CBL & Associates Properties, Inc. (CBL) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CBL & Associates Properties, Inc. First Quarter Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. And afterwards, we will conduct a question-and-answer session. (Operator Instructions.) As a reminder, this conference is being recorded Thursday, April 29, 2010.

And I would now like to turn the conference over to Mr. Stephen Lebovitz, President and Chief Executive Officer.

Thank you, and good morning. We appreciate your participation in the CBL & Associates Properties, Inc. conference call to discuss first quarter results. Joining me today is John Foy, CBL's Chief Financial Officer, and Katie Reinsmidt, Vice President Corporate Communications and 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 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.

During our discussion today, references made to per-share amounts are based upon a fully diluted converted share basis. 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 be available for replay on the internet through a link on our website at CBLProperties.com.

This conference call is the property of CBL & Associates Properties, Inc. Any redistribution, retransmission or rebroadcast of this call without the express written consent of CBL is strictly prohibited.

During this call, the Company may discuss non-GAAP financial measures as defined by SEC Regulation G. A description of each non-GAAP measure and a reconciliation of each non-GAAP measure to the comparable GAAP financial measure will be included in the earnings release that is furnished on Form 8-K.

Thank you, Katie. Over the past year, one of our strategic priorities has been to stabilize our NOI results in the face of unprecedented challenges in the economy. While we would like to see our NOI grow, we are pleased with the 1% decrease in same-center NOI compared to first quarter last year.

The commitment of the CBL team and the strength of our relationships with retailers and our financial partners has been an important contributor to this result. During the first quarter, we worked to reinforce these relationships by visiting face-to-face with quite a few of our major retail partners. Consistent with a number of recent news stories, the retailers indicated that they are feeling better about their business, and are more confident that the economy is moving in the right direction.

Similar to the results in our portfolio, retailers have generated significant sales increases in 2010 year to date, which is encouraging. The important moves that they made last year to reduce costs and increase margins, along with their recent sales increases, have produced better profitability and increased liquidity. As a result, retailers have openly discussed investing in existing stores and reinstating or increasing their new store expansion plans. All of these bode well for CBL and our future negotiations, as well as our ability to stabilize and grow NOI at our properties.

While we are encouraged by these improvements, one quarter of positive sales results was not enough to significantly improve our leasing spread results. These spreads representing comparable leases signed in the quarter are the result of negotiations that started months ahead of the signing. Retailers will need to see evidence of a sustained positive trend in sales before our negotiating position becomes more favorable. We are hopeful that the positive sales trends will continue and lease spreads will start to improve throughout the year.

During the first quarter, we signed more than 1.1 million square feet of leases, including 942,000 square feet of leases in our operating portfolio and 197,000 square feet of development leases. The leases signed in our operating portfolio included 402,000 square feet of new leases and 540,000 square feet of renewals. Total leasing activity in the operating portfolio was down slightly from the 1.2 million square feet signed in the prior year quarter, primarily due to anchor renewals last year. However, we were pleased to complete roughly 30% more leasing in the mall portfolio year over year. Compared with the prior quarter, spreads are trending in the right direction, and average spreads on leases signed with a term greater than five years were positive.

For the first quarter on a same-space basis, renewal rates were signed at an average decrease of 10.4% from the prior gross rent per square foot. Several retailers have indicated that they plan to renovate their stores and sign longer terms on renewals, which should positively impact our leasing results. We believe this will continue throughout the year as the economy recovers. We will also be looking to improve shorter term deals that we have signed over the last 12 months.

One of the contributors to our NOI results this quarter was our ability to increase the occupancy in the portfolio. Stabilized mall occupancy increased 60 basis points to 89.7% compared with the prior year. Total portfolio occupancy increased 20 basis points from the prior year to 88.8%. We are maintaining our forecast to achieve a roughly 100-basis point increase in total portfolio occupancy by year end, compared with 90.4% at the end of 2009.

It has been encouraging to see retail sales year to date which positively impact our cost of occupancy, allowing retailers in our malls to be more profitable. Same-store sales in the first quarter for our portfolio increased 4.7% from the prior year period. For the rolling 12 months ended March 31, 2010, same-store sales were down 3.1% to $316 per square foot. Sales in March were outstanding, partly due to the shift in timing of the Easter holiday. Traffic in the malls is up, and indications so far for April are positive, as well.

This quarter we experienced limited bankruptcy activity, with just a couple of small retailer filings. Retailers' balance sheets are now stronger than at any point in recent years. We are optimistic that this year will result in fewer bankruptcies and store closures compared with the average for the past three years.

Even though we have scaled back our development program, the 2.5 million square feet of new projects opened in 2009 and this year are contributing positively to our FFO results. On March 10th, we celebrated the grand opening of The Pavilion at Port Orange, our open-air center located near Daytona Beach, Florida. The 415,000 square foot first stage opened with a leased or committed rate of more than 92%, with anchors including Belk, Hollywood Theaters, Home Goods, Marshalls, Michaels, Petco and ULTA. The center has been extremely well received, with retailers' sales well above plan.

In March, we started construction on the first stage of a 75/25 joint venture community center project in Madison, Mississippi. We converted our ground lease position into a 75% ownership position in the development. The anchor stores were very desirous of seeing the project move forward, given the strong results of our recent new development in D'Iberville, Mississippi, as well as the strong retail demand in the Madison, Mississippi area. The first phase of this project is 110,000 square feet, comprised of three boxes -- Dick's Sporting Goods, Best Buy and Stein Mart. The project is 100% leased, and will open in the fourth quarter 2010.

We are focusing our development and redevelopment efforts primarily on opportunities within our existing portfolio. We have a number of phase two projects at centers we have opened over the last two years that provide opportunities for future growth. With anchors and box retailers beginning to open up their expansion plans, we are seeing strong interest in these future projects.

We are also making good progress in releasing our inventory of vacant boxes, and have now leased or committed 50% of the boxes vacated in the past few years with new users.

I'll now turn it over to John for the financial review.

Thank you, Stephen. During the first quarter, we raised more than $127 million in a follow-on offering of our existing Series D preferred stock. We priced the offering at 9.08%, including accrued dividends of $20.30 per share. Net offering proceeds were used to reduce outstanding balances on our lines of credit. The equity raised and cost containment measures that we have undertaken over the last year resulted in a decline in our overall debt levels by more than $600 million, or 9% of our total debt as compared with a year ago.

We made excellent progress during the quarter, seeing our upcoming mortgage maturities. We refinanced a loan secured by Saint Clair Square Mall outside of St. Louis in Fairview Heights, Illinois. The loan was placed with a new lender, and achieved excess proceeds of approximately $14 million after the payoff of the existing $58 million mortgage. The new $72 million non-recourse, five-year loan bears interest at a floating rate of 400 basis points over LIBOR. Concurrent with the closing, we entered into a two-year LIBOR cap with a strike rate of 3%, effectively capping the interest rate at 7%.

Year to date, we've paid off two separate CMBS loans totaling approximately $47.9 million, secured by Park Plaza Mall in Little Rock, Arkansas, and Westgate Crossing in Spartanburg, South Carolina. We then pledged these assets to our $560 million credit facility.

We are encouraged by the improvements in the capital markets. We are actively making progress to refinance our remaining mortgage maturities this year, and are experiencing increased demand from lending institutions, including interest in the re-emerging CMBS markets.

Interest rates remain attractive in the 6% to 7% range. We have term sheets or commitments on the remaining loan maturities for this year, and anticipate closing on or before the maturity date.

As of March 31, 2010, we had more than $540 million availability on our lines of credit. Our financial covenants remain sound, with a debt-to-GAV ratio to March 31, 2010 of 54% and an interest coverage ratio of 2.3 times for the rolling 12 months.

As Stephen said, during the quarter, total same-center NOI for the portfolio, excluding lease termination fees, declined 1% from the prior year. NOI during the quarter continued to benefit from the incremental improvements in the cost containment program that we implemented in late 2008 and 2009. We are still experiencing success in controlling costs. However, most of the measures were in place at the end of 2008 or early 2009, so we anticipate the incremental benefit to moderate throughout the year.

NOI will experience pressure from the decline in rents on leases signed over the last year. We are seeing some improvements in leasing spreads, and continue to aggressively pursue occupancy. These steps have allowed us to compensate for anticipated declines in top-line revenue. We are optimistic that as traffic and sales continue to increase throughout the year, we will experience growth in seeing sponsorship and percentage rent.

In the first quarter of 2010, we achieved FFO of $0.49 per share, compared with $0.76 per share in the prior-year period. FFO in the current quarter was diluted by $0.31 per share as a result of the 66.6 million common shares issued in the June 2009 offering and the common shares and units issued as a part of the April 2009 dividend.

One-time items impacting FFO in the prior year quarter included an impairment charge related to the Company's investment in China of $7.7 million. Other major variances in this quarter results included bad debt expense in the first quarter of 2010 was -- of approximately $1.5 million compared with $2.1 million for the prior year period. Our cost recovery ratio for the first quarter was 99.7% compared with 96.8% in the prior year period. The cost recovery ratio in the current quarter was impacted by $900,000 of higher snow removal expense.

Variable rate debt was 18.9% of total market capitalization at March 31, 2010 versus 23.3% at the end of the prior year period. As of March 31, 2010, variable rate debt represented 28.4% of our share of consolidated and unconsolidated debt, compared with 25.3% at the close of the prior year quarter. We have interest rate caps of 16.3% of our variable rate debt, limiting our interest rate exposure.

We are maintaining our 2010 FFO guidance per share in the range of $1.82 to $1.90. Major assumptions in our guidance include out-parcel sales of $3 million to $5 million and same-center NOI growth of a negative 1.5% to a negative 3.5%.

As we said recently, our ongoing objective is to continue to strengthen our balance sheet, including reducing leverage levels. We were pleased to complete the $127 million preferred offering during the quarter, and continue to prudently evaluate all of the various sources of capital that are available. We remain in discussions with possible joint venture partners. However, we are very selective on the structure and the properties that we would include, and believe it is important to maintain our long-term outlook and operating philosophy.

We appreciate your joining us today, and look forward to visiting with many of you at the ICSC RECon Convention next month in Las Vegas and at the NAREIT Convention in Chicago in early June.

We would now be happy to answer any questions you may have.

Thank you. (Operator Instructions.) One moment please for our first question. And our first question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed.

Hey, Todd.

Hi, good morning. Jordan Sadler's on with me as well. Is -- first question -- as you look through your portfolio and you look at the properties that you may sell or contribute to joint ventures and so forth, how are you evaluating those properties? Can you walk us through the -- your decision process?

Yeah, what we're doing, Todd, is we're looking at -- there's various joint venture partners out there who we're having discussions with. Some of them are driven by the desire to have significant current pay. Others are driven by other items, and so on. So I think it depends upon the partner and what their direction is and what they desire to achieve. So there are some people who are just looking for trophy properties and some who are looking for dividend yields. So that is a lot of what it depends upon.

And what is your preference right now, given the environment and the demand that you're seeing from those partners that are interested?

Well, I think our desire is to really get a sound financial partner who's willing to move forward and pursue acquisitions with us that provide that capital for us and some acquisitions going forward, and one who is patient. And, basically, looking at that, the long-term growth of those properties as well. I think that there's a balancing act, and I think that we can pursue both avenues. And I think that it will prove beneficial to our partners. We don't want to get into a box where we're giving up interest in properties without the necessary controls and the growth of our shareholders who've been with us for so long.

Okay. And then, moving over to leasing, as you indicated in your remarks, retailers -- their profitability seems to be improving and expansion plans are being discussed again. At what point do you get a sense of comfort that you might start to see leasing spreads trend in the positive territory? Is it 2010? Or is it probably a little later still?

Well, we -- even though our leasing spreads are still negative, the trend was in the right direction for this quarter with the improvement. So it's starting. But I think it's going to be through this year we're going to continue to see decreases, just given the negotiations, when they started and the fact that the sales increases are more recently. So, hopefully, we're thinking next year will definitely be a better environment.

Also, the shorter term leases that we've done does give us the opportunity to come back quicker and work out longer term deals with retailers. And we've heard from a lot of them that they're -- that they want to lock in, that they're making money at the stores. They're past the stage of closing stores. And now they want to lock in long term these locations. So I think that's going to help us as well, that there's no new developments happening. So as the retailers are looking to expand their store count, and we're definitely hearing more of that, then that helps us in terms of retailers wanting to come to the mall.

And there's some new concepts -- Best Buy has Best Buy Mobile that they're looking to roll out aggressively. And we've been able to do a few of those. And that's encouraging. And then there's other retailers that are looking at the mall as their expansion opportunity, because there's really nothing else out there in terms of new development. And some of the other competitive projects have been weakened by vacancies through big boxes and other types of things that have happened over the past year and a half.

Okay. I guess just to follow-up, though, on that -- so are new discussions that you're starting today -- they're still indicating that we wouldn't see necessarily positive leasing spreads result if leases were executed, based on your discussions that you're starting today?

It's really hard to generalize and say across the board. Some of the conversations definitely involve better leasing spreads. Some of the -- just depending on how hard the hit was to their sales over the past 18 months, it's tougher to get a positive lease spread. We look at the occupancy costs as a percent of sales. And we're -- we've got a long-term focus. Our priority has been to hold up occupancy and hold up NOI. And so, everything plays into the discussion in these lease negotiations.

Okay. And then, just lastly -- Sears, they recently set up an online database. They're leasing spaces within their stores. They're selling excess land and chopping their real estate portfolio. I was just wondering what kind of impact, if any, could that have on your portfolio? And have you been in discussions with them at all?

We talk to Sears all the time. We were up there just last week working on a lot of different situations where we have various redevelopments going on at projects. And we've been working with them for a number of years as far as finding ways for us and for them to take advantage of opportunities in parking lots or excess land. So, that we don't really consider anything new.

As far as them subleasing parts of their store, we'll have to see how that goes. But that's kind of a trend as far as what they've done in terms of buying some other retailers and putting them in their stores. And they're -- it's a complementary type use. And I think the type of retailers that are going to sublease store space in a Sears store aren't going to be the same retailers that are going to be out in the mall. They're going to want to be complementary within a Sears store. So that -- we view that as a positive.

And also, anything that can come into the Sears stores and add more business, bring in a new look, we view as a positive. Because they haven't really invested in their stores for a number of years. So anything that can create a more dynamic and successful Sears chain is a positive from our point of view.

Okay, then, that's helpful. Thank you.

Thanks, Todd.

Thanks.

And our next question comes from the line of Michael Mueller with JPMorgan.

Hey, Michael.

Hey, Mike.

Hey, good morning. Two questions -- one, what was the offset? Because I'm assuming the preferred issuance wasn't in prior guidance. So number one, what was the offset that kept guidance where it is?

And then secondly, for the occupancy pickup within the mall space, can you talk about how much of that 60-basis point increase was influenced by more of the box tenants that made their way into the malls as opposed to small shops?

Yeah, with regard to the first question, it's we used that to pay down debt. So the interest on that will have some type of negative impact. It should basically be even, where interest rates are under our debt today and what that dividend is on the preferred.

As to your second question, Mike, what was it?

Yeah, mostly it was small shops in the malls, actually. The occupancy for the associated centers was up about 50 basis points. So that's a positive. But in the malls, we made good progress. And that's not boxes, since we're reporting the space as less in square feet in the occupancy. So that was really progress we've made in new leasing, trying to increase occupancy to offset some of the negative lease spreads that we've had over the past year.

Okay. And actually, while I have you on there, one other one, too. John, on your comments about the potential joint venture conversations that you're having with folks, is this something you envision where on day one you contribute assets so it's effectively an asset sale disposition? But you also mentioned you want a joint venture partner who can grow. So can you just walk us through how we should think of the JV? Is it more de-leveraging defensive? Or is it set up really to kind of help you acquire?

Yeah, I think it's both points. Number one is that any joint venture partner that we deal with is -- whether it's 50/50, 75/25 or 49/51 -- they will infuse cash into the Company and likewise take on a portion of the debt for those specific assets. So that in and of itself will help de-lever the company, number one.

Number two is that we likewise think that the opportunities are going to be pretty good out there once GGP sorts out. That's really what slowed down, I think, our movement to a certain extent. And the movement by a lot of joint venture partners who we've talked to is basically going (inaudible) with GGP.

Under either scenario is we think that there's great opportunities for us. Because we think that they will basically dispose of some of those assets. And some of those are in market areas that would basically be good for us, or the size of those malls would be extremely good for us. So I think that's what we see -- having a partner who has a pocket of money that we can use to make those acquisitions and show that those assets can grow. And we've had a really good track record of doing a good job in these middle markets. And I think that's where the opportunities are going to be for some of these acquisitions, not only in GGP, but others who've already talked to us about major portfolios that they see that we can add value to.

Okay, just following up on that -- so if you consummate a JV, cash comes in, leverage dips initially, how do you envision pursuing the acquisitions and keeping leverage at that lower level then? Or does it just implicitly kind of move back up a little bit?

No, I think it would come down somewhat, also. Because the acquisitions would probably be disproportionate. They would probably infuse more cash than we would, so that there would be a disproportion.

And then, there are other ways to de-lever the portfolio from the standpoint of swapping additional assets into the joint venture. We can also issue units in conjunction with those acquisitions. Because I think some of these transactions are very tax-driven. And over the years we have really developed an expertise in handling these types of situations with people who have tax problems, whether they're a foreign entity or whether they're domestic with a low tax basis. So I think that bodes well for us as well.

Okay, great. Thank you.

Thanks, Mike.

And our next question comes from the line of Nathan Isbee with Stifel Nicolaus. Please proceed.

Hi, good morning.

Hey, Nate.

Hey, Nate.

Good morning. Just going back to the occupancy numbers, how much of that -- of the occupancy gains was organic in the same-store pool versus moving any to spaces unstabilized, which actually dipped year over year?

Well, the unstabilized only has two properties. So that gets distorted by what goes in there. And what happened there is, at Alamance Crossing we opened a freestanding building that -- it opened (inaudible), even though there's more leases committed. It's just from a timing point of view. So that brought down the occupancy of the unstabilized.

And then, on the other pools, it's pretty consistent -- it's real -- it's consistent as far as the properties being the same in the comparing periods. So there's nothing in there that would really cause any type of distortion.

The community centers is where some of the new projects came in that we just opened. And we don't do unstabilized community centers. So like, if Settler's Ridge came into the community centers and that -- again, even though it was 90% committed in terms of what opened in the first quarter, it was more like 80%. So we've got stores opening -- Barnes & Noble is opening next week at Settler's Ridge. We've got some other shops opening. We've got really good lease activity. But just the timing impacts that.

Similarly, Hammock Landing in West Melbourne is 90% leased, but only about -- it was only 72% open during the -- at the end of the quarter.

Okay, good. And just on the same store under same-store NOI guidance, you did negative 1 during the first quarter. Can you just talk about the rest of the year where you see some of the weakness that you would -- that you're assuming that you're going to slip down through the course of the year?

Yeah, I think what we're seeing, Nate, is that we -- the implementation of the cost savings is -- we instigated that. And so as the year goes on, those cost savings will be comparing against the cost savings in the prior year. And then the leasing spreads from last year will basically impact us as well. So that's why we're cautious with regard to our forecast and our guidance with regard to NOI growth.

Okay, thank you very much.

Thank you, Nate.

And our next question comes from the line of Ben Yang with Keefe, Bruyette & Woods. Please proceed.

Hey, Ben.

Hi. How're you doing? And good morning. Going back to the potential asset sales, there have been some reports in the media recently that suggest you're trying to sell Oak Hollow Mall, and yet you made no comment regarding this property and didn't take any type of write-offs for the quarter. Given that you carry it for more than the potential selling price of $15 million, can you talk about your plans for this mall?

And I'm also curious how often you look for potential impairments in your portfolio? Is that done quarterly or more of an annual exercise?

Yeah, what we do is, impairments are looked at quarterly. They're also looked at by our outside auditors as well. So we do that.

With regard to the Oak Hollow Mall, this is a mall about a year and a half, or year or so ago, we basically had negotiations with the bank who had the non-recourse construction loan on that particular property, and basically said to them that we wanted to give the asset back to them. And they basically said that they would just go on a cash -- they would do a cash mortgage and take the cash flow on that. Since that time, that bank who had that loan has been taken over. And the new bank that's taken them over has basically said cut the amount of their mortgage back by that $50 million that was listed in the price. The reason why there's no impairment is because the mortgage amount is higher than the carrying value on our GAAP basis. So technically, for GAAP purposes, it would be a gain as such, or it'd be close to a break even. So that's the reason why there's no impairment there.

Okay. And do you have any other properties that are kind of in similar situations as Oak Hollow?

No. No, none that are in place today.

Okay. And then, just a final question -- looking at Pavilion at Port Orange, which you recently opened, did the yield on that really fall by 50 basis points, taking the current supplemental at 7.3 and the last supplemental at 7.8? I'm curious, what happened there?

Yeah, we trued up just the proforma to where the actual rent came in. And then we lowered the projected rents for the remaining space that's coming on line and that'll be opening. And just to clarify, though, that's the phase one. We have a phase one A and a phase two. So what we're hoping to do is, when you blend them all together to bring that back up, then the combined yield will be a lot more favorable once those additional phases come online.

And is it too early to say what those future yields would look like for the latter phases?

Yeah, it's a little too early. I mean, we've got some tenant interest that we're working on that's encouraging. But it's still a little preliminary to talk about where the numbers would be.

Okay. And just finally, on the new developments that you started in Madison, what do the future phases look like in terms of the investment that you'd make and maybe the timing of those future openings?

Yeah, the -- well, the rest of the project is basically a number of junior boxes and small shop leasing. So it's not -- it's more mini anchors on the project. And the timing is such that we haven't -- we need to get (inaudible) before we start. But the total project is about 244,000 square feet. So the second phase would be 134,000 square feet. And our blended return on our proforma now is a 10% yield. So the second phase is a lot more favorable, because we put all the land costs in the first phase.

Got it. Thanks, guys.

Thank you.

Thanks, Ben.

(Operator Instructions.) And our next question comes from the line of Carol Kemple with Hilliard Lyons. Please go ahead.

Hi, Carol. How are you?

Good. How are you all?

Great, thanks.

At the end of the first quarter, what percent of your portfolio was actually leased?

We just report the occupancy that was in the supplemental. What -- I'm not sure we understand the question.

I'm just trying to see -- because I'm sure the way you talked about a lot of the new developments, there's a lot more leasing done than there is actual occupancy. So I was just wanting to see what the difference between occupancy and leased space was.

We'll, we're predicting -- we're not predicting -- forecasting that at the end of this year we'll pick up 100 basis points in leasing over where we were at the end of last year. So that'll bring the portfolio occupancy to 91.4%. So that incorporates really what's been leased, but what isn't open yet.

Okay. And then, do you all have any updates on the properties that you took impairment charges on in the fourth quarter? Any potential uses for those besides retail?

We continue to look at those. We're still having conversations with other users for those specific properties. Like on Hickory Hollow, we're still continuing to have discussions with the parties to basically change the total overall complex into more of a multi-use project. Those are going along pretty good. But it'll be very slow in achieving that. And the other, Pemberton, we're -- we have new site plans and discussions with tenants for that, and Towne likewise. So there's nothing immediate on the radar screen on those. But we are making progress, even though it's slow.

Okay, thank you.

And our next question comes from the line of Craig Schmidt with Bank of America Merrill Lynch. Please proceed.

Hey, Craig.

Hey, Craig.

I'm just -- when I look at the 10-K from '08 and the 10-K for '09 in terms of lease expirations, your next three years sort of jumps up. I'm assuming some of that is your short-term leasing?

That's correct.

And when you sign -- let's say a guy signs a one, two or three-year lease and he renews, he would show up in your renewal statistics?

Yes.

So if -- are you expecting to get bigger increases from those short-term leases, or from pure renewals from people with more regular lease terms?

We're -- I mean, the plan with the short-term leases is -- was to keep the tenants in place until they're ready to commit long term. And then, at the time that they commit long-term, that they would invest in the store and do a renovation. And we would get a better economic deal because of the long-term commitment. So -- and also, with sales going up now, that helps the negotiating dynamic. Because it lowers the occupancy costs. And ultimately, that's how most of these leases get negotiated is based on a cost of occupancy.

So that's -- the other thing we did is, when we would -- when we lowered the rent on renewal, we would adjust the percentage rent break point. So again, when the sales kick up, we're seeing some percentage rent, hopefully. And that goes into the new negotiation as well.

Are you starting to see some of those leases come back and are in negotiation now? The shorter term leases?

Yeah, some of them. Although what we try to do is get two-year commitments, as much as we can. Just because one year goes very quickly. So right now it's a lot smaller percentage. We'll start seeing more of those later this year and going into next year.

And I guess just finally, would you need to ramp up any personnel in leasing if the activity would necessarily accelerate with some of those shorter term leases?

No, we're right-sized in terms of leasing staff. And we've got good coverage. And also, our philosophy towards leasing is not just to have the leasing agents working on leasing. We have -- the mall staffs are involved in leasing in a lot of respects. We're working to convert temporary tenants to permanent leasing. So assistant mall managers who take the lead with specialty leasing are involved in that.

So it's not just the people in the leasing division that are doing leasing. It's a Company-wide effort. And we've got very good coverage in terms of being prepared to handle that.

Okay, thank you.

Thanks, Craig.

And our next question comes from the line of Rich Moore with RBC Capital Markets. Please proceed with your question.

Hey, Rich.

Yeah, hi. Good morning, guys. I'm curious -- you mentioned General Growth. And I'm wondering, do you -- are you negotiating at all with General Growth, Simon or BAM? Or are you just sort of hanging around the edges, so to speak, and seeing what kind of develops?

No, I think we're hanging around the edges. And we have conversations with all the parties that are involved. So I think that we're well positioned in that transaction. So we don't have any direct negotiations with GGP.

Okay, great. Thanks, John. And then, on the bankruptcy front, Stephen, how would you characterize that? I mean, it seems to be obviously much better. But from a historical standpoint, how do you see retailer bankruptcies at this point?

It's dramatically better this year. We've had less than ten stores close -- seven stores close -- and gross rents of under $1 million. So we have our fingers crossed that it'll stay like this. And there's still retailers that we watch closely in terms of their financial situation. But Zales, who's been on everyone's watch list, had a recent investment by a private equity firm, which was encouraging. And some other companies seem to have made it through the worst and made changes to turn things around. So we're really encouraged by just the whole bankruptcy forecast out there.

Okay, so for the rest of 2010, it will probably stay fairly light, it sounds like. Or you hope it'll stay fairly light, it sounds like.

Yeah, that's correct. And when you look at the financial results that have come out from retailers, they've been generating a lot of cash for the most part. Their balance sheets are in good shape. And so we're feeling good, definitely, through this year. And the economy continues to improve. That'll carry into next year.

Okay, great. And then, on the base rents -- the average base rents that sell in the stabilized small portfolio, that's shorter term leases being put into there -- being averaged into the numbers. Is that right?

Yeah, that's right, Rich. It's the shorter term leases and the lease spreads for the leases that are actually in place that have now begun to take that number down slightly.

Okay, good. Thank you. And then, as far as future redevelopments or development, is there anything -- obviously, you announced that you have one -- but are there any others? I mean, is this the right environment, do you think, to begin looking at new projects, be they either expansions, redevelopments or ground-up type things?

It's early to look at ground-up. There are some supermarket-anchored projects that we've looked at, because there seems to be some opportunity there. But the economics have to make sense. The leasing has to be there. And we're really cautious. The focus is on some of the phase twos of the projects we opened in the past couple of years, where we've got good box demand. And so, that'll be the first ground-up development that we'll be doing.

And then, also, the redevelopment at the malls -- we're seeing a lot of box activity -- boxes interested in moving to malls. And in the past we've done a number of Dick's Sporting Goods and Barnes & Nobles and some redevelopments of department stores where we added Target or Kohl's or Costco or people like that.

And now there's even more boxes, because there's no new development that are coming in. Some of the pet stores are looking at the malls at mall entrances. And ULTA Cosmetics, which has had great results, is looking at a number of locations with us. So that's an opportunity for us as well.

Okay, and then -- great, thank you. And then, the last thing -- if you guys do some acquisitions, do you feel like you need to clear the lines of credit first before you start doing that? And if you do, what would your plan be for that?

I think our lines of credit are extended out significantly. There's no requirements with regard to that. There's -- we've got excellent capacity with regard to both the lines. And we also have excellent coverage ratios under all of our covenants. So we would not have to clear those out. We would keep the banks that are involved with us and the financial institutions who are involved with us. We keep them up to date so that they have a confidence and a definite feeling of the direction of -- and we have had meetings with all of our banks and continue to keep them in the mix. So we feel very good about that. And we would see those acquisitions basically being accomplished with partners and that they would have a neutral impact to our balance sheet, and possibly even a positive impact in some way.

Okay, great. Thank you, guys.

Thanks, Rich.

Thanks, Rich.

And our next question comes from the line of Cedrik Lachance with Green Street Advertisers. Please go ahead.

Thanks. You referenced occupancy cost ratios a couple of times in regards to lease negotiations. If you're trying to lease a space that's about the average -- your portfolios would say about $320 a foot in sales, what kind of occupancy cost ratio are you trying to negotiate with the retailer?

It really depends on the category and the retailer. And it's all over the place. But it's in the 10% to 20% range. Again, it depends on who you're dealing with. Some retailers definitely are comfortable in the high teens. And others are trying to push that down.

Okay. Then can you -- I understand the range -- when you think about a category that generates sales per foot that are staying below $300 a foot, could you narrow that range a little bit for us?

We've always tried to operate in the 12% to 13% range. It's crept up last year because of the sales going down. But -- so that's a range that we're always comfortable with on average. I'd say that with retailers having their profitability higher, their margins are higher, that we're making the argument that a higher cost of occupancy makes sense. Because they brought down their sales intentionally by keeping their inventory so lean, by cutting prices. And so, the traditional ratio that they can only afford to pay, now they can afford to pay higher. And I think there's a lot of logic to that, just given the moves that they've made in terms of managing their other categories. So it's really -- I mean, I think our range right now is in line.

Also, there's -- whether we're at $316 or $400, each store you look at individually. And it's not so much the sales per square foot of the property, it's the profitability of the retailer that determines the negotiation. And, yeah, some high-end luxury guys work on an extremely high margin. So they can afford a higher cost of occupancy. But if Aeropostale is in a mall doing $600 a foot or doing $300 a foot, they're looking at their profitability and their occupancy. And it's -- I don't think it's a different negotiation, depending on which mall it is.

Okay. In regards to the preferred equity that you've issued, how did you think about your cost of capital there versus the cost of capital if issuing common equity? And why did you ultimately decide not to go the preferred route?

We look at the cost of capital, definitely. We look at the impact to our shareholders. We look at all of those when we take into consideration how we raise capital. In this particular situation, we basically opted to do the preferred. And we think that was the right decision.

We also could have lowered that interest rate if we'd given up the ability to transfer this -- if we -- change of control in the stock. And we opted not to give up the change of control, because we felt it was in the best interests of all of our shareholders. So we could have lowered that cost fairly significantly if we'd given up the change in control to all of those preferred shareholders.

We in turn thought that it was in our best interests to basically do the preferred stock. And at the 9.08%, we think that that was an effective source of capital for us. And as a percentage of our total overall capitalization, the preferred stock is a minimal amount of that. So we felt good with regard to that. And we think that that's going to provide us with additional flexibility and goes into the total overall capital plan.

Great. Thank you.

Thank you.

And our next question comes from Christy McElroy with UBS. Please proceed.

Hey, Christy.

Hi. Good morning, everyone.

Good morning.

Just with regard to some of your expansion, redevelopment and development projects that opened during 2009 -- excluding Pavilion at Orange -- just looking at last quarter's supplemental, can you provide an update on how much incremental spending is required for those projects? How much incremental NOI is integrated from those centers? I think your average initial yield was in the low 7s. So where should we expect those projects to stabilize on average, and sort of what the timing looks like?

Well, all of the costs -- Christy, all of the costs are basically covered by construction loans. And so, there's no additional capital needs in that respect. If there are any, it's very, very minimal. So there's no additional there.

As far as the returns and so on, Stephen spoke earlier about that we're in the process of developing those proformas on the phase twos. And, therefore, it would bring down those -- would increase your returns. Keep in mind, also, that the returns that we announce are after management fees and after a development fee that we include in our proformas. So those tend to be -- the returns are basically lower than what they ultimately end up being from the standpoint of cash flows to the Company. It does not --

So there's no incremental -- I'm sorry, go ahead.

I'm sorry, go -- it does not include any percentage rents, any sponsorship or anything such as that that could be supplemental income to us as well. So those tend to be the bottom type of approaches. That's the worst case-type scenario that we announce.

So there's no incremental lease-up on these spaces?

Oh, there's definitely incremental lease-up. But those are basically into our guidance numbers as well.

But the yields that we put in all are based on stabilization of the project. There -- those aren't the yields that we were achieving at that time.

Oh. What were the initial yields upon opening?

Well, it depends upon the project and the lease-up of those. So the lease-up on most of these will be achieved within six to 12 months of the opening. So it would be into those numbers ultimately on a return basis.

And most of them are -- they're a pretty high percentage of boxes and anchors. So the initial yields aren't that off from what we put in the supplemental. But it -- the -- what we put in the supplemental brings the small shop leasing up into the 90s. So like the D'Iberville now is 94% leased. And over the next couple of months, it'll be open. So that'll be in line with the supplemental roughly six months after it opens.

Okay. Have you guys looked into potentially taking advantage of the re-emergence of a limited CMBS market and refinancing some of your property levels coming due? And can you sort of walk through some of your options and costs for raising debt capital as you stand today, given the improvement in the market?

Yeah, I basically see the CMBS market coming back fairly strong. We're in negotiations with those. We've taken care of -- as we said in our opening remarks, we've taken care of all of our maturities in 2010. We have commitments or term sheets for most of those -- well, they're all taken care of, either with a term sheet or a commitment, or they go into the line.

And what we're seeing is that as things continue, the market's getting more aggressive and pricing is basically becoming better in our favor. Underwriting standards are where they should be from the standpoint of being very cautious. And underwriting quality is very, very good. So the assets and the loan to value are basically in line with where we had originally projected. We're seeing some positive impact with regard to interest rates.

So in terms of how you look at your cost of capital today, how do the changes in the markets factor into that?

I don't think it -- it only impacts from the standpoint of what we refinance, and also, the ultimate of growth in your cash flows as a result of maybe lower interest rates. So that should increase the FFO to our shareholders as such. So -- but as far as the cost to capital type of consideration, we look at the debt markets. And we also look at non-recourse debt as being a very sensitive thing to us. Because if the project is not up to the standards that the cash flows are going to cover, we don't want it to impact or come out of pocket. So we've been very sensitive to that. And we try to watch existing rates on these assets.

And then, just on your -- the calculation of your re-leasing spreads, I'm just looking at page 12 of your supplemental, with regard to the prior gross rent per square foot number, is that GAAP average rent over the life of the prior lease? Or is that cash rent that you received in the last year of the lease?

It's the latter. It's the rent that we paid at the end of the lease.

Okay, got you. And then, are you including spaces vacant for 12 months or longer in these numbers?

Yes, we include every space, whether -- it doesn't matter how long it's been vacant, and as long as the lease term is for a year or longer.

Okay. And then --

So it doesn't -- it doesn't include the temporary deals.

I'm sorry, it includes temporary deals?

No, it does not include those.

It does not.

It includes every -- I mean, we don't exclude projects under redevelopment. We don't exclude spaces that have been vacant for more than a period of time. We include everything.

Okay. And then, just lastly, with regard to the other leasing that you did in the operating portfolio -- I think it was another 260,000 square feet beyond the same-space mall shop leasing -- can you characterize what was in that pool and what the changes in rents were there? I assume a lot of it was just (inaudible).

It's mostly the over 10,000 square feet spaces, so a lot of the junior anchors. And then, sometimes we'll end up combining a space. Or a retailer will take a portion of the space. Old Navy's been right-sizing deals so -- at their terms. So they'll go from 25,000 to 15,000 square feet. So it's things like that.

Is it mostly re-leasing vacant space?

No, it's mostly re-leasing of existing space. It's not -- it's not -- I mean, it might be temporary -- it might be vacant on a short-term basis. But it's -- no, it's mostly re-leasing of existing space.

So can you give us a sense for what the impact is to the rents there? I don't have a sense for it in the re-leasing spread numbers. This is outside of that. Can you give a sense for what the downside was to rents there?

It's roughly -- it's right in line with what it was. So roughly down 10% on -- compared to -- but it's not comparable. So it's hard to look at that calculation and give it to you reliably, which is the reason we don't include it.

Yeah, I hear you. I'm just trying to get a sense for the rent loss. Okay, thank you so much.

Thank you.

Thanks.

And our next question comes from the line of Quentin Velleley with Citi. Please proceed.

Hey, Quentin.

Hey, good morning, guys.

Good morning.

Just going back to the leasing spreads, I think earlier on, Stephen, you said that for leases greater than five years, you had positive spreads. And I think last year you commented that you were doing about 40% of your renewals for short-term leases. I'm just wondering, in the first quarter, how many of those -- what proportion of those renewals were short-term leases?

Yeah, actually last year the -- we were up in the 70% range for three years or less. So a higher percentage of short-term leases. This quarter it was 60%. So that's come down. And we expect that to continue in terms of the percent of short-term leases.

Okay. And so do you have a -- I mean, we can work it out. But what was the breakdown on the spreads -- the leasing spreads for the short-term leases versus the longer term leases? Because the longer term leases were positive last year and the short-term leases were down 15% or 20% or something.

Well, the -- I mean, we don't disclose that kind of breakdown. But your math logic is exactly right. The shorter the term, the lower the spread. And like I said, in a lot of those cases, we lower the percentage rent and the break point so we can make it up in other ways. But we take the worst hit on base rent for those shorter -- the shortest term renewals. And it gets better as we get further down the spectrum in terms of the term of the renewal.

Got it. And so, you've gone down from 70% short-term last year and 60% first quarter. How do you see that trending through the rest of the year? Do you think by the end of the year we'll have less than 20%? Or is it still going to be up around 40% or something?

I think it'll still be up in the 40% or 50% range. Unfortunately, it just doesn't change that quickly. And we're fighting every deal. But the retailers are also under a lot of pressure to continue to push their costs down. So it's a negotiation. And we're -- we work with the retailers on a long-term basis. And we can -- in one situation, we might give up base rent. But then we get other things down the road, other benefits, either in that specific lease or other situations. So we're working with them on a partnership basis. And, obviously, we don't like where our lease spreads are. And we're pushing like crazy to get those up. But every individual negotiation has its own dynamic.

Okay, that's very helpful. Just in terms of -- maybe a question for John -- there was a $1.9 million tax benefit in the quarter. Just wondering what that related to?

Okay, the tax benefit, Quentin, was a result of our management company basically operated at a loss for that quarter as a result of some bonuses were paid. And we also had less out-parcel sales.

Okay. For the full year, what are you expecting for the tax line?

I think it's basically going to -- it's probably going to be about where it is today. It may be flat, because the fee income is down because developments are down. So the fee incomes will be down. So we think it should be about flat, where it is today.

Okay, got it. Thank you.

Thanks.

And we have no more questions on the telephone lines at the moment, Mr. Lebovitz. I will now turn the call back to you. Please proceed with your presentation and closing remarks.

Again, we'd like to thank everyone. We're looking forward to seeing you in Las Vegas at ICSC's RECon Conference and NAREIT in the next month or so. So thank you for your time. Have a good day.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your lines. Have a great day, everyone.