CBL & Associates Properties, Inc. (CBL) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CBL & Associates Properties, Inc. first quarter 2012 conference call. (Operator Instructions) As a reminder, this conference is being recorded Tuesday, May 1, 2012. I would now like to turn the conference over to Stephen Lebovitz, President and CEO. Please go ahead.

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 meaning of 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 on 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 the transcript of today's comments and additional supplemental schedules.

This call will be available for replay on the Internet through a link on our website at cblproperties.com.

Thank you, Katie. We are pleased that 2012 has started out so well for CBL. Our results for the first quarter show continued progress in driving growth in our core portfolio.

Occupancy increased 150 basis points from this time last year. Sales growth was particularly strong with a comp store increase of just under 6%. Lease spreads increased over 7%, and same-center NOI grew by 1.5%. We are also laying the ground work for future growth at CBL, sourcing attractive new investments to add value to our portfolio. Over the past year we have made meaningful progress building our presence in the outlet industry with 2 ground-up development projects, and our recent investment in 2 operating outlet centers.

In aggregate, outlets comprise a small percentage of our revenues, but we are encouraged by the potential we see in that area. Many retailers have made their outlet strategy a priority, and this sector will provide one of our best avenues for external growth over the next few years. Horizon has been a terrific partner for us. Through this venture we see additional opportunities for new outlet projects where we will be able to meet our preleasing requirements and achieve attractive financial returns. We recently announced our investment in 2 additional outlet centers that are operated by Horizon. We acquired a 75% stake in The Outlet Shoppes at El Paso, and a 50% interest in The Outlet Shoppes at Gettysburg.

The blended cap rate was very attractive in the high 7s. We see near long-term growth prospects for both centers. The Outlet Shoppes at El Paso open in 2007 with 350,000 square feet; is 99.6% leased with sales trending toward $400 per-square-foot. The center serves a market with more than 2 million residents plus a significant tourist population, and is located near the Fort Bliss Army base, which is benefiting from the BRAC program.

The Outlet Shoppes at Gettysburg is a 250,000 square foot center, which serves the more than 2 million tourists that visit the area annually. A new $95 million Civil War Museum opened just a few years ago and is driving additional traffic to the center. Sales are in the mid $200s per-square-foot today and we are working on re-tenanting opportunities to increase sales. Both centers also have additional land available for future expansions.

On the development side, construction is set to start in the next few weeks on The Outlet Shoppes at Atlanta located in the affluent suburb of Woodstock north of the city. The 370,000 square foot project is approximately 70% leased or committed with a first-class lineup of retailers including Saks Fifth Avenue OFF 5TH, Nike, Levi's, Brooks Brothers, Converse, and Cole Haan. Similar to The Outlet Shoppes at Oklahoma City, this project will be developed in a 75/25 joint venture with Horizon Group with an initial unleveraged yield above 10%.

We are also pursuing plans to add a second phase to our project in Oklahoma City. Sales for this project are in the $400 per-square-foot range, and it continues to exceed our financial projections. Phase 2 will encompass approximately 30,000 square feet and will be under construction shortly.

Other important sources of growth are expansions and redevelopments to our existing centers. We recently celebrated openings for several major boxes within the CBL portfolio. In Maryville, Tennessee, at our Foothills Mall we open a new Carmike 12-screen during the first quarter. The theater filled the former second Belk location in the mall, which closed, so they could consolidate their operations into and renovate their other location at the mall. The theater has already proved to be a great addition to the mall and has exceeded performance expectations.

At the end of April we celebrated the grand opening of American Girl at Chesterfield Mall in St. Louis. The opening crowds and sales were more than double American Girl's projections. This store should drive new traffic and lift the sales at mall.

Last month Microsoft announced that they would be opening a store at our Oak Park Mall in Kansas City. This is only their 20th store, so it is very exciting and should be another great attraction for the center.

Our renovation program for this year includes 4 malls; Cross Creek Mall in Fayetteville, North Carolina; Mall del Norte in Laredo, Texas; Post Oak Mall in College Station, Texas; and Turtle Creek Mall in Hattiesburg, Mississippi. The aggregate expenditure for the renovations is estimated at approximately $20 million. These renovations are important to the continued growth of the centers, helping to attract new retailers, and driving traffic and sales.

First quarter sales at our malls increased 5.9%, solid evidence of the improving consumer demand in our markets. Of the 9 consecutive quarters of positive sales growth the CBL portfolio has posted, this is our largest quarterly increase. The sales results were helped by the earlier Easter holiday combined with mild weather, as well as improvement in consumer confidence. As the economic recovery progresses, we anticipate improved sales for the remainder of the year.

A number of retailers have recently announced significant expansion plans for the coming years. This is very encouraging, and coupled with the positive sale trends, bodes well for the CBL portfolio. Additionally during the quarter we did not experience any major bankruptcies or store closure announcements. In the first quarter this strong demand translated into our portfolio occupancy improving 150 basis points over the prior year to 91.8%. Occupancy in the malls grew 150 basis points over the prior year to 91.9%.

We are continuing to make progress in our leasing spreads. Overall leases for stabilized malls during the quarter were signed at a 7.7% increase over the prior gross rent per-square-foot. Renewal leasing spreads were down 60 basis points over the prior rents, and new leases were signed at a 43.6% increase over prior rents. New leasing was helped by the replacement of several tenants that were on short-term leases. We backfilled Gap and Abercrombie stores with new retailers such as White House Black Market, Lego, Apple, PANDORA, Microsoft, and Victoria's Secret Pink. We anticipate continuing to benefit from this conversion.

We are focused on pushing renewal spreads, as well as maintaining the increases we are seeing on new leasing. In the first quarter we completed the sale of 2 centers. In January, we closed on the previously announced sale of Oak Hollow Square, a community center in High Point, North Carolina. We also sold the second phase of Settlers Ridge in Pittsburgh, Pennsylvania. The 2 centers were sold at an aggregate sales price of $33.4 million.

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

Thank you, Stephen. Year-to-date we completed approximately $195 million in financings at a weighted average rate of 5.09%. These financings generated net cash proceeds of more than $79 million after repayment of the existing loan balances. Both new loans are 10-year, nonrecourse loans. We achieved significant interest rate savings as the previous loans carried an interest rate of 6.51%.

On the last earning call, we mentioned that we had taken advantage of favorable short-term rates by placing several of our 2012 mortgage maturities in our lines of credit while we worked to complete new permanent financings. The 2 new mortgages that we just completed were part of this pool. We have term sheets for all but one of the remaining 2012 maturities. The debt markets are very attractive for quality sponsors, and we have received interest from CMBS lenders as well as institutions and banks. We anticipate completing these financings within the next several months.

We finished the quarter with close to $800 million of availability on our lines of credit. Our coverage ratios remain very sound with an interest coverage ratio of 2.5 times and fixed charge coverage of 1.9 times. Our debt-to-GAV ratio was 51% at quarter end. Today more than 80% of our debt is nonrecourse and property specific.

First quarter 2012 FFO per share was $0.49 per share compared with $0.46 per share in the prior year period excluding a $0.17 per share gain on extinguishment of debt in the prior year period. Our same-center NOI growth in the mall portfolio was encouraging, increasing 1.7% over the prior year. Same-center NOI for the total portfolio was healthy at 1.5%. FFO and NOI benefited from both occupancy and rent increases as well as from lower snow removal and bad debt expense in the quarter.

Other major items and earnings results included G&A as a percentage of revenues was 5.5% for the first quarter compared with 4.4% in the prior year period. G&A was higher as a percentage of revenues in the current quarter due to lower revenues resulting from the deconsolidation of the TIAA joint venture properties. Our cost recovery ratio for the first quarter 2012 was 94.8% compared with 95.4% in the prior year period. We recorded bad debt expense of $667,000 for the first quarter 2012 compared with $1.4 million in the prior year period.

Variable rate debt was 12.7% of total market capitalization versus 15.9% at the prior period. Variable rate debt represents 22.8% of our share of consolidated and unconsolidated debt compared with 26.6%. Based on our current outlook and expectations we are maintaining guidance for 2012 FFO in the range of $1.95 to $2.03 per share. The guidance assumes NOI growth in the range of 0% to 1%; out-parcel sales in the range of $3 million to $5 million for the year; and portfolio occupancy flat to up 50 basis points for the year.

This year we have already taken advantage of several attractive investment opportunities. We are excited to add these new sources of growth to our portfolio as they will contribute to CBL's future success. Our existing portfolio is also improving and benefiting from increases in retailer demand and limited new supply. Our leasing team is currently ramping up for a very busy ICSC RECon in Las Vegas this month.

We will have the full contingent in the leasing hall and look forward to visiting with many of you. We are pleased with the strong start to the year and to continuing this momentum throughout the remainder of 2012. We appreciate everyone joining us today and would now be happy to answer any questions you may have.

Thank you. (Operator Instructions) Our first question comes from Paul Morgan with Morgan Stanley. Please go ahead.

Hi. Good morning. On the leasing activity, could you just maybe provide a little bit -- you talked about being -- having a good start to the year; sales up, and starting to push renewals. Can you talk about that in the context of the renewal spreads that you are reporting, which are still kind of flat to slightly down. Maybe some of the offsets where you are kind of lowering rent on renewal and maybe some areas where you are seeing strength? Is there any notable retailer for example that is dragging it down?

Sure. Good morning, Paul. Like we have been pushing the past couple of years, we are really making a big effort to improve renewal spreads. There are still a few retailers that it seems like every quarter we get into a negotiation with and we decide that it makes more sense to renew them short-term and allow us more time to find a better user for the space. And we benefited from that with some of the new leasing this quarter and the replacements that we did for some of the short-term leasing that we had done.

There were a couple of retailers, I would say Abercrombie was one, where we renewed some leases on a short-term basis at a significant negative spread because of the sales decreases that they have had the past couple of years. So that dragged our renewal spreads down. And Payless Shoes was another one where we did a number of deals with them and negative spreads again, short-term renewals for the most part, the Payless is a pretty tough spaces. So those were definitely factors that kept us from being in positive territory on renewal spreads. First quarter is also the largest quarter for renewals, so we expect to show better results as the year goes on.

And to that 40% mark up on new leases, that was driven by taking some of the temp deals that you did and bringing in new retailers at a more normalized base rent?

Yes, exactly, because we had taken basically a mark down on those rents that had previously been in the space for 2, 3 years, and then we were able to replace them at market rents. So that drove those higher lease spreads on the new leasing.

Do you see that as a source of upside? Could we continue to see these big double-digit numbers on new lease spreads?

We hope so. That has really been a big part of our strategy in leasing is to maintain the NOI, but at the same time really push to find more productive users. And now we are seeing a lot better demand from retailers, more expansion plans, more new retailers coming into the market. And then with limited supply of new space being built, the number of retailers that are looking to come into the malls have increased. So we feel like things are coming our way to a bigger extent, and we'll continue to benefit going forward.

Okay. And then just on the -- there is about 700,000 square feet or so of renewal leasing activity that isn't reported in terms of spreads. Are those just a few department stores or something?

Exactly, those are anchor spaces, large spaces.

Okay, great. My last question on the outlet side. As you work with Horizon and look at the landscape for new projects and given your experience at developing centers in smaller markets, do you see many opportunities in terms of a shadow pipeline that projects that one day would have been a mall in a smaller market maybe could be an outlet center again, and what do you think the longer term looks like?

Well, I think we do see a decent pipeline of new projects working with Horizon. The type of market we feel like we need to be careful with and there needs to be some minimum requirements and we typically look for at least a million people in the trade area from a population point of view, significant tourist space, and so that limits the amount of markets that are available.

But, that being said, Horizon and us are out prospecting in new markets, and our goal is to have a new project every year to 18 months. And looking forward, we feel like we are on track to achieve that. So there is definitely some opportunity out there. It is competitive as everyone knows, but Horizon has done a great job. They have great relationships with the retailers. We have our relationships with the retailers, and there is a lot more overlap and convergence today in the outlet centers in terms of the retailers than at any point in the future. So the partnership is really working for both of us, and we are excited at the progress we have made and see a lot of upside as well.

Great, thanks.

Thank you.

Thank you. Our next question comes from Craig Schmidt with Bank of America. Please go ahead.

Thank you.

Good morning, Craig.

Good morning. The TIAA-CREF deal closed I guess in October, and at that point you were talking about pursuing new opportunities. I wondered if you could describe how that is going, and what kind of things you guys are looking to do together?

Yes, I think the relationship has been great. We continue to have meetings with them, bring them up to date on what is going on in the markets and so on. And we continue to explore various opportunities with them. There is nothing specific at this point in time, but they have a tremendous appetite, and they have got tremendous flexibility and tremendous financial capacity to do it. And the expertise we are seeing with the existing properties is basically, we think, furthering their pursuit of the specific opportunities. So we are real excited about it, and will continue to work with our friends at Teachers.

In terms of acquisitions, is -- some things that you would buy individually as opposed to what you would buy in a joint venture? Is there any kind of different things you would be looking for?

No. I think that Teachers is very focused on the upper end and high productivity malls. There are certain malls and certain geographical areas that probably don't fit their criteria, but they would fit our criteria because we see great sales per-square-foot, we see also the opportunity to expand the project and add our management expertise to it. So there are opportunities that we'll do and that Teachers probably won't be involved in because of different criteria, et cetera. But we also explore with other joint venture partners on lower productivity malls where we can add the management expertise in leasing that we have been doing since 1978, so it is a great opportunity for us.

Okay. Thank you.

Thanks, Craig.

Our next question comes from the line of Nathan Isbee with Stifel Nicolaus. Please go ahead.

Hi, good morning.

Good morning.

How much of the occupancy increase this quarter would you say was same-store versus perhaps selling some of the properties over last year?

It was really all same-store. The only centers we sold have been the community centers, so we haven't sold any malls. And even the malls that were taken out for the impairments as a percentage of the portfolio, they are so small that they really didn't move the needle at all. So it was just same-store occupancy, new leasing increases that we were able to achieve.

Okay, great. And then on the Gap and Abercrombie stores that closed this quarter, can you just give us some idea of what type of malls they closed at, and did any of them close in the same malls?

Hang on, I am looking. They closed in really a wide variety of malls. And one example, in CoolSprings, Abercrombie closed and that is where Apple is replacing them. They've closed in other malls where we have different replacements. They didn't close in any of the same malls. The Gap, for example, by their vacating it gave us room to do the Lego deal at Oak Park. So it is really a combination of factors some of them are stores that weren't doing so great from their point of view. But others were ones that we work with them to take back because we had better replacements.

Okay. And then how many of the 15 that closed this quarter are released already?

About half of them are.

Okay. And then just focusing on the CBL/Horizon relationship. You continue to move forward there in terms of new deals. I am just curious if you can just give us some insight into what is stopping you from acquiring the whole entity at this point. Is it on your side? Is it on their side?

I think we have a great working relationship with them today, and it is working out very well for us. And we continue to explore various opportunities for each of us. So those are things that, as this joint venture continues to progress, everything is available for either of us to do from that standpoint. So we have not pursued in any aggressive way other than how we have been pursuing these developments today.

Okay. And then just on Gettysburg, can you just give a sense on time line and size perhaps of what you plan to do there? Is it too early to say?

Yes, I think that they have some expansion plans we are working on together. They also have the -- now that we have gotten rid of some mezz financing that was in place there, there is the opportunity to bring in some other tenants with tenant allowances and other improvements can be made. So I think Gettysburg is going to be an excellent opportunity for us as well. And I think our friends at Horizon see it the same way. Even though its sales per-square-foot are not as high as the others, it's still got great opportunities, great expansion potential. El Paso is doing extremely well and Oklahoma City continues to progress above everybody's expectations.

All right. Thanks.

Thanks, Nate.

Our next question comes from the line of Quentin Velleley with Citi. Please go ahead.

Hey, Quentin.

Good morning. Just in terms of the guidance just with the refinancings that you did, and I think you commented that you had term sheets out on pretty much all of the 2012 mortgage maturities. Have your interest expense expectations changed in guidance as a result of those refinancings or is it still the same?

I think it is basically the same. I think that as the markets have progressed we basically watch those as well. We expect the bad debt expense could go up somewhat, so we are making certain that we are conservative in our approach on that. And tenant reimbursements have tended to be down a little, so we are watching that as well. So those are a couple of things that have resulted in our basically being cautious with regard to the guidance we have given. But, no, I think on the financing standpoint we are very excited about the fact that we have been able to replace these loans at good fixed interest rates on a nonrecourse project-specific basis and our returns on equity have just gotten even better. So it is an excellent outlook for us from the standpoint of financing.

Okay. Thanks. And then just in terms of the outlet acquisitions, it sounds like there might be some other opportunities out there, some of the development and the renovations that you are looking at. How are you thinking about leverage and liquidity at the moment? Do you think you need more common equity, or are you sort of comfortable with leverage ratios and liquidity where it is?

Well, Quentin, I think we have been cautious since forming our Company as to basically using nonrecourse loans, and that was one of our big concerns about the outlet business is basically it has been more corporate debt. So when we were able to finance the Oklahoma City project with a CMBS loan that left us with about $8 million of equity in the project and returns are well in excess of 50% -- returns on equity -- that gave us a lot of confidence. So we think that there are going to be some more opportunities out there to take advantage of.

Stephen, it is Michael Bilerman speaking. I have a quick question. Just as you think about the portfolio today, how much of the inline GLA is on these short-term leases? Because it seems that it is both an opportunity and a risk, right? Where certainly a big portion or a sizable portion it seems like there is lot of upside as you rotate to tenants like Apple and others, but then there is also some -- you talked about Abercrombie and Payless that continue to move down. So how much of it today is under that?

Hey, Michael. I would say probably about 40% is 3 years or less if you include everything that has been done over the past few years. It is definitely higher than it has been at any point, but we feel good about the prospects going forward that we are kind of reaching the end of the wave of remarking or resetting that a lot of retailers have gone through.

You know, even Gap had really strong sales in February and March, and I was actually just out at the their offices last week, and there is a lot of excitement and good energy there. So I think they look at the rest of their portfolio with CBL after the stores that have closed and they are really positive. Sales are up dramatically. Their occupancy costs are in line so we feel like we are reaching the end with them in terms of the closures.

Abercrombie, there is still some ways to go, but for the most part, other retailers are healthy. And we are just seeing a lot of good demand from boxes. And we have been talking about the boxes we have been doing, but that helps occupancy. And we are able to combine vacant spaces and spaces that are on short-term leases to bring in real strong traffic and income generators there.

And then there's just categories that have made a real resurgence; athletic shoes has been on fire for the past year. We are seeing a lot of good growth in demand there and new concepts. Jewelry has made a strong comeback, and we are doing a lot of deals with Kay which is owned by Sterling; it's one of our largest retailers. And also by PANDORA; they are expanding with the specialty jewelry in a lot of malls. So just -- we feel like it is a lot better part of the cycle from a demand point of view. So, we would rather --- we are comfortable with the exposure to the short-term leasing going forward.

And you said your 40% of the inline GLA is under 3 years or less, and the composition of those retailers in your view is much healthier than causing some of these declines in renewals?

No, I think that that is going to come down over time. It is something where -- we are doing -- most of the new leasing is done on a 10-year term, so I don't see that being something that gets sustained overtime.

Right. I am just saying that it sounds like 40% of the existing base is on leases under 3 years, and it would seem from your comments that that represents a significant opportunity as you move these short-term leases to longer term leases granted there is some capital. I am just trying to get a sense of the next few years we could actually see pretty strong growth out of the core as you migrate all these short-term leases to long-term.

Yes, we agree. Thank you. That is a great point. I think this quarter really we have seen the strongest evidence of that with the new leasing that we have been able to achieve. That is a priority for us and for our leasing team and the other thing that is helping us is just the general economic recovery in our markets, and we are seeing better employment or lower unemployment, more job growth and better consumer confidence. So that is helping the retailers be willing to expand more into the middle markets.

I think initially they were focused on the real high productivity malls, but now we are seeing retailers coming to us and talking about expanding into our markets. They weren't having those conversations a year ago. So we are excited about the convention in Las Vegas; have a lot on tap there. And then we follow that up with our Connections leasing event here in Chattanooga in June. So we are positive about the prognosis going forward.

Thanks for the color.

Thank you.

Our next question comes from Ben Yang with KBW. Please go ahead.

Yes, hi. Good morning, thanks. John, I am just wondering if you could further elaborate a little bit on the 2 CMBS loans that you just completed, Arbor Place and Northwood, because I think you commented that debt markets are attractive, but the 5.09% rate is still pretty good from all [that do] in that low $300 a foot range. So I am just wondering is there anything unusual about these malls that led to that attractive rate and term, or is this maybe what the CMBS market can bear for $300 a foot type malls?

I guess the uniqueness was is that CBL was managing and owned those properties.

That is the secret sauce?

That is definitely the secret sauce and it is a special recipe too.

So based on the term sheets that you have out there for your 12 maturities, $300 a foot, low 5% range, that is kind of your expectation as well?

Yes, I think it is in that same range, in basically the term sheets that we have in place. The only loan that we don't have a term sheet on is our project in Livonia, Michigan, Laurel Park, which comes due in December. That is too late in the game, but we will continue to pursue that. But the term sheets that we have and the loans that we are closing in the next 60 to 90 days are basically in that same range. It all depends upon what happens with swap rates and spreads are coming in somewhat. So we are very positive about it. In all seriousness, I do think that the difference in the CMBS markets today is based upon the ability of the sponsors, and we have had some great relationships with the sponsors who are basically quoting these CMBS loans to us, so (multiple speakers)

(multiple speakers) sponsorship matters. Any thoughts on what that rate would look like if it went to a balance sheet lender?

It probably could have been a little lower but it wouldn't be 10 years, because the balance sheet lender is probably -- other than insurance companies -- are basically in the 5 to 7 year range.

Fair enough. And then just curious on the Horizon outlets that you just bought. How did you guys come to an agreement on price? Did they set the price, and you took it? Was there a negotiation? Was there a more formal process for price discovery on those outlet centers?

I think everything in today's worlds is negotiations and that is what went on with regard to those two as well.

And then can you remind us what the cap rate was on that purchase as well?

The combined cap rate was in the high 7s.

High 7s. Okay. And then just final question. Stephen, I think you commented more retailer expansion plans, willing to expand in the middle market, limited supply. I think Chico's is the only retailer that has publicly stated that they intend to expand in the middle market. Just wondering, are you aware of any other national retailers that have similar growth strategies based on public or even some of your private conversations?

Yes, I think Chico's made that public announcement which we liked a lot, but -- we talked about Apple doing more stores with us. We are working with J.Crew in a number of markets. North Face, Oakley, Coach and Sephora are new ones, but we are continuing to do more with them. We actually just did a deal with Armani for one of their concepts. These are middle markets. Tilly's and Zumiez which are more junior oriented. H&M, we are doing a lot with H&M, and their sales have increased. They are very strong. So those are just, I think, some more names that we are working with and that we are excited about.

Okay. Great, thanks guys.

Thanks, Ben.

Our next question comes from Carol Kemple with Hilliard Lyons. Go ahead.

Good morning.

Hey, Carol. How are you?

Good. How are you all doing?

Good.

Can you tell us about any progress made on the acquisition you all did last fall in the Chattanooga market?

Sure. We've got a lot going on there both in terms of redevelopment and releasing. Belk is doing a renovation of their store. They have a home store that they are consolidating into a space right adjacent to their department store that will take some vacancy in the mall. Then we have a group that we are backfilling their existing home store.

We have an associated center right out front that we have got letters of intent pending with 3 boxes. That would bring that to 100% leased, and we are working on a streetscape redevelopment along the front of the mall that would combine some boxes and restaurants and retailers and preliminary plans to do some renovation work. So we have a lot going on there. As we get leases signed, we will obviously make announcements about the specific names, but we are real pleased with the progress, and it is going to be a good project for us long-term.

Are you all seeing anything attractive on the acquisition front besides outlets?

Yes. I think we are looking at a lot of things and discussions. But I don't think that -- there is quite a few out there and we are sorting through those so I think we will see more opportunities as things come along. I think the deal that Westfield is concluding with Starwoods is basically a good indication that the middle market malls are basically producing good sales results and good sales potential. So, we are looking, but we are going to be selective with regard to what we do.

After hearing the results of that deal, does that make you all more likely to sell some of your malls?

Well, I think we would look at those opportunities as they present themselves. If there is a good opportunity to monetize some of our properties, we would do so. We are focused on watching our leverage as well. And that will continue to be something we are focused on as well.

Okay. Thank you.

Thanks, Carol.

Thank you. Our next question comes from Todd Thomas with KeyBanc Capital Markets. Please go ahead.

Hey, Todd.

Hi. Good morning.

Good morning.

Couple of questions just going back to the new leasing in the quarter for a second. First, how much of the 136,000 square feet of new leasing entailed the conversion of short-term to permanent leasing? And then your new leasing spreads, they have been positive for several quarters now, but is this the first quarter that we have really seen some burn off of the short-term leasing now that we are roughly, I guess, 3 years or so out from when you really started doing those deals?

Hey, Todd. We don't have here right now the exact number of the square feet to answer your question about the short-term leasing and the 136,000. But it has been part of new leasing. I think it is becoming more of a part, a bigger part, in this quarter and going forward. I also think a factor is just -- we have had 9 quarters of sales growth. And as sales grow, our occupancy cost is down. It was 50 basis points down at the end of last year compared to the year before. So that allows us to push the rents and that is our job, so that is what we are doing to try to do that. With no new developments happening, retailers are -- if they want a location they are being realistic and understanding what the economics need to be. So those are just some of the different factors that come into play.

Okay. And then in terms of tenant sales growth actually in the quarter. Can you just break out what you saw within the portfolio, maybe some of your higher quality centers relative to some of the more moderate malls in your portfolio, was there any difference between the 2 groups?

It was across the board. We had some malls that were doing sales in the $200s that had double digit sales growth because of factors in their economy. Our mall in Cheyenne, Wyoming, that economy has really gotten a boost because of energy and other growth in there, so it has had double-digit sales growth. El Centro and Imperial Valley because of the strengthening [Mexican] economy has had double digit sales growth. And that is a mall that is at almost $400 a foot now. So it is really pretty spread out throughout the portfolio in terms of where the sales growth is coming from. We are pleased, and we see that some of the malls that have sales in the high $200s or low $300s are having good growth in both sales and NOI, and we are pleased with that.

Okay. And then just lastly a question for John. I was just wondering -- I heard you go through some of your guidance assumptions. I was just wondering with regards to the income tax benefit that you realized in the quarter, are you still expecting about $3 million to $5 million of income taxes for the year?

Yes. That was some carryover from the last year, so that is what helped us in that first quarter. But we do anticipate that our taxable REIT subsidiary, the management company, is doing well and that is probably where that is going to result in our paying some taxes. It is not always bad to pay taxes though, especially when you are making money.

All right, great. Thank you.

Thanks.

Thank you. Our next question comes from Jim Sullivan with Cowen and Company. Please go ahead.

Hey, Jim.

Good morning, guys. How are you? A couple of questions on the outlet center business. With the recent acquisition, Stephen, I think you said in your prepared comments that both of those centers have land available for expansion and I am just curious number one, how much land, and number two, whether when you acquire the centers whether you fully costed that land into your cap rate calculation?

Jim, I will answer that one. We did not anticipate --- we did not use any of that excess land in our calculation when coming to that. In El Paso there is probably 20 to 30 acres of excess land. There is 2 specific potential areas for expansion there that will -- expansion there should happen relatively quickly. In Gettysburg I think there is probably 5 to 10 acres of additional land there, and there is some expansion potential there as well. So we did not take any of that excess land and put any value on that for coming up with our cap rate.

And then in Oklahoma City like I said we have got the new phase that we are about start on. That is about 30,000 square feet, and then we have an additional phase that we can do down the road once we have the demand for that.

Typically I think the pro forma yields on the expansions are higher than phase 1 typically for outlet centers, right?

Yes.

What kind of numbers should we thinking about? If we are thinking about 10 on phase 1, what kind of ballpark increments should we expect on the expansions?

Well, they will be in excess of 10.

The buildings are more expensive because you don't have the economies of scale. So it is not a dramatic increase over the initial yields, but they will definitely be double digit.

Okay. John, really for you I guess, in terms of the outlet center business as you are expanding this part of your overall portfolio. I just wonder what kind of conversations you have with lenders? How much of an appetite they have to lend on outlet centers, and how they approach them perhaps differently than they might approach a traditional mall in terms of a loan to value and rate and other variables?

I think in Oklahoma City they approached it fairly consistent with what they have done on the other ones with not much change. I think they look at the sales per square foot and the productivity of those prop malls probably more so than they do on a convention mall. Because the leases are shorter, and I think that their underwriting criteria is basically going to be that, and they are going to look at that occupancy. Oklahoma City was great because it opened 100% leased, and so I think that helped tremendously. I think that the conventional institutional guys are still waiting for sales results over a more extended period of time, whereas the CMBS lenders feel a little more comfortable with looking at the sales and what is happening from a productivity standpoint.

Okay. And then, Stephen, can you give us an update on what the preleasing percentage is in the new outlet center in Georgia?

Sure, Jim. We are at 70% leasing committed. And we have got a real good backlog, so we are anticipating a strong opening, getting a lot of new interest, and looking forward to breaking ground in the next few weeks or few days.

Okay, good. Then final question from me, back on the mall business, I'm just curious is there any ability to expand the CoolSprings Galleria?

Yes, there's -- we have looked at CoolSprings and a number of our malls. There is not vacant land, but it is more identifying what is there and working with the department stores to come up with a plan that works for them and works for us. Building out into the parking lot. So that is something that we have been working on in CoolSprings, and we think it's got some good opportunity, and also at several other of the malls there is good opportunity to do that.

Okay. Leave it there. Thank you.

Thank you.

Thank you. Our next question comes from Cedrik Lachance with Green Street Advisors. Please go ahead.

Good morning, Cedrik.

Good morning, guys. Just one quick question in regards to capital allocation and dispositions. When I look back to the TIAA-CREF JV which basically was completed or signed about a year ago, pricing in the market has increased quite a bit. I think with the Westfield transaction we got confirmation of some pretty robust pricing for, let's call them B malls, and since then you have also tried to bid on that Westfield portfolio I think at the time. You mentioned that the pricing that you had represented to them was very, very quickly surpassed by others. So when I look at that, it seems to me that you would be more inclined to dispose of assets than to acquire. Why not be more active on the disposition front at this point?

I think we look at every opportunity to basically enhance the portfolio and pay down debt and we will continue to do that. While at the same time looking at how we can grow FFO, and that is the focus we will continue to do. If you sell off those assets, granted you can pay down debt but in turn you have got to figure out how you are going to reinvest that money to make certain that your shareholders can enjoy the benefits of increased dividends. So we watch that constantly and we don't rule out selling any of our assets, just depending upon what the opportunity is and what has been presented to us on that. We don't sit back and just take it as a gradual thing, but focus on it to make certain we are doing the right thing.

So in that case you are basically looking at the reinvestment issues associated with that capital. What makes for a good reinvestment versus what would make for a good disposition at this point?

I think the ability to see growth in that NOI, and to see something that hasn't been managed up to the standards that we would manage something, as well as the ability to cut expenses and see other potential possibilities with an asset. Also there could be some opportunities coming along where people have a negative tax basis. We have worked through that for a number of years with people. So we have that ability to structure transactions that can be tax sensitive to people who have a tremendous negative basis. So I think creativity and the ability of our management, leasing and redevelopment team to focus and take advantage of those opportunities are really forefront on our minds.

Are you actively negotiating with anyone in terms of trying to acquire properties?

Well, we are very quiet with regard to that. We don't announce anything until we are actually ready to close a transaction. We will continue to look. There is opportunities out there, and we will take advantage of those when we see an opportunity that makes a great deal of sense for us.

Okay. Thank you.

Thanks, Cedrik.

Our next question comes from Michael Mueller with JPMorgan. Please go ahead.

Hey, Michael.

Hey. Most of the questions have been answered but wondering if you can talk about two things. One, the renovations you have underway this year. When you look out over the next couple of years, does it feel like you are back in that consistent flow of doing 3 or 4 of these a year at this point? And then secondly, John, you talked --- you mentioned the dividend. Can you just talk about the dividend outlook over the next couple of years given the low payout ratio?

Sure. I will take the renovation question. So I think that we are looking at roughly that same dollar amount for the next couple of years. It's -- our malls because of the renovations that we have done are in pretty good shape. So it is not necessarily 4 malls, but there is some smaller capital projects that -- entrances or floors or items like that that we feel like we want to update again to keep the malls fresh from the customer's point of view. So it has been a real effective strategy. The malls that we renovated last year we have gotten great feedback, we are seeing good results in terms of sales and leasing. So it is definitely something that we feel is important. Now I will let John talk about the dividend.

As to the dividend I think what we do is we balance between paying down debt, bringing down our debt numbers, and basically paying to our shareholders a good reasonable dividend. So in addition to that we are amortizing just on our -- amortizing debt about $98 million a year so we are amortizing the debt down.

We will look at that dividend. We think the dividend growth is an important aspect, but we also think having a good strong balance sheet and paying down debt is something that we focus on as well so we are very, very focused on that. We have the highest dividend yield in the mall sector today so we would like to see some growth in the stock price and that could drive the dividend as well. I think it is a balance between paying down debt and then paying a dividend that we think is sustainable and safe for all of our shareholders.

Okay. But when you look at taxable net income you don't see anything over the next year or two that is going to cause taxable income to pop and basically push up the dividend in a similar way?

Not at this present time I don't see that that is a case with regard to anything significant causing taxable income to go up. Thanks, Mike.

Okay. Thanks.

Great. Bye.

Our next question comes from Rich Moore with RBC Capital Markets. Please go ahead.

Hey, Rich.

Hi. Good morning, guys. A couple of balance sheet questions if I could. John, the $360 million of line debt that you have is the thought there that you will continue to pay that down as you get, like you got the $79 million of excess proceeds on your recent mortgages, is that sort of the plan, or you just let that ride for a bit, or do you take that out with some other more permanent structure?

No. We will pay those down with cash as we over finance those. We also have a short-term term loan that comes due in 2013 for the acquisition of the Starmount portfolio, and we will pay that off too out of proceeds and other things, refinancings, et cetera.

Okay, yes. I was going to get to that. You kind of stole my thunder. So Starmount I thought was actually in November of this year; is that right?

Yes, you are right. It is November this year, and we will pay that off. That is correct.

Okay. So that is just with proceeds. And then the same is true of your other unsecured term loan which is next year. I guess the idea there would be to extend that at some point or maybe get another term loan to replace it, that sort of thing?

No, I think our plans would basically be to pay that off as well. With the refinancings that we accomplished last year and the refinancings that we are working on this year we see excess proceeds and other things that we are working on that would pay that off without having to access the equity market. So we have a financial plan, the plan is very solid and conservative, and I think that we are well ahead of that plan at this point in time. And we are excited about the possibilities of really beating that plan significantly.

Okay. All right. That sounds good. It is $755 million of total debt you would be paying off, so that would certainly be substantial. The second thing I had on Atlanta, what is the cost of that project?

We are still negotiating the contracts on that, Rich. I think in the next supplemental we will basically have those returns. As we said it is going to be in excess of 10% on an unleveraged basis. And I think we are pretty excited about what we are seeing as far as the leasing and as far as construction costs as well, so we will have that definitely in the next supplemental.

Okay, very good. Thank you, guys.

Thanks, Rich.

Our next question comes from R.J. Milligan with Raymond James. Please go ahead.

Hey, R.J.

Good morning. Just two quick things because most of my questions have been answered. Stephen, I don't know if you mentioned the percentage of short-term leases that were signed in the quarter?

No, I didn't. It is in the mid 40s, and it is down about 600 basis points from where it was last year first quarter.

Okay. Do you anticipate that number continuing to decline as we go through the year?

Yes, definitely and this was this quarter because of the number of renewals was higher than it will be going forward as well probably.

Okay. Just curious, you guys had said that the weather and the Easter holiday had helped boost sales in the first quarter. I am wondering if you have any indication as to how April has been tracking?

Yes, I mean it's -- we don't have specific numbers yet from retailers; that will come out in the next few days. But from traffic we are really pleased. It looks positive. Traffic has been good and reports we have gotten from retailers have been good, so it seems like things have stayed on a strong track.

Great. Thanks. That is all I had.

Thank you.

Thank you. Our next question comes from Jeffrey Donnelly with Wells Fargo. Please go ahead.

Hey, Jeff.

Hey, good morning, guys. Stephen, if I could maybe build on R.J.'s question. I am curious, what is the process of getting the 40% of your shop tenants to commit to a longer lease? I would presume other than just maybe asking nicely it is only going to happen when they think they are competing against more than one user for their space. And certainly you guys have a cost to try and extend that lease, I would think it is either -- or meaning to release that to somebody else who might want it for a longer period of time, downtime or [TI] money. I guess my question is do you feel there is enough gap in the net rent between what you are getting from a short-term lease tenant versus what you could get from someone who would come in at longer term that you might have to refigure?

In 90% of the cases we are better off economically with a long-term deal even though there might be some downtime or some costs associated with it. So the short-term leasing is an interim step. And it is either something where we are working with the retailer to -- while their sales recover to work out a longer-term deal. Or we have got someone to replace them and there is a timing issue, or we are working to get someone to replace them. So it is definitely not our preference, and there is always going to be a certain percentage of it, but we are not happy in the 40s, and we want to get that lower.

Where do you think that was in typical -- I guess call it pre-2008? What do you think is normal, if you will, for a mall in terms of leases less than call it 3 years?

Those probably always in the 25% to 30% range just because there is so many moving parts in the malls. That is where we are looking to see it go back.

And have you seen a lot of the folks that you do have these short-term leases with actually become the long-term tenant if you will? Do you think -- is there a high conversion rate, or is it not as high as you might think or hope?

In some cases it happens, but probably in more cases it is bringing in someone new where we get the longer-term tenant. Yes, some of this is driven by some retailers, there are not as many, but some are still working through some issues they have. So part of the relationship with them we work with them in certain locations and they work with us. As their business gets better then that pays off. And we have seen that with a number of retailers, Zales was a great example. They were on the brink, and we kept a lot of locations open short-term. And now their business is on fire, and we are doing a lot of long-term deals and things have improved. So that is part of it with several retailers as well.

And another question or two, John. I think you had mentioned that on the outlet side of the business that lenders because of the shorter lease term they tend to focus a little bit more on the productivity of those properties. Have you guys had any maybe change in the tone from your lenders I guess as your average lease term in the malls has shrunk down a little bit because of the short-term leasing --- have they [maybe] I guess call it rattled their saber at all or have they been pretty supportive of it?

No, we haven't seen that. The construction alone on our project in Woodstock, or Atlanta, has basically been very aggressive from the banks who wanted to do that. On the permanent lending side is I think they are just looking at the asset and the property specifics so, no, I haven't seen them rattle their saber or anything such as that.

Just one last question maybe more big picture I guess is that there has been a lot of activity certainly in the mall transaction side of the business and improvement I guess in the financing markets. Are you able to maybe compare and contrast first, John, like how you kind of think things stand today for maybe how lenders are underwriting malls at close to $400 a square foot in sales versus those at $300 a square foot? Has there really been any shift or improvement in the last few months in terms of how they are thinking about loan proceeds and willingness to finance those assets?

I think that basically -- I don't think there has been a huge, huge differential in their minds between $300 and $400 a square foot. I think occupancy is an important element to them. I think they see what is going on with your NOI and the tenant leases that are going over -- rolling over, et cetera. So I think that we have been able to negotiate with them, and I think they are aggressive with regard to that. And so many banks today have so much money that they want to do term loans, and they can be aggressive on those as well. So I think the appraisers are becoming more realistic. I think that as a result of that things are much more positive. And as I said earlier, I think the sponsorship and the ability to stay in the deal is so, so important and what you have done in the past. And I think we have been very fortunate in having great relationship with our banks. We are basically doing a lot of these CMBS loans to sell through their investment banking groups. So it has been a great relationship that we have had for so many years and with so many banks.

Great. Thank you, guys.

Thanks, Jeff.

Mr. Lebovitz, there appears to be no further questions at this time. I will turn the call back over to you, sir. Please go ahead with your closing remarks.

Great. I would just like to thank everyone for participating again. We look forward to seeing you in a couple of weeks out in Las Vegas, those of you who are going to be there at the RECon convention and then at NAREIT in New York a few weeks after that. So thank you and have a great 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.