior year period. Retailers are still benefiting from strength and resiliency in consumer spending. Although second quarter was impacted by Easter timing this year, we are optimistic about the back to school season and the remainder of the year.

Occupancy costs as a percentage of sales was 13.8% for the six months ended June 30, 2007, compared with the prior year period of 13.7%. We are pleased with the improvement in our same center NOI growth this quarter and the occupancy improvements we have achieved. Although the REIT capital markets are disappointing recently, retail real estate fundamentals remain solid. With our active development and redevelopment program, we can continue to have growth opportunities available to us. As the announcement of our stock buy-back program demonstrates, we have confidence in our strategy and the long-term success of the company. Thank you again for joining us today. We appreciate your continued support and will now be happy to answer any questions you may have.

(OPERATOR INSTRUCTIONS) We go first to Matt Ostrower with Morgan Stanley.

Can you talk a little bit about the asset sale? Can -- I didn't hear in the comments did you disclose the cap rate for that and, more importantly, out of all the malls in your portfolio this one had low sales activity, is that sort of how you chose it? And other malls now that you would clearly put on the disposition list and should we think about this disposition as sort of meant to be funding the buy-back specifically?

Sure, Matt. This is Steven. We don't have a disposition list and this was a situation where we were working on redeveloping this mall and relocating the theater and doing some department store redevelopment activity. And a developer who owns a large project down the street approached us with an attractive price and we decided that it made sense to move forward. And we didn't disclose the cap rate because under the redevelopment scenario it really wasn't relevant in our opinion. So that is really the story behind Twin Peaks. It's -- it is $0.01 dilutive in the quarter. But we thought it made sense, given what was the attractiveness of the offer we received, and if that happens in other situations, we will entertain offers. Although right now we don't have any active disposition program that we announced or that we are looking to do.

I guess it's just to push back a little bit, it is the first mall you have sold that I know of, and I guess -- maybe I'm wrong about that -- but if I'm not, then can you explain, is it you just never got an offer like this before? It seems to me like a bit of a change in philosophy and I wanted to understand that a little better.

I think -- you are right. It's the first mall that we sold, although we don't have a lot else in the portfolio other than malls, since we sold the Galileo, we have a few community centers and the associated centers. And I don't think it's a change of philosophy. I think we've always looked at the assets and evaluated, especially in a redevelopment, what our returns are and if it makes sense to complete the redevelopment, to hold the asset. And if we get an offer like this where we see value then to go ahead and maximize the return on our capital.

So then you would say that this is sort of a -- it's actually more coincidence that it coincides with a buy-back program being announced. Is that a fair statement?

I mean, these things take time. Think it's opportunistic and the discussions have been going on for awhile. I think the buy-back is really result of what's happened with the capital markets and equity markets and the share price in the past two months.

Okay. And then just to go to the buy-back for one second, the magnitude of that program, can you talk about how you chose the amount that you are buying back and sort of how that fits into your overall balance sheet flexibility.

I think that size of it was basically a discussion with board members and we felt that in no way crimped our style to do anything that we have going forward. That our balance sheet is well structured and we considered the -- all of the capital needs that we had going forward and this was a reasonable very conservative number in our estimates to buying back.

Could you have done more without crimping your style, as you say?

Yes, definitely I think we had definite capacity on our balance sheet. We just did a refinancing on our Gulf Coast Town Center which is a partnership there and we were able to overfinance that and take out about $11 million of financing. And as that project leases up, we will have a significant cash flow of $3.7 million as all those tenants come online. So that's a type of approach we had taken. It's consistent with what we have done in the past, is to maximize the loan amounts on as many -- as few projects as possible to give us maximum flexibility in our balance sheet and I think we'll continue to do that.

If you could have done more, not that I'm advocating that you should necessarily, but could you explain why you wouldn't have done more than what you already announced if you have the capacity to do it.

I think that as we've always said is that when we announce something we follow through with regard to that. And that's our intention and that is what we basically -- that's the feeling that was in place when we announced the $100 million. That's not to say we couldn't do more, but I think what we feel comfortable and confident with today is $100 million.

Great. One minor question. The minority interest component for interest expense looks like it reversed in the quarter. Did you address that in your comments?

It was an adjustment in Gulf Coast where we had a joint venture. It was an adjustment in that. We did not address that in the conference call. Appreciate you're bringing that to our attention. Basically it was a readjustment on our Gulf Coast accounting.

That was sort of a true-up where you had overaccrued business expense before or something?

It wasn't an accrual of interest expense. It was an allocation of costs, et cetera.

Great. Thank you.

Thanks.

We go next to Christine Mcelroy with Banc of America.

Good morning. John, can you provide more color on the delayed development openings? What specifically resulted in the co-tenancy rent triggers, where were they and what are the co-tenancy requirements that need to be met?

This is Steven. I will start and John will fill in. One of them that is impacting us is for the project in Millford, Connecticut. Wild Oats is the anchor to that project and when they got into the middle of the Whole Foods proposed acquisition, they had to delay their plans for opening that store. So now it's not going to open until next April. It was originally scheduled to open September 1 of this year. And the nature of that center is that there is co-tenancy requirements. So the specialty stores are basically going to be paying us a percentage rent of their full rent until that anchor opens and that's the type of thing that has just come up and it's a delay in rent. We will get to the fully stabilized return on the project. It's just going to take us a little longer than what we anticipated.

And you mentioned that there was a chance that you could start receiving some of that rent later in the year. What would spark that?

The sales, we were conservative in our estimates on what the sales are of the specialty stores that are going to open. So hopefully, they will do better and we'll realize more income there. Also, at Gulf Coast, a few of the stores that were opening have been delayed because building permits take so long to obtain down there, and again we tried to be conservative in what we were projecting for the rest of this year. But hopefully those will open up sooner and we will be better off.

Okay. Then lastly, regarding the agreement to sell Twin Peaks mall, is there any chance the deal could fall through on the buyer's end, given the changes in the debt market? Does Panattoni already have financing in place?

I think this is John, I think that the chances of that falling through are fairly minimal. There is a significant breakup involved in that basically would embellish us if something were to incur.

Great. Thank you.

We go to Alex Goldfarb with UBS.

Good morning. I'm filling in for Jeff specter.

Hey, Alex.

How are you? I just want to go -- quickly just going back to the buy-back program. Did I take it correctly that we should expect this to be more funded off of cash flow from operations rather than using more leverage?

I think that there is a multitude of places where we can finance this buy-back. The sale of Twin Peaks as well as other outparcels sales that will occur during the year. Refinancing as we just mentioned. Those things can finance as well as the cash flows as they increase. So I think that it doesn't crimp our style in anyway whatsoever. Our development programs are totally funded in our capital plans and we anticipate that we can develop up to that -- we can achieve that $500 million development program without having to go to the equity market whatsoever.

Okay. Just going to retailer expansion. Are you seeing any preference among retailers to expand in the sun belt for some or some of the higher cost areas of the rest of the country?

I think that it's hard to generalize. Some retailers like we mentioned the store Tilly's which is a junior store from the west coast and they are expanding into Texas and Florida initially, as they come to our part of the world. But I think over time that will spread and they will go up the coast and fill in. In a lot of other cases we are seeing retailers that are filling in in markets, Apple Or Coach, a lot of the deals we are talking about with them are in malls throughout the southeast or the Midwest. So I think it's hard to generalize about that and we are seeing it balanced across the portfolio I think is the best way to put it.

And just the final question is on Wisconsin. Seems that there is a lot of growth in that market especially between the Milwaukee and Madison. The Bay Shore which I think is a privately held seems to have had a pretty nice renovation there. Do you have plans to expand your presence in that market? Would you see it as a growth market?

Well, we have got Brookfield Square in Milwaukee which is pretty far from Bay Shore. Bay Shore they did a nice job with that. We have been up there, but Brookfall Square we have been redeveloping it for the last couple years, adding restaurants. I mentioned in the script that we were adding the restaurants this year with Flemings, it's open and Mitchell's Fish Market. And then next year Claim Jumpers. We are renovating the mall. It's got some potential expansion down the road. So we think that asset has good potential. Madison we have got two malls, west town and east town and those are both having good sales increase, as we added Dick's a couple years ago and we continued to upgrade the tenancy there. The mall in Janesville is not that far away. Janesville, Wisconsin where we added a food court and it's good leasing opportunity there. I agree with you, that area is having a good bump in terms of activity and I think our malls are benefiting from it.

Okay. Thank you.

Thanks, Alex.

Next to Jonathan Litt with Citi.

Hi, this is Ambika with John. Could you clarify about the co-tenancy rent trigger issues, that's related to only two assets, correct?

It's likewise has some impact on a couple of -- like Alamance Crossing where a couple of the restaurants didn't get open on a timely basis because their contractor was slow. So it impacted Alamance, Gulf Coast and Millfords and possibly some others. But those are the three major ones. I think in fact those are the only three.

And just talking about that same issue, are there any underlying trends where it's retailers just opening up late or construction issues? Are there any common threads behind these delays?

I don't think there is any underlying trends. One of the things that we've learned is that the lifestyle centers where you are mixing in the boxes and different specialty stores, it takes a lot more of a concerted push to get everyone to open, as opposed to a mall when you have the grand opening and everyone opens on that one day. In Gulf Coast it has been more staggered and that's made it more difficult to predict the cash flows as accurately as we usually do. We have learned from that because Alamance when we opened it this week, we had a great grand opening. We had 40 stores that opened. Dillard's and Penny's, Barnes and Noble all opened. Like John said, the restaurant delays are going to hurt us a little bit. But it's a lot different story there than it was at Gulf Coast. And the permitting is the factor, too. That's continued to be a challenge in Florida that we are working with and I think trying to do a better job with.

And given the delays in the developments, can you update the targeted guidance of ramping up to $400 million to $600 million of developments a year? And also on that issue, given that your project size is pretty small at $20 million, do you expect it to stay there or are you expecting to pursue larger developments?

I think our project size is continued to go up significantly. I think that we see opportunities with joint venture partners to basically -- what we have done with joint venture partners is been able to leverage off of their relationships and also their skill talents and do the -- create an opportunity for us to use our financing as well as our talents coupled with theirs. So we don't have to continue to add to our staff. We also can leverage off of their relationships, so these joint venture programs are going to be great for us and we think good opportunities. They in no way inhibit or limit the ability to do with those properties what we would normally do if we owned 100% of those properties. It really gives us that opportunity to use the relationships they have with retailers. I think that we think that our development pipeline is increasing dramatically.

And there is any difference in yields with doing the joint venture developments and the wholly owned developments?

Minimal if any.

Thank you.

Thanks.

We go next to Paul Morgan with FBR.

Hey, Paul.

On the rent spreads, I appreciate you sort of foreshadowed this last quarter, think. I appreciate the reasoning for going to gross spreads but makes it really difficult to connect the dots with your trends. Could you have the numbers as they were reported last period or could you tell me whether the numbers if you had reported them the old way would have been higher? The rent spreads versus what you put in the first quarter or last year or what the trend is generally?

What we were doing is the last couple quarters is trying to run it both ways and there really are pretty much comparable. It didn't make a significant difference. And what we decided is we wanted to be consistent with our peers. And everyone is reporting or starting to report on the gross basis. So we figured we got the information available. We go ahead and do it. That was the reason. Also where we went from 20,000 to 10,000 square feet because again that's what our peers are doing. We are trying to make your job easier. Sorry about this quarter not making it as easy for you.

Okay. And then in terms of the trend would you say that like the numbers you have for the year to date, I could pick maybe the 10.5% stabilized mall spread or maybe the 8.6% versus initial. Is that what you would expect for the second half of the -- for the second half of the year?

I think, look, we are trying for it to be better. I think it is improving. To have low double digits is not unrealistic. So I think we will end up the rest of the year better than that.

Okay. And then a follow-up on that co-tenancy issue. You have been developing annually for years and I appreciate that that it's somewhat different in the lifestyle center space, but would you say some of the reasoning might be related to the fact that the kind of the lease standards in the lifestyle industry are a little bit more lax because sort of at least the popular perception is that the private operators have been pretty loose with sort of what they require of retailers and co-tenancy, et cetera. And faced with that when you try to lease up a new project and maybe that's what's going on?

I think in our projects it's the same standards that we have in a regional mall are the same standards that we would have with regard to a lifestyle center. I think that it does highlight the fact that in a regional mall you basically have a significant grand opening all at one time whereas in a lifestyle center it's not unusual for it to open sort of in phases which is what is occurring here. And I think you will see it basically with other lifestyle centers as they are occurring. I think you know it likewise to a certain extent emphasizes the rate quality and the ability of regional malls as a sustained force and their stability versus some of these lifestyle centers. But when we look at it, we basically want to make certain that our lifestyle centers are built to the same standards as our malls in quality as well as in the lease documents we sign with these tenants. I think that some of these openings, as Steven pointed out, is just a result of approvals and permitting in Florida. With the growth in that Fort Myers area has just been incredible and they just didn't staff up probably sufficiently in their offices to permit us effectively. With regard to Millford, it's a situation whereby there was a merger going on that sort of muddied the waters and caused that problem. And in Alamance, the restaurant situation is another situation where it basically occurred. But I think the CBL standards and the CBL quality of forcing things to occur will continue to dominate in any project we do whether it's an associated center, community center or regional mall or lifestyle center.

You've always had the same kind of percentage rent opening co-tenancies in your leases for closed malls. It just hasn't happened because of the nature of the opening.

That's probably correct.

Thanks.

Thanks, Paul.

We go to Lou Taylor with Deutsche Banc.

Hey, Lou.

Talk about a little bit about your expense recovery rate and what is driving it lower?

I think a lot of it is seasonality, Lou. I think you know as we go to fixed cam that has an impact upon it and a lot of it is just basically seasonality. So it was lower in Q1 as everybody pointed out and they pointed out that my weather forecasting was good for the second quarter versus what it was for the first quarter. So I think that it's basically so much seasonality and I think that we will see that going forward and I think as we see and get to more fixed cam in our portfolio -- we're I think about 60%, 65% today pushing that by year end, we will see a better stability, not a stability but a better way of evaluating and see less volatility in that.

Can you just talk a little bit about the seasonality? You have been running I thought north of 100 for the last couple of years. And I guess what's changed in the seasonality? Or how is it driving or changing from quarter to quarter?

This quarter as you'll note, we are up over the 100% number and we think that by -- for the rest of this year we will do so. I think as you go from fixed cam to prorata cam, there is some lumpiness that will occur because you are billing some of these tenants on a pro rata basis and some on the other. I think some of that lumpiness will go out. In turn the seasonality will always occur because whether in the first quarter and the fourth quarter is probably going to be a little more significant from snow removal and things such as that.

And when do you do your annual true-ups, first or second quarter?

We do it in the first quarter.

Thank you.

Thanks, Lou.

We will go to Jay Habermann with Goldman Sachs.

Hi, Jay.

Good morning. John, question for you. On the line of credit you are running roughly $121 million. What are your plans for the back half of the year and can you give us a sense where you could fund that today in the debt markets given the changes?

Our lines of credit are spread out for -- I think the earliest maturity is two years to three years out on those lines. As far as how we would pay those lines of credit back, refinancing proceeds over the next couple years should be fairly significant. In addition to that, we funded out of these lines of credits and construction projects and development projects. And as those come online, we can put construction loans in place on those. As they are built and developed, hopefully we can get the same results we got on Gulf Coast where we financed out at least 100% of our cost or significant portion of our costs. So from a credit standpoint and from an availability of credit and availability of cash, I think we are in excellent condition and I think that we just paid -- bought back $100 million of our perpetual preferred. Our ratios with regard to our perpetual preferred are very good. So we can always access that market too. But what we want to do is make certain that we aren't at the vagaries of the capital markets and I think the way we structured our balance sheet and the way we focus on that, the company's in excellent shape to move forward with its development program.

So you are comfortable with the level of floating rate data or do you expect that to come down?

I think as we do construction projects it is going to stay in that line but we have reduced fairly significantly from the prior year's period. I think by 7% or something like that. So we're are focussed. We do not like to take interest rate risks. We will eliminate it any time we can. And I think there is evidence of that between what we did just recently with these refinancings.

Okay. Now as part of your revised guidance, do you have an occupancy assumption built in there for the total portfolio?

We do. We have about 90 basis points increase.

At year end?

At year end.

Okay. And in terms of the 1.5% to 2.5% same store in line growth, which seems to be a bit below peers. Are there any specific malls that are holding back the results or any regions in particular and with that is the housing market in the Midwest having an impact on the performance?

I think that where we are is that 1.5% to 2.5% NOI growth in this quarter, I think if you look and compare us with our peers we were in very good shape versus what they have accomplished. And I think that I don't think that the housing market situation in the Midwest is impacted us any significantly. And if you look at it, after lease termination fees, if you didn't put those into that count, it would have been 2.5% to 3.5 %.

We go next to [Skip Stone] with Morgan Stanley.

Hey, guys. John and Steven. This is Skip. I just -- I know you all talked about the bankruptcy situation being very muted and you had Foot Locker maybe affecting two locations. But going down on the credit worthiness of your tenants, do you see in conjunction with that increase of 9.2% in rents, do you see more push back on that? Or how do you see that going forward?

I think like we said, we feel pretty good about where we are this year. We don't see a lot of bankruptcy activity. There is always some retailers that are struggling for whatever reason. I would say the companies that were affected by the housing slump are stores like Bombay or Kirklands that are home related. We don't have a lot of furniture stores in the mall. Those are the closest thing to it. And those for the most part if we get those spaces back there are things we can release and do better from a merchandising mix and income perspective as well. So I don't think we see a lot of exposure on that front this year. Especially compared to how it was last year.

So actually see improvements maybe. And then am I correct in saying is it 13 projects that are currently under development? Is that the total?

I think it might be 14.

I know this is more of a vague question. But is your portfolio comfortable at that level? Or do you expect to expand that or do you have plans of higher growth in different areas in concentrating what areas might that be.

I think it's definitely something that we have been focusing on ramping up to do more projects. I think also to do larger projects, earlier there was a question about the size of the project. I think one of the reasons the size of the project is lower is because we include in the redevelopments some restaurants and some smaller pad buildings that aren't that big in terms of project size and we also split them up over time. So if we are doing three or four restaurants, we will count them as three or four separate projects. I think going forward if you look at '08, and '09 that we have a good pipeline of both projects that we will get 100% of and JVs that are good quality and also sizable projects in terms of both square footage and investment. And I think given some of the challenges in the credit markets, we see more opportunity probably coming our way on JVs because money is tighter and in this type of cycle we usually find that we get opportunities when things are easy, then the money is no problem for everyone to come by.

We will have the -- do you think the delays in some of the openings even though they are kind of idiosyncratic delays, do you think that might affect your pipeline going forward?

No, I don't think that's got any impact.

Thanks so much, guys.

Thank you.

We go next to Michael Mueller with JPMorgan.

Hi, Michael.

Few questions. First of all, is there any known FFO gains or significant chunks of lease term that should hit in the third quarter at this point?

No.

Okay. In terms of looking into management fee income, it kind of jumped a little bit sequentially. Was there anything one-time driving that or what's behind it?

It was Gulf Coast that really drove that more so.

Is that more of a run rate, or was it something that comes out of the run rate?

It was the Gulf Coast and it was a one-time occurrence.

How much of that was one-time?

About $1 million. I think $1.4 million. It was the ability to sell an easement for some utilities that basically jumped it.

And going back to the development pipeline, one more time, the target to get -- I apologize if you addressed this. But the target to get to the $500 million per year, do you think you will be there by 2009?

I think that's realistic.

Okay, thank you.

Thanks, Michael.

Go next to Carol Kimball.

Good morning.

Good morning.

I was wondering as far as the community center occupancy goes do you expect it to continue to decline for the remainder of the year or to go back towards the 2006 rates.

The only reason that declined was that we have a center, High Point Commons in Harrisburg, Pennsylvania that came in to the mix. It wasn't in last year. At the end of the quarter it was 70% open, but it's well over 90% leased. So I think that will come back up to where it has historically been very quickly.

Okay. Thank you.

Go to Nat (inaudible) with Stifel Nicolaus.

Hey, Nat.

How you doing? Just wanted to know you had given color last quarter at that time it was negative renewal spreads. Basically flat this quarter. Just wanted to know if there is anything specific that was holding that down?

Well, we were still working to improve it. It is better. And I think a couple of things that impact it that keep it down, the main one is that on the renewals we are doing a fair number of short-term one-year, two-year renewals so we can upgrade the merchandising. Typically when we do those, they will be either a slight decrease or the rents will be flat. Just while those retailers are continuing to operate. I think they know what we are trying to accomplish and so it's a situation that keeps the income coming in from the space while we can bring in the higher performing tenants. That's really the biggest thing that's driving the lack of increases in the renewal spreads. I think we will continue to see improvement it there as well as we do in the new leasing.

You will continue trying to upgrade the tenancy so you can see weakness there over the next few quarters?

Yes. Look, we are always -- I think we are better off getting income coming in from the space on an interim basis than just letting it sit there vacant. So ,

Agree. Okay, there was some extensive discussion in another call this week about possible weakness in the consumer and the lower price point malls. Obviously you aren't as pessimistic. I wonder if you can comment on that little bit and tell us why you would differ in your opinion?

The consumer confidence reports that came out were up somewhat. And we are not seeing a pessimism among the retailers. I think those who are basically seeing good growth are continuing to see that. I think the good merchants are always doing things to make sure that their sales grow and I think the employment is up, and I think there is always that sector of the housing market and the sub prime lending and what's happening in the volatility of the market that impacts it. But the markets where we are, I think we are much less impacted by that volatility than some of the major metro areas like New York where people are more dependent upon the investment banking or these markets. I think that where we are, our people stay focussed and conservative approach to their own home economics and so on. And we got a stable economy in those areas where we are.

And just one quick follow-up. What is the total cost of the Grand Rapids project?

We haven't announced it yet.

Thanks.

We go to Jonathan Litt with Citi.

This is Ambika. Just a couple of follow-up questions. On a management development and leasing fees line item you mentioned that there was one-time gain in there. What is -- it still looks like second quarter after backing out the gain is higher than first quarter. Can you give a full year guidance number for that line item?

That was with the joint ventures and the development fee we got off of RED and as you do joint ventures you get development fees and other fees, so that impacted it. As far as going forward, I think we just think it's a thing that will change from time to time. And as we do more joint ventures, it should be in that range.

The range of what number?

Q1 plus couple hundred thousand dollars.

Okay. Great. And then on the Foot Locker closing announcement I guess there are only two stores. Have they gone through their 250 store closures or is that just a preliminary count?

I think it's the full 250. We talked to their head of real estate and we have a good relationship with them. One of the stores the lease expires January of '08, and the other one is a couple years after that. But that's all we anticipate. The other thing to look at on the rent for Foot Locker is that their rents are not above our base rent. I think you are comparing gross rents to base rents. And their rents are right in line with our averages.

Great. Thanks for that clarification.

Thanks.

We go next to Rich Moore with RBC Capital Market.

Hey, Rich.

Good morning, guys. Hello, John. Are you looking at the Pyramid portfolio at all?

Yes, we were looking. We look at everything. We were looking.

And I'm curious if you were commenting in these kind of dislocations in these tough marks you are apt to see some other opportunities and potentially I assume Pyramid is a possibility, too. Do you feel like you have enough balance sheet capacity to do all of these things to look at Pyramid, to maybe buy something that comes up to do development and to buy back stock?

Yes.

That's the short answer.

Longer answer to follow.

You don't feel like -- I guess it concerns me a bit that you only have so much equity in a tough environment. You can't raise equity as easily. You don't sell a lot of properties. But you feel comfortable that all these things are on the table and make sense.

Yes. I think didn't mean to be short with you. But I think we do have definite capacity to do those. Think that we have tremendous opportunities to joint venture with people. We have other opportunities to liquefy the balance sheet in other ways that we have in our capital plan. I think we will look at every opportunity and we will balance out how we spend our capital. As one of our directors has pointed out to us, your opportunities will probably always exceed your capital and that's why we will be jealous with regard to how we invest that. But I think if the opportunity makes a great deal of sense for us, we can figure out ways to make it work. We have done it in the past and we will continue toe do it in the future. And we don't depend upon the volatility or the capital markets. We don't want that to dictate to us what we do and how we run our business.

Okay. Very good. Thanks, John. Then let me ask you real quick, do you have -- do you see any difficulty getting that either for construction loans or anything else you are doing? What are the debt markets really like for you guys?

I think even in this sort of volatile market that we were in today is there is no indication that floating rate deals, construction loans or any credit crunches occurred there. If you go back in the history of this company, in the most difficult times we made the most money and we've always kept our availability and we've worked with our banks to make certain we have that capacity and the ability to access those capital markets. So we continue to get calls from other banks who want to come in to our credit lines as well as to give us credit availability. No, I don't see it and I think it's a relationship driven business. And we have been loyal to our banks and they have been loyal to us as well. We think that we have got some loans that are coming up next year that we can refinance and there is a lot of money built into those. And as we have done these remodels, we increased these cash flows significantly and haven't put any additional debt on at the finance load. So there is a lot of capacity left in this company and a lot of creativity still to access capital when and if we needed it.

Excellent. Good. Thank you. And on occupancy costs where are you on occupancy costs?

It was 13.8 for six months which is roughly what it had been last year. And I don't think we see it changing over the course of the year.

And so does it -- it doesn't come down from here, does it?

It's over the year it does. Over the course of the year it goes down into the low 12s, but when you get into the fourth quarter is always the lowest because sales are higher.

Okay, that's fair. That's a good point. I got you. On a full year basis you are probably mid 12s?

Low 12.

Low 12 for the full year. And then last thing for me, the interest in other income, it seemed higher than usual. Anything special in there? Or is it just one of those things.

It's some fees that we got from different things like I mentioned a moment ago, the easement fee we got and things such as that, we continue to see those pop up and come into the company. The janitorial business adds to that line some as well.

But more one-time things?

Yes.

Very good. Thank you, guys.

That concludes our question-and-answer session. At it time I would like to turn the call back to Mr. Lebovitz for any additional closing comments.

I just like to thank everyone for joining us this morning. And as you can tell we are still very positive about the fundamentals of our business. The malls are performing well. The retailers are continuing to look to expand. And despite what's going on in the capital markets we are committed to continuing to run our business and run it well and maximize the results and performance for our shareholders. Thank you all and we will look forward to talking to you and seeing you soon.

That concludes today's conference call. Thank you for your participation, and you may now disconnect.