CBL & Associates Properties, Inc. (CBL) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the CBL & Associates Properties third quarter 2011 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded Wednesday, November 2nd, 2011. I would now like to turn the conference over to Stephen Lebovitz, President and Chief Executive Officer. You may proceed, sir.

Thank you and good morning. We appreciate your participation in the CBL & Associates Properties, Inc. conference call to discuss third quarter 2011 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 meaning of the federal Securities laws. Such statements are inherently subject to risks and uncertainties. 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 most recent Annual Report on Form 10-K. During our discussion today, references made to per share amounts are based upon a fully diluted converted share basis.

During this call, the Company may discuss non-GAAP financial measures as defined by SEC Regulation G. A reconciliation of each non-GAAP financial measure to the comparable GAAP financial measure will be included in the earnings release that is furnished on Form 8-K, along with a transcript of today's comments and additional supplemental schedules. This call will also be available for replay on the internet through a link on our website at www.cblproperties.com.

Thank you, Katie. Over the past few months, we have seen a disconnect in the public market's valuation of our stock compared with the strength of the fundamentals in our business. While we have experienced positive movement over the past two weeks, our current stock price still undervalues our Company. It does not reflect the positive results that we have seen in our operations nor the tremendous improvement in our balance sheet.

At the end of the quarter, we had over $1 billion of availability on our credit facilities and cash on hand. In October, we closed a TIAA-CREF joint venture, further reducing our debt by $486 million. Portfolio performance metrics have been steadily improving, with NOI in the third quarter increasing more than 2% for the portfolio and more than 4% for the malls.

We are having ongoing success in negotiating positive leasing spreads, up 8% in the quarter. Additionally, portfolio occupancy improved sequentially and from the prior year to 91.3%. We anticipate closing the year near 93%.

As a result of this positive momentum, we are increasing our guidance for this year for both FFO and NOI. While headline news has diminished confidence in the economy, the reality is that the consumer is shopping and retail sales are growing. Retailers are expanding their store counts and our portfolio has been benefiting from new store openings, both new concepts and existing retailers.

We recently announced a new American Girl store opening at Chesterfield Mall in St. Louis in the spring of 2012. At West Towne Mall in Madison, Wisconsin, we opened Dry Goods, owned by Von Maur, one of only four openings for this new juniors concept. We also opened new mall stores for Ulta, J. Crew, Carter's, Dressbarn, and many others. Restaurant boxes and theaters are opening at our malls. Later this week, Cinemark is opening a new state-of-the-art theater at Stroud Mall in Stroudsburg, Pennsylvania.

Retailers have generally kept a long-term deal on their businesses and are going forward with store expansion plans. Third quarter leasing results demonstrate this demand and build on the positive momentum we established earlier this year. Overall leases for stabilized malls in the third quarter were signed at an 8% increase over the prior gross rent per square foot. This compares with spreads of negative 4.9% for leases in the third quarter of 2010, a significant positive swing of more than 13%.

Renewal leasing spreads were positive, up 80 basis points over the prior rents, and new leases were signed at a more than 22% increase over prior rents, a strong increase. We're happy to see that short-term deals of three years or less were consistent with the reduced levels in the second quarter at 42%. This compares with 55% for 2010.

Our leasing volume has increased significantly as well. In total, we signed approximately 2 million square feet of leases during the third quarter, almost double the square footage signed in the prior-year period. This included approximately 700,000 square feet of new leases and 1.3 million square feet of renewal leases.

We have been pleased that traffic and sales have steadily increased despite the uncertainty about the economy. Back-to-school results were solid and we anticipate similar positive trends for the holiday sales season. Same-store sales per square foot increased 3% over the prior year during the third quarter. For the trailing 12 months, sales grew 3.2% to $329 per square foot.

With Gap's recent announcement, we thought it would be helpful to provide an update on our conversations with them. Gap is an important tenant for us and we work with them across their various divisions. Gap had a very successful opening in our new Oklahoma City Outlet Center project and we are working with them on one of only four new Old Navy stores opening in 2012. We have already completed our renewal negotiations through 2013. Six stores will close at expiration, but we have new leases out for signature for two of these spaces and are under negotiations for the other four.

In September, we closed our acquisition of Northgate Mall in Chattanooga for $11.5 million. This was an all-cash deal with no debt assumption related to the transaction. We purchased the property through an online auction at a very attractive cap rate of 26% on income in place, which is not indicative of the quality of this property.

While the size of the transaction is small, this is a terrific deal for us. Prior to the closing, we had received calls from a number of box retailers that are interested in locating at Northgate mall. We are finalizing our redevelopment plans for this property.

Last quarter, we opened The Outlet Shoppes at Oklahoma City, our first outlet center. Since opening, this project has achieved tremendous results and we have received outstanding feedback from the retailers. We are exploring opportunities for outlet center development joint ventures or acquisitions and expect to grow our presence in this area.

We opened two expansions recently, including the second phase of Settlers Ridge in Pittsburgh. The 78,000 square foot expansion is anchored by Ross Dress for Less, Ulta, Pet Supplies Plus, and Michaels, as well as 18,000 square feet of stores and restaurants. The expansion opened 100% leased or committed.

The 220,000 square foot second phase of Alamance Crossing in Burlington, North Carolina, opened 98% leased or committed with anchors Dick's Sporting Goods, Kohl's, and BJ's. The expansion also features 13,000 square feet of specialty stores, including Five Below and Pier 1, as well as three new outparcel locations.

We announced two new construction projects recently. In Waynesville, North Carolina, we are under construction for a 128,000 square foot community center anchored by Belk, along with PetSmart and Michaels, located next to an existing Wal-Mart. The project is expected to open in October 2012.

We also started construction on Phase II of our community center project in Madison, Mississippi. The project is 83,000 square feet and anchored by Ulta, HomeGoods, and Petco, with the opening scheduled for summer 2012.

We are just now completing the four mall renovations for this year and are seeing a positive reception from both retailers and shoppers to the updating of our facilities. For 2012, we are planning additional renovations with a comparable capital commitment of $20 million.

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

Thank you, Stephen. Last month, we closed our joint venture with TIAA-CREF. We are excited about this partnership and believe our long-term goals with growing lease properties, as well as the portfolios, are aligned. We received approximately $220 million in cash at closing, of which $134 million was used to retire the construction loan on Pearland Town Center and $21 million was used to retire the construction loan on the West County restaurant district.

We applied the remaining proceeds to reduce our outstanding balances on our lines of credit. Additionally, as part of this transaction, Teachers assumed approximately $268 million of property specific debt. We did not close the transaction in time for these improvements to be reflected in our third quarter balance sheet metrics.

Pro forma assuming the transaction was closed on September 30, our total debt would have been $5.28 billion. All said, we have reduced our debt outstanding by more than $1.34 billion since December 31, 2008. Our coverage ratios are very sound and today, more than 75% of our debt is non-recourse and property specific.

Many investment banks are active in the CMBS market. We are experiencing very strong demand from institutional lenders and banks for refinancing opportunities. We are getting new quotes on upcoming maturities from a variety of lending sources and believe that the uncertainty in the CMBS market will have little or no impact on our abilities to address these maturities.

We also recently completed the extension and/or modification of our three major credit facilities, with total aggregate capacity of $1.15 billion. At quarter end, we had nearly $1 billion of availability on these facilities. We reduced our borrowing cost by more than 250 basis points with the removal of the LIBOR floor on all three facilities and a reduction in the borrowing spreads.

For the third quarter, we reported a 2.1% increase in FFO per share as adjusted to $0.48. This compares with FFO per share of $0.47 in the prior-year period. FFO as adjusted excludes an impairment charge of $0.27 per share related to Columbia Place in Columbia, South Carolina.

NOI at this mall has experienced declines and after reviewing the updated projections, we determined that it was appropriate to write-down its book value to approximately $6 million. Year-to-date, this mall has contributed less than 30 basis points to the total NOI. We have $28 million of non-recourse loans on this property.

Total portfolio same center NOI, excluding lease termination fees, increased 2.3% in the quarter from the prior-year period. Same-center NOI in the mall portfolio increased 4.3% from the prior-year period, benefiting from the increases in occupancy and rental growth in new leasing. NOI from non-mall properties declined during the quarter, primarily as a result of lower income from our third-party subsidiary that provides maintenance and janitorial services. Bad debt expense was approximately $460 million versus $1.2 million in the prior-year period.

Other major items in the earnings results included -- G&A as a percentage of revenue was 3.7% for the third quarter, compared with 4% in the prior-year period. Our cost recovery ratio for the third quarter was 100.4%, compared with 103.3% in the prior-year period. We anticipate that the full-year to be in the 100% range.

Variable rate debt was 14.8% of total market capitalization at the end of the third quarter 2011, versus 20.1% in 2010. Variable rate debt represents 20.8% of our share of the consolidated and unconsolidated debt, compared with 30% last year. The reduction of variable rate debt is a function of year-to-date financing activities, where we've used new property specific non-recourse mortgages to reduce the balances on our credit facilities.

Based on our results to date and expectations for the full-year, we have raised our guidance for 2011 FFO per share to a range of $2.12 to $2.15 per share. The guidance assumes NOI growth in the range of 0% to 1.5% and excludes the impact of non-cash impairment charges net of taxes and includes the gains on the extinguishment of debt.

Our results this quarter validate both our strategy and strength of our properties. We believe that the market has not sufficiently recognized the added value of owning the only or the dominant mall in its market. Our properties are well located in growing and dynamic markets.

For example, in Chattanooga -- contributed a third of all the jobs created in Tennessee for the past 12 months. Retailers need and want to be in our malls in order to reach a significant population of consumers. We are their first and, in many times, only choice.

We maintain a dominant position by continually improving our properties through expansions, additions, redevelopments, and renovations, including the four completed renovations in time for the holiday season. To date this year, we have already added seven new anchor stores, 19 new box retailers, and 11 restaurants across our properties.

We are positioned for the future growth and our results this year demonstrate the opportunities across the CBL portfolio. The outlet center business is a new growth vehicle for us that we are excited about, and we are always looking to take advantage of lucrative acquisition opportunities, such as Northgate Mall, while staying disciplined with our capital.

We are confident that the CBL portfolio will continue to prove the strength of our Company. Thank you for joining us today and we appreciate your support.

We are now happy to answer any questions you may have.

Thank you, sir. (Operator Instructions). Our first question from the line of Christine McElroy from UBS. You may proceed.

Hi. Good morning, everyone.

Good morning.

John, just with regard to the guidance range, if I'm doing the math right on the comparable year-to-date number, so excluding the impairments but including the debt extinguishment gain, I'm coming up with a year-to-date number of $1.62 which basically implies a guidance range of $0.50 to $0.53 FFO for Q4. Is that right?

Yes. That's correct.

Okay. Just comparing that to a year ago and excluding the one-time items, you went from $0.47 in Q3 to $0.62 in Q4 with the seasonality, so I'm just wondering what I'm missing here. Is there anything one-time happening next quarter?

Some of the Teachers acquisition will take a significant portion out of that and outparcel sales are basically lower this time as a result of the development pipeline is much smaller and as a result of that, the inventory of outparcel sales is less. So the Teachers transaction was a significant decline in that, but in turn, it's a great partner and it did remove approximately $500 million of debt from our balance sheet, so it's really an interesting thing. And I think that basically handles most of those questions.

Okay. And then just on the balance sheet, for the mortgage debt that you have coming due in 2012, assuming you are already involved in refinancing talks with lenders on a portion of those loans, can you give us an update on who's quoting and what kind of terms you're seeing?

Yes. We focus on the fact that we want to keep our maturities pretty flat, so we look at ten-year loans and look at the cost of those. I would say we're approximately almost two-thirds of the way through on getting those refinancings finished, either through what we set in motion and commitments or term sheets that we have in hand, so we're very positive with regard to the results that we'll see and we're very bullish with regard to the other third that we still have to finish up.

So is it mostly life companies that you're talking to and can you comment on specifics in terms of quotes?

Yes. I think that it's all of the institutional as well as CMBS financings, as well as banks are doing non-recourse loans as well today. And the terms, basically the institutional lenders are probably better on interest rates, probably a little less on the amount of dollars that they're willing to commit, but the CMBS lenders are likewise widening their spreads but swaps have come down somewhat.

So that's the market we see, and then banks basically have tremendous amount of capital today to do non-recourse loans. And the relationships which we have enjoyed with these banks since our Company was founded in 1978 gives us an incredible good foundation to depend upon them to give us the best loans that are available in the market today.

And then just lastly, Stephen, any initial performance metrics from the outlets at Oklahoma versus tenants' expectations, and any early sense for where sales per square foot and occupancy costs will ultimately pan out? I know it's early.

Yes. It is early, but sales have been terrific. And we're hesitant to throw out numbers, but we're confident we'll be over $400 a foot in the first year based on sales per date and it's really going well.

We're 100% leased with permanent tenants. We're looking at an expansion that is planned for the center where we already own the land for that. We're working actively with a number of prospects for the outparcels there, so we couldn't be more pleased with how that's gone so far.

Great. Thank you.

Thanks, Christy.

Our next question from the line of Rich Moore with RBC Capital Markets. You may proceed.

Good morning, guys.

Morning.

On the Columbia Place Mall, what happens with that exactly at this point?

We're exploring all the avenues. As I mentioned in our comments, we have a $28 million non-recourse debt on that and we will have discussions with the lender on that project and look to see what can happen with regard to that.

We have lost two department stores. It probably was one of the two weakest malls when we took over the Jacobs transaction. So it was an unfortunate thing, but we thought that it was the proper way to report it and we think that we'll work through those situations, and that's the benefit of having non-recourse mortgages.

And we're also working on some redevelopment plans with some non-retail type uses for the department store areas that are vacant. So we still see some opportunity there.

Okay. Okay. Good. Thank you. Now, that mall, Stephen, does about $180 a foot, so I'm curious. Do you have others in the portfolio that might fall into a bucket like this that you might do something special with?

We have malls that the sales are in the low $200s a foot, but we've -- every mall is different. It's hard to generalize. We had the mall in Del Rio, Texas, that did sales in the $180 range and it stayed pretty fully leased, and we were able to sell it for a good price last year. So it just depends on the circumstances of the property.

And we have -- within the lower sales per square foot, we have a mall, Foothills Mall in Maryville, Tennessee, where sales are $220 a feet and we are replacing a former Belk store, where they had two stores in the mall, with the Carmike Theater that's under construction.

One of the comforting things is that we -- in our whole portfolio, we have very few vacant department stores. We have only one today where we don't have any redevelopment activity going on and we've got really good relationships with the department stores and we work closely with them. So we're there looking to rationalize or close a store or consolidate, we're working with them ahead of time to bring in some other use.

And that's what we're able to do with the Belk and that's what we're able to do with -- we have Boscov's in Monroeville Mall, which is higher sales per square foot, but we're under construction there with the redevelopment of that that we started this quarter. So we're really watching all the properties and trying to make sure that we don't have future Columbia Place type situations.

Okay. In general, I'm wondering if you guys would give consideration to splitting into buckets, maybe, for us how you guys view some of these different assets? Which ones are your core, or don't need to change assets, ones that might have these redevelopment opportunities, that sort of thing. Is that something you guys would think about doing?

Well, I think we look at that, Rich, every time and it's such a fluid type of situation. It's hard to determine what you're going to do with each of these specific assets, but it's something that we look at inside, but because it changes so much and the fact that it could be misunderstood by certain people in the analyst community, I think we haven't done it thus far, but we'll continue to monitor that and consider it.

Okay. Good. Thank you, John. And then one last thing, guys. The drop in the office same-store NOI, what was that exactly? The big drop.

It was other -- it's a big percentage drop, but it's not -- it's roughly $1 million, so it's not that big of a dollar amount. And it related to primarily to some revenues from -- like John said, from the subsidiary that does maintenance and security, and so it's really -- we don't think it's that material in the grand scheme of things.

Okay. So those office properties, they will remain viable in your opinion?

Oh, yes. The office properties are doing well. Look, the markets are not easy and we're working them hard, but we continue to sign leases. And most of them are around Friendly Center in Greensboro, and they're doing well and they're definitely viable.

Okay. Terrific. Thank you, guys.

Thanks, Rich.

Thanks, Rich.

Our next question from the line of Ben Yang from KBW. You may proceed.

Hi Ben.

Good morning. Can you guys just broadly walk through how you get to 4.2% same-store NOI for your malls? Obviously, rent growth was a big reason, but given that the mall occupancy actually fell a bit and your leasing spreads on renewals were also down, it seems like there was maybe something else that was driving that strong result and it also doesn't look like new leasing -- or that you did enough new leasing to drive that growth. So just curious. Is it temp to perm conversions, anything else that's contributing to that result for the quarter?

Ben, it's really a combination of things. Definitely the boxes and the restaurants helped because we're able to fill a lot of vacancy and get higher revenues from that. So I can't tell you what percent of the 4% that that was responsible for, but that was definitely a factor.

We've gotten the benefit from the improved leasing and even though the spreads have just turned this year, we had been making progress last year and we -- like we said, we pushed hard to maintain occupancy, and so when the leasing spread started turning, we got an immediate benefit from that. And then on the expense side, we haven't let up the pressure to manage our costs very closely in areas like utilities and other expense areas. We've been very vigilant pushing those down as much as possible and working it hard.

So we've been really focused on NOI growth for this year, and like we said earlier in the year, our top goal internally has been to turn positive on NOI same-center growth, and I think what you are seeing is the result of a full-force effort across the whole organization to move NOI in a positive direction.

I think you had previously mentioned about 90% of your tenants on fixed CAMs though. To the extent that you can lower costs, obviously that helps the NOI. Should we be concerned at all that those expense savings might reverse at some point and that it could be a drag on the NOI maybe next year or beyond?

I think it will be harder to achieve further decreases because we've made that a priority, but we don't see exposure to higher costs. I mean there are areas we don't control, like snow removal and all that, but we feel like we can maintain the levels that we're at.

Okay. And then just year-to-date, your same-store NOI is above your new guidance range. Are you being overly conservative, are you -- is there anything coming in the fourth quarter that could drive that same-store NOI number much lower than what we saw this past quarter?

Well, last year's fourth quarter we had a real strong finish with same-center NOI, so we're going up against a tough comp and so we're trying to be realistic in looking at just where the projections are compared to that.

Okay. And then just final question. I know you had previously made comments that you intend to sell some community centers and you obviously sold Settlers Ridge, but you continue to invest in this part of the business. It currently represents about half of your investment.

What's the game plan here? Are you trying to diversify away from the malls and into community centers or are you intending to develop with the intention to sell and capture that spread on the business?

I think where we are, there have been assets that -- we have sold some of our community centers and as we see the opportunity to do so, to monetize and pay down debt, we will continue to do so. I'm not so sure that we spent that much money on acquisitions of community centers. We did -- those were expansions, basically, of Settlers Ridge and some of the others. We are building the community centers that Stephen mentioned and we see that that's an opportunity for us. That's where the business is headed today.

I don't think there's any regional malls or lifestyle centers under development or construction today. So I think that we see that as an opportunity. And the relationships we've built over the years with Belk gives us that opportunity to build those for them and make some significant profits if we ultimately sell those assets.

So I think it basically goes back to our roots where we were when we started the Company. We built opportunity centers to sell those to generate equity. So I think what worked for us years ago works again this year.

I thought maybe going back to that merchant building model that you used to be way back when?

Well, I don't know that we have classified as merchant building. I think we classified as taking advantage of the opportunities to build those relationships with our tenants, while at the same time making profits for our shareholders.

Okay. Great. Thanks, guys.

Our next question from the line of Carol Kemple from Hilliard Lyons. You may proceed.

Hi, Carol. Good morning.

On the acquisition front, are you all seeing anything out there? And was the acquisition of Northgate, being an online auction, is that a pretty rare opportunity?

Well, we've never participated in an online auction and to our knowledge, we don't know of any other malls that have transacted that way, so it was definitely a unique opportunity. We were -- Northgate being in Chattanooga, our hometown, we knew the asset. It was originally developed by a predecessor company to CBL, so it's a property that we've known over the years, we've followed closely, and we were pleased with the price we were able to buy it at.

And like we said in the script, there's a really good redevelopment opportunity for it, to add boxes, and we're comfortable with its long-term viability. We were just with Belk this week and they want to renovate their store, so we're really excited about that.

We'll look for opportunities like that. We look at everything and if we see something that we feel like is a great opportunity and where the risk/reward ratio is -- makes sense, then we will definitely pursue it, but I think those opportunities to get a 26% initial cap rate are pretty extraordinary.

As far as the rest of the acquisition activity, the pricing has been really expensive for the properties that have transacted this year -- the Taubman acquisition and GGP for Frontenac. So we've looked at things, but we don't feel like that's the best use for our capital.

Okay. And did you say earlier in the call you expect occupancy to be 93% at the end of this year?

In that range. That's correct.

Okay. Thanks.

Thanks.

(Operator Instructions). Our next question from the line of Jim Sullivan from Cowen and Company. You may proceed.

Hey Jim.

Thank you, good morning. Two questions from me. First, Stephen, if you could talk about the outlook for seasonal revenues in the fourth quarter this year in terms of temporary tenants, pop-ups, and other specialty revenue sources?

Sure. Sure, Jim. Thank you. The specialty leasing has actually been running a little bit ahead for the most part of the year, but we're expecting it to flatten out in the fourth quarter. It's been tough for the local retailers to get financing for their businesses, just because of the state of the banks, and so we're feeling that a little bit. So we're still seeing strong demand and strong activity, but it's tough to get the increases like we had gotten in the past.

So when you say flattening out, do you mean flatten out year-over-year or sequential?

Year-over-year, and also as our occupancy moves up, there are fewer spaces in line available, so that impacts it as well.

Okay. Then the second question, you talked about uses for your capital and better uses versus some of the pricing in the acquisition market. Clearly you do have some assets which are 100% occupied, and in markets where the recent UAW contract suggests increases in economic activity. I wonder to what extent with assets like CoolSprings and maybe some others -- and I know CoolSprings, of course, is in the TIAA joint venture -- but to what extent there are opportunities for meaningful expansion here. I know your returns on your redevelopment tend to be in the low double digits and I wonder about the potential for that as we look forward to 2012 and 2013.

Yes. CoolSprings is a great example. We've been working closely for an expansion there to add about 75,000, 80,000 square feet and we're in pre-leasing. So we haven't announced anything as far as any retailers or anything like that, but we're hopeful that we can make some progress there.

We look at all the properties to see if there are opportunities to add value, and the redevelopment of the former Boscov's in Monroeville is a good example. That's not a mall that's 100% leased but there's opportunity there.

So it's not just the top malls where we see that opportunity and the retailers are really limited as far as their expansion opportunities because of the slowdown in new development. So they focused on the malls. Boxes like Ulta and Joann's, we have done a lot of business with them bringing them into the malls, and previously they were focused more on open-air centers.

And there's also opportunity for us, Jim, with certain of our outparcels that we haven't sold, to develop those and we're under construction in Chattanooga with a small 6,000 square foot project on an outparcel that hadn't been sold, but that's a project that will open in the next month or so. So there's lots of opportunities that we're always looking at to create some more value at the properties.

Okay. Thanks.

Thank you, Jim.

Our next question item line of Jeffrey Donnelly from Wells Fargo. You may proceed.

Good morning, guys. Stephen, I apologize if you touched on this because I got on a little late, but retailers have been expanding their store counts but they're also rethinking their prototypes. Do you guys have a sense of how store counts might compare to net square footage growth or absorption potential over the next two to three years? How do you think about, I guess you'd call it your net absorption trends? That's what I'm interested in hearing about.

Well, we've -- you're right. A lot of retailers are looking to be more productive out of less space and we have seen it the most in the -- with some of the boxes like Staples, for example, or Office Depot. We have one of those that's coming up in the next couple years and we're going to downsize the Office Depot, but it gives us an opportunity to add other retailers. We have two other retailers that we will put in the former Office Depot space that they're not going to use any more and that will give us opportunity to generate more revenue.

Old Navy, we have worked with them. That's an example of a retailer that has been on a rightsizing program and they downsized their average store from, say, 25,000 to 15,000 to 18,000, but again, we can recapture that space and use it and hopefully get more rents.

And then with some of the retailers, it's helping us. We're doing a lot with Best Buy Mobile, for example, in the malls and that was a use that we didn't have any stores with them three years ago and we have over 20 of those that we're working on throughout the portfolio. So in that case, it's benefited us.

And I'm curious. In practical terms, how does that actually play out? Because on paper, when a retailer says I want to go from a 25,000 square foot prototype to an 18,000 square foot prototype, it makes sense. But carving, sometimes 6,000 or 7,000 square feet out of a box that's pretty deep doesn't really lend itself to a -- necessarily a leasable space or what I will call a normal space.

How have you found that in practice? Do you think it works in most situations or do you think it ultimately gets resolved by just the tenant staying in their existing box and just paying less rent?

No. It usually gets worked out. Like we said in our conference call script, which you might have missed, but we have Gap. Old Navy is, I think, our fourth largest retailer, so we're always working with them on multiple deals, and we might work with them on one situation where it helps them and they'll help us out on another.

So that's the benefit of having the portfolio approach to business with these folks, that we can create situations that help them and help us and at the end of the day work for both parties. And then a lot of times the spaces, they're bigger but they're not paying that much rent so we can -- we don't have to use 6,000 square feet. We might be able to use 2,000 or 3,000 square feet and we'll still be ahead of the game from an income point of view.

That's helpful. Just one or two housekeeping questions. Just considering leasing activity in the quarter or year-to-date that you detail on page 14 of your supplemental, what's roughly the average lease term of the new and renewal leases that you're doing? Is it five to seven years for shop leases? Is it longer? I am just curious how that sorts out.

That's roughly five to seven years. Probably the renewals are at the low end of that range and the new leases are at the higher end.

Okay. And just a last question. I'm not sure if it's for you or for John. Just concerning the capital markets you touched on for the low sales productivity malls. Do you find that lenders on those properties, say malls that are in that $200 to $300 a square foot range, tend to want to limit their LTVs or keep financing maybe to a certain per square foot amount?

I think that they're looking at the debt coverage ratios as well and I think they're looking to see how those malls have operated in those specific market areas over the years, and the debt yield is a significant thing to them. So I think with the abundance of capital out there chasing deals and the relationships, I don't think that the per square foot sales basically impact them tremendously.

And where do you say the debt yields are for a mall that's doing $275 a square foot versus $375 a square foot? Is there a material difference?

I'm not so sure there's a significant one. There's maybe a couple hundred basis points difference.

Okay.

Yes. But we paid those debts down so low that that we still are capable of refinancing those. We amortize about $90 million a year just in our principal amortizations because I think on almost every loan that we've done, we have some amortization built in it, so each year we're pulling down those debt levels by that amount of money.

Okay. Thank you.

Thanks, Jeff.

Our next question from the line of Michael Mueller from JPMorgan. You may proceed.

Hey, Mike.

Hi. A couple things. First of all, an accounting question. Can you just talk about the tax provision in the quarter and what we should expect going forward?

It'll be a provision going forward, but we made some changes with regard to how we account for the management on a tax structuring basis, so that was the impact this time and it won't be as significant going forward. We basically had our management company where we wanted to get into a provision where it was showing that it could make some money.

Okay. On the outlet side, does it feel like you will have any announcements in 2012 either on the acquisition side, stuff you're looking at, or new developments?

Well, I think it's a very volatile market and we have shown that discipline to basically look at those assets. We were interested in a couple of the assets that Taubman bought, but not at those acquisition levels, so we think that there is going to be some opportunities.

But there's -- on the outlet front, we're optimistic and we have had really good results with Horizon in Oklahoma City and we're definitely looking at other opportunities, both development and acquisition. So we definitely hope to have some announcements in 2012.

Okay. And maybe going back to John one more time. Going back to a prior question on the implied fourth quarter guidance. Taking a look at fourth quarter last year, there wasn't a lot of one-time type stuff in the numbers. Gains were nominal at best. Lease terms, same thing.

I think the CREF JV was only mildly dilutive, so is there really anything else weighing on the fourth quarter guidance this year? Anything particular, say, to bad debts or anything else that would be pushing it down?

In addition to the Teachers, we had sold some other assets that basically will pull that number down somewhat. It's just not the Teachers CREF thing. We sold off Settlers Ridge and we did some of those others. That impacts us on a comparable basis when you look at it on a quarterly basis.

Okay. Okay. Thank you.

Our next question line of Quentin Velleley from Citigroup. You may proceed.

It's Michael Bilerman and Quentin. How are you?

We're good.

Good. Just maybe continuing on Mike's question. Just looking at it from a same-store perspective, your same-store guidance is 0% to 1.5% for the year but you're 1.7% year-to-date, 1.6% overall? So what's happening in the fourth quarter on a year-over-year basis if occupancy is up, percentage of rents have been tracking a little bit up. What's drawing -- that would obviously be a pretty big negative number to get you 0% to 1.5% for the year.

I think where we are, Michael, is looking at the comps from the fourth quarter of last year was pretty good. So that's one of the things that impacted us. And as I mentioned to Mike just a minute ago, it's the number of sales that we have done that's impacted us as well from the fourth quarter.

The sales -- the sales are not in -- same-store NOI, if you've put out a range of 0% to 1.5% and you're at 1.7% for year-to-date, that would imply that the fourth quarter would be negative. Put sales aside because it's not in same-center. You have talked about occupancy reaching 93%. You're at 92.4% for the fourth quarter of last year. Percentage rents as a percentage of your minimums are up a little bit.

There has to be something causing same-store NOI to be down year-over-year, and I don't know if it's your recovery rate. Are you recovering less? Is it less CAM relative to the 4Q last year? I am just trying to get specific as to what's happening. Or you're going to blow through numbers and you will put something above your guidance, which is fine as well, but just trying to understand where the numbers shake out.

Well, I would say a couple of things. The fourth quarter is the biggest number, so even if we're between 1% and 1.5%, that would reduce where we are year-to-date. So if we're still in the range -- we put out the range of 0% to 1.5%. We're hoping to be at the higher end of that range.

There's been a lot of bankruptcies this year, more than we had last year. We had Borders that hit us this year and we're backfilling those spaces, but that doesn't kick in immediately. We just had Trade Secret this past quarter. We had Sharon Luggage. That was over $0.5 million hit, so the bad debt is going to be a bigger factor.

And like I said earlier, we had a really strong fourth quarter last year that -- pushing NOI, so we're going up against a tough comp. So we're just trying to be, I think, realistic about where we're going to end up.

Is there -- your recovery rate was 103% the fourth quarter of last year. What are you forecasting embedded in the fourth quarter? Or what are you embedding for the full-year? You were at almost 102% last year.

I think we're saying we'll be at 100%, which is where we were for this quarter, and that's where we will end up for the year. So a little bit lower than we were last year, so that's a factor also. Percentage rents, we push a lot of the percentage rents to try to convert those to effective rents. That's not a big revenue number, but it's hard to get growth there.

Right. And then just going back to the portfolio in terms of the assets below $250 a foot or even those below $200 a foot, and not saying you can't make money on those assets, but how much of a drag is it on your NOI when you think about that, let's say, 1.5% number? Do those 17 assets that are producing below $250 a foot, are those negative same-store and the rest are positive? How should we think about the differential between growth patterns?

Well, we don't look at it that way. We don't do a tiering approach to the NOI in the numbers. We look at certain assets, though, and there's some are a drag and some contribute positively, and I can tell you that there's some in the lower tier that are growing north of 5%, 5% to 10%, so that helps.

Now, it's a lower NOI, so it doesn't drive our overall numbers as much and there are some malls that have higher sales per square foot where NOI growth is flat. So in a sense, that's a drag on the overall ratio.

It changes year to year and it could be impacted. If one of these smaller malls has a vacant box, then that vacancy is going to negatively impact NOI, but when it gets leased up we'll get a real pop from it so we hear you and the point you're making.

We're comfortable with assets below $250 a foot. We always have been. We feel like we know how to work them and make money off of them. And I know other companies tout their sales per square foot and that's great and I think that makes sense, and it clearly is something that retailers focus on and it's a big driver of rent, but there's also a lot of ways to create value and profitability and that's our number one focus.

Well, I guess to that point, do you have a sense, when you look at your return on cost in the portfolio and those assets that are below $250 a foot, call it just under $1 billion of historical investment, what is your current yield on cost of those relative to the current yield on cost of the portfolio?

I don't think we have that, Michael, especially not off the top of our head. A couple of the properties that are below $250 a foot were just opened in the past year, so they haven't stabilized, either, or they're large open-air centers which they had good initial returns, but they haven't generated the sales per square foot like a mall does, and that's been really common across the industry. The [actual] costs, though, are lower on those, so the retailers are still making money and are happy with the performance.

The return on the equity on those projects as well, because we're amortizing down that debt. So if you really look at the return on equity on some of those assets, they could be significantly greater than the returns on the other assets. So if you bought a Frontenac at a 4% or 5% cap rate, what's your return versus if you bought a Northgate at a 26% cap rate?

So you got to look at these returns on equity in our view and the risk that's taken with regard to these assets. We point out constantly that we developed a shopping center in Mississippi where we were able to finance 100% of the asset. We still have a positive $700,000 cash flow. That center probably does in the range of $200 a square foot, so it's an asset by asset and it's basically a return on equity based upon the risks.

Hi. Good morning. It's Quentin here. Just in terms of your leasing spreads, which were pretty strong again for your new leases, top 8%, I am just curious. Was this driven by previous short-term leases where you'd cut rent significantly over the last two or three years, that tenant had been left and then you'd release them back towards market rates? Was that a key driver of those strong leasing spreads?

There were a few in there, but it wasn't -- I wouldn't say that was the primary driver of it, Quentin. It really was just new leasing activity with retailers where we're able to get seven- to ten-year terms and they're good additions to the portfolio. Some of the -- like the Best Buy Mobile deals are all -- not all, but for the most part are -- had good leasing spreads.

We did a lot with Zumiez. They're a junior retailer that's doing well. The jewelry category has come back and so we've been able to do some good new leasing there. Athletic shoes has been very strong this year. So that category has been good. So I think it's just driven by certain categories that have bounced back from where their business was a couple of years ago and we've been able to benefit that -- benefit from that with the new leasing activity we've done with those guys.

And I might have missed this earlier, but did you give a proportion of leasing that was short-term that you did over the quarter?

Yes. It was 42% for this quarter, so last year this time it was 55%. So that's definitely trended in the right direction. Pretty comparable to what it was last quarter.

Okay. Great. Thank you.

Thanks, Quentin.

Thanks.

Our next question is from the line of RJ Milligan from Raymond James. You may proceed.

Hey, RJ.

Good morning, guys. Could the answer to Michael's question about the same-store NOI guidance be that JV assets were contributing a greater proportion of the same-store NOI growth year-to-date?

Yes. That's correct. Good point. Thank you.

Okay. And the -- just wondering if sales per square foot, if you guys can break that out or if you are seeing any trends in terms of have the higher productivity malls outpaced the lower productivity malls in terms of sales per square foot? Have you seen it regionally? I was just wondering if you could get a little bit more granular on that.

Yes. The malls with Apple stores, which we have four, that's definitely a factor and that helps, especially with the business they've done this year and the new iPhone that has come out. It's not a significant driver for us as it might be for some other companies, because we don't have that many, but I'll say it's actually been very even, even across the country.

We have seen the border malls have done really well because the peso has been stronger versus the dollar and those have had strong increases, but when you take that out, it's been pretty even across the Southeast and the Midwest in terms of the growth and also based on the range of sales per square foot. So it's probably the most even spread of sales per square foot that we have seen in a couple years.

Okay. Great. Thanks, guys.

Thanks, RJ.

Our next question from the line of Todd Thomas from KeyBanc Capital Markets. You may proceed.

Hey, Todd.

Hi. Good morning.

Morning.

A question on the St. Louis market where you have a fairly large presence. I know that there's some competition over a new outlet site in that market and I was wondering, first, if you looked at St. Louis as a potential outlet -- for a potential outlet site, and then also, I was just wondering if you have any thoughts about the potential impact to the entire retail environment in St. Louis on your malls?

Yes. I mean there's several sites proposed. We had not looked at St. Louis for an outlet center project, but Taubman announced something and then there's two -- a couple others that are working to compete with them. We think that with Taubman, their focus is going to be on some of the higher end retailers and really the luxury stores, and that will be good for the market to bring in those retailers and it will help the shopping in St. Louis in general.

At our malls we just announced American Girl doing a new store at Chesterfield. That's going to be a real shot in the arm for that. West County continues to benefit from the new retailers we're doing there and St. Louis held up probably better than any other market during the recession, and so it's stable and I guess we're -- we feel comfortable about our malls going forward even with some new competition.

Okay. And then I was just wondering, I may have missed it earlier in the discussions, but how far through 2012 leasing are you and do you have any projections for leasing spreads as you think ahead?

No. It's hard -- our leasing spreads are based on leases signed, so it's not based on when the stores open. So that's current information but it's not something that we can necessarily project. We're pushing to continue to make the same progress that we've made this year and have positive results in leasing spreads. And leasing activity for the next year is on track, pretty comparable to last year at this time; I would say roughly a third.

Okay. And then lastly, Stephen, you mentioned at the beginning of your prepared remarks that you think there is a disconnect between the price of your stock and the private market valuation of the portfolio. I was just wondering if you could comment on that a bit. We haven't seen a lot of data points on malls with sales productivity below $400 a foot, so I was just wondering if you had any thoughts about valuation, whether that comment is based on your own internal valuation to some extent or if you have had conversations with private capital partners or anything else that you can point to with regard to valuation.

I think the biggest thing that we think drives that is our multiple is just so much lower than we feel like it should be. If you look at our leverage ratios, our debt to EBITDA is just roughly 7.5 times and that's below average for the whole -- if you look at all our mall peers. And we have made huge progress on leverage, so we think we should get some benefit from that in our multiple. And then we seem to get dinged for low sales per square foot but we're putting up results this year with positive leasing spreads and positive NOI growth that refute that. So we just look at our multiple and feel like there's room for expansion there.

Okay. Great. Thank you.

Thanks, RJ.

Mr. Lebovitz, I'll turn the call back to you. You may resume with your presentation or closing remarks.

Thank you, everyone, for joining us this morning. We appreciate your support and we're available if you have any further questions. Have a good day.

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