CBL & Associates Properties, Inc. (CBL) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CBL & Associates Properties Inc. second-quarter 2012 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 Friday, July 27, 2012. I would now like to turn the conference over to Mr. Stephen Lebovitz, President and CEO. Please go ahead, sir.

Thank you, and good morning. We appreciate your participation in the CBL & Associates Properties Inc. conference call to discuss second 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 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 on a fully diluted converted share basis, and 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 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 CBLproperties.com.

Thank you, Katie. We are pleased to report another strong quarter, headlined by very positive operational results on our portfolio of market dominant properties. FFO per share increased 6% to $0.53, beating the most recent consensus estimates of $0.49 per share. Same-center NOI grew by 2.7%. Occupancy increased 180 basis points, and leasing spreads by 10.2%. As a result, we have raised our guidance for the year for same-center NOI growth to 1% to 2%, and FFO to a range of $2.00 to $2.10 per share.

Our improved performance reflects the more robust retailer demand we are experiencing in our portfolio. Sales growth year to date has been encouraging, as well, at 4.3%. This, coupled with improved occupancy, allows us to generate higher rents and better lease terms in retailer negotiations, and improve the productivity of our portfolio going forward. We've spent a lot of time this quarter meeting with our retail partners.

The ICSC RECon in Las Vegas this May was up roughly 10% in attendance, and we experienced a similar increase in the number of meetings at our booth. Overall, our meetings were positive, and we were able to effectively follow up on pending deals with our own leasing conference in June, which we call Connection. Approximately 145 retailers attended Connection here in Chattanooga, which is the best turnout in the 16 years that we have held this conference.

We had nearly a dozen new companies represented, including Francesca's, Firebirds Restaurants, Pandora, and Godiva, to name just a few. Connection is a great opportunity for us to make deals, and also to strengthen our retailer relationships with key deal makers that visit us over the three days of the event. Recently, we welcomed several new stores to the CBL portfolio, opening our first LEGO and Microsoft at Oak Park Mall in Kansas City, Kansas, as well as Armani Exchange at Mall Del Norte in Laredo, Texas.

The stores experienced strong openings, and we are pursuing discussions for additional locations in CBL malls. We also celebrated the grand opening of our fifth Apple Store at Cool Springs Galleria in Nashville. Stabilized mall occupancy improved during the quarter by 180 basis points, increasing to 92.3%. Total portfolio occupancy experienced a similar improvement, increasing 170 basis points to 92.3%. We only have one property, the outlet shops at Oklahoma City, in the new mall category at this time, and that property is 100% leased.

We are very pleased with the progress in leasing spreads this quarter, which showed strength across both new and renewal leasing. Overall leases for stabilized malls during the quarter were signed at a 10.2% increase over the prior gross rent per square foot. Renewal a leasing spreads increased 9.5% over the prior gross rents, and new leases were signed at a 13.2% increase over prior gross rents.

The improvement in renewal spreads is encouraging, and coupled with our occupancy increases, demonstrates the strengthening of our properties as demand improves, and new supply remains constricted. During the quarter, we commenced construction on the outlet shops in Atlanta.

With just over a year until the grand opening, the 370,000 square foot project is approximately 72% 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 shops at Oklahoma City, this project is being developed at a 75-25 joint venture with Horizon Group.

We have recently announced several new project starts during the quarter. We are underway with the development of the second phase of the outlet shops at Oklahoma City. Phase II will encompass approximately 30,000 square feet, with great new stores, such as Ann Taylor Loft, Waterford, Lucky Jeans, and Cole Haan. The project is scheduled to open ahead of the 2012 holiday season.

We just started construction on an expansion at Southaven Towne Center, our open-air center across the state line from Memphis in Southaven, Mississippi. The first phase of the expansion features 15,000 square feet, and is fully leased to Men's Warehouse, College Station, Torrid, and rue21. The project is scheduled for completion in late fall.

At Southpark Mall in Colonial Heights, near Richmond, Virginia, we announced the first phase of the redevelopment of the existing Dillards. Dillard's will be closing their store in September so we can begin construction in October on a new 56,000 square foot Dick's Sporting Goods. This will be a great addition to the center. We will announce more details on the project, including additional retailers, when construction commences later this year.

Year-to-date sales at our malls increased 4.3%. During the second quarter, sales lagged in April as compared with the prior year, primarily due to the earlier Easter holiday. However, May and June showed healthy increases. For the trailing 12 months, our sales have increased 4% to $341 per square foot, compared with $328 in the prior-year period. We anticipate sales will continue to improve at a steady pace for the remainder of 2012.

During the second quarter, we closed on the acquisition of Dakota Square Mall in Minot, North Dakota, for a total investment of $91.5 million. This is a great addition to our portfolio at a very attractive price. The mall currently generates sales of over $490 per square foot, and they continue to increase. We see a number of opportunities to grow the NOI at the center, since the average occupancy cost is in the high single digits.

The Minot economy is growing tremendously, in part because of the booming oil and gas industry in the area. The unemployment rate is one of the lowest in the country, at under 4%. We are confident Dakota Square will be a solid long-term contributor to the CBL portfolio. In July, we sold at Massard Crossing, a community center in Fort Smith, Arkansas, for $7.8 million.

We were pleased to expand our third-party management businesses in the second quarter, with a new contract with Starwood to provide management services for six of the seven malls they recently acquired from Westfield. The contract is for an initial two-year term, and will provide day-to-day on-site management, accounting, specialty retail and branding, marketing, and other services.

We are excited to work with Starwood to unlock the potential each of these properties. It is a strong endorsement of our operating expertise to have Starwood select us to provide these management services. I will now turn it over to John for the financial review.

Thank you, Stephen. You may recall that in the first quarter we retired most of our 2012 maturities using our credit facilities. Since that time, we have been actively placing new mortgages on those properties, and reducing the corresponding balance on our lines of credit. Year to date, we have closed over $456 million in loans at a weighted average rate of 4.97%, and a term of 10 years.

These financings generated net cash proceeds of more than $138 million, after repayment of the existing loan balances. We have achieved significant interest rate savings over the previous loans, which averaged 6.25%. We anticipate using the excess proceeds to retire $167 million unsecured credit facility that matures in November 2012.

We have one remaining mortgage maturity in 2012, which we expect to refinance when it opens to pre-pay in October. As a result of our financing activity, our variable rate debt declined to 17% of our shares of total consolidated and unconsolidated debt from 23% in the first quarter. We finished the quarter with $100 million outstanding on our credit facilities, providing ample capacity and flexibility.

Our financial covenant ratios remained very sound, with an interest coverage ratio of 2.5 times, and fixed charge coverage of 1.97 times. Our debt-to-GAV ratio was 52.5% at quarter-end. Today, more than 80% of our debt is non-recourse and property specific. Beginning in January of next year, we have the option to call the Westfield preferred units. If we choose not to call the units before July 2013, the rate steps up to 9%, and depending upon the circumstances, will either return to 6% in July 2016, or stay at 9% into perpetuity.

We anticipate addressing this using our combination of capital sources. We have more than enough capacity on our lines of credit to retire the entire principal balance as a short-term solution. However, we would anticipate a longer-term takeout to include a combination of assets sales proceeds, excess financing proceeds, and other capital sources, depending upon market conditions.

Second quarter 2012 FFO grew 6% to $0.53 per share, compared with $0.50 per share in the prior year. FFO was positively impacted by lower interest expense resulting from our recent favorable financing, and lower overall debt as compared with the prior-year period.

Our cost recovery ratio for the second quarter of 2012 was 97.3%, compared with 102.5% in the prior-year period. This was primarily the result of lower tenant reimbursements. G&A as a percentage of revenue was 4.7% for the second quarter, compared with 4.3% in the prior-year period. G&A as a percentage of revenue will be slightly higher going forward, primarily as a result of lower revenues from the deconsolidation of the TIAA joint venture properties.

Our same-center NOI growth in the mall portfolio was encouraging, increasing 2.9% over the prior year. Same-center NOI growth for the total portfolio was also healthy at 2.7%. Same-center NOI was positively impacted by increases in rent as a result of occupancy gains and positive leasing spreads. We also received a $1.5 million bankruptcy settlement related to Wilson's Leather in the quarter that was included in base rent.

Property operating expenses increased by roughly $1.3 million on a same-center basis, primarily as a result of higher payroll costs, bad debt expense, and legal fees. Bad debt expense during the second quarter 2012 was $663,000, compared with $111,000 in the prior year. Based on our current outlook and expectations, we are updating our guidance for 2012 FFO to the range of $2.00 to $2.10 per share. The guidance incorporates our stronger assumptions for NOI growth and occupancy.

We increased our forecast for same-center NOI growth to a range of 1% to 2%, and portfolio occupancy up 50 basis points to 100 basis points for the year. The guidance includes contributions for the property interest acquired this year, as well as the additional third-party fee income from the Starwood contract. While our expectations for the full-year results have improved, we would anticipate the pace of NOI growth to mitigate somewhat in the second half, as we head into a period of tougher comps.

We anticipate a negative comp for bad debt expense, and a lower tenant recovery ratio compared with the prior year. We are pleased with the progress that we have made improving our internal growth, and believe it should continue with further occupancy advances and positive leasing spreads. We have been successful in sourcing attractive external growth opportunities, contributing to higher overall portfolio growth.

Our balance sheet has also improved through pruning of non-core assets where we have found attractive pricing. We have generated roughly $40 million in sales year to date through the dispositions of three community centers. We have refinanced, substantially, all of our 2012 maturities and are well-positioned to address our future obligations. We appreciate everyone joining us today, and would we happy to answer any questions you may have.

(Operator Instructions)

Christy McElroy, UBS.

John, just with regard to the guidance increase, and following up on your comments. How much of the increase was related to the Starwood management contract? Can you walk through the different line items that will be impacted, specifically fees and G&A? Can you also talk about why leasing wasn't part of the arrangement?

Christy, yes. I think our guidance basically included about $0.01 for the year. It's a $2 million contract per year with our friends from Starwood.

Okay. And then leasing?

On the leasing spreads, we don't really give that number out from the standpoint of how much is in that number.

No. I'm sorry. Just with regard to why leasing management wasn't part of the arrangement -- the leasing fees.

Oh, okay. Stephen, do you want to address the leasing question? That we are not doing the leasing on the Starwood properties, we're doing --

Was that your question, Christy?

Yes, it was.

We are just doing the property management, and the specialty leasing, and branding at the properties. But we are not doing the actual leasing for Starwood. They are hiring people to do that work themselves. So, that wasn't part of our contract.

Okay. Then, percentage rents have been down year-over-year the last several quarters. With positive sales growth, I'm just wondering what's driving that? Is it the mix of tenants, or are you just doing fewer percentage rent deals?

Percentage rents are actually up, if you basically take out the deconsolidation of the Teachers joint venture. They are up slightly. That's a difficult thing, until we get Teachers in our numbers for a full year, the comps are tough for you guys to follow. But actually, percentage rents are up, and we feel very good about those. And, as has been our principle, our leasing guys are on top of those tenants as soon as they get into percentage rent to try to get them to make that into fixed minimum annual rents. The trends are looking much, much better. I think we are positive with regard to the outlook, even on percentage rents.

Lastly, in light of your comments regarding the likely Westfield preferred unit redemption. If I think about non-core dispositions, how actively are your marketing some of your centers? And realistically, how much would you expect to sell over the next 6 to 18 months?

I think we are going to be very opportunistic with regard to the sale of assets. As we see those opportunities, we will jump on those and take advantage of those situations. We don't have a definite amount set in mind, but as pointed out in our comments, we would anticipate that our lines of credit would provide that take-out for that on a short-term basis. We do have plans. We are looking at the non-core assets, and the market has been very good and very attractive for those, coupled with the low interest rates. And the markets where we serve, because the occupancies in those have basically held pretty good, and now are starting to come back up. So, we would anticipate that the salability of these assets should be pretty good.

Thank you.

Paul Morgan, Morgan Stanley.

Sticking with the Westfield -- can you provide a little bit more color about what you are currently thinking, based on market conditions about what you expect to do? You outlined the options, but in terms of selling assets, or using it to recapitalize part of the balance sheet?

It's a very favorable preferred interest rate, or preferred dividend that we pay on that $400 million-plus. So, it's a very, very favorable rate. We don't anticipate paying that before the due date on that. During that period of time, we are exploring all of the avenues that basically gives the best benefit to our shareholders, and also to increase the basic -- lowering our debt ratios and taking all of those things into consideration. So, there is a plan that we have. We have dual plans in place in case certain things don't occur. But we are very comfortable and confident that we will take care of that situation when that time arises.

Is part of the plan a broader desire to reduce leverage over the next year?

Yes, of course. I think that's been a focus that we have been on with the Teachers joint venture, and the continual approach to looking at all of our assets, paring down those non-core assets, as well as any other assets that we believe would bring the best pricing in the market today, considering all the circumstances.

Okay, great. My other question is on acquisitions. First, partly on Dakota Square. How do you calibrate incremental capital investments in such a boom market, given that boom markets also can be bust markets down the road? You have got very low occupancy costs, presumably lots of potential there. How do you think about the risk-reward for putting incremental capital?

And then, are you seeing other assets of a similar middle-market type that are interesting, in terms of your acquisition pipeline? How active is it right now?

Sure. As far as Dakota Square, when you look at the metrics on the center, even if it had a more normal rate of growth, to be able to buy an asset that's close to $500 a foot, over an 8% cap rate with low occupancy costs in roughly the 9% range, we see solid upside there, regardless. It's got all the characteristics that we look for. It's the only mall for hundreds of miles. It's the dominant retail facility in the market. It's not easy to build stuff there, in terms of additional retail. It's just a great fit with our strategy. We are looking at ways to add value to it. There's out-parcel potential in terms of expansion, and moving tenants around. That's our business. That's what we focus on.

As far as other acquisitions, there is definitely properties out there. We look at everything. If we see a good opportunity, then we would definitely pursue it. Right now, we don't have anything that is close to being announced. But we look. We are cognizant of the impact on our leverage and our capital, and if it makes sense, we would work on something with a joint venture partner. There's a lot of interest out there from private equity and other institutional sources, and doing joint ventures in malls with sales in the $350-and-up range. So, we feel like we are in a good position to take advantage of opportunities if we like them. But we are also not forced to be desperate, or to chase anything that doesn't make sense for us.

Do you feel like those cap rates in that, say, mid 7% to 8% or so are achievable for that middle-market type asset these days? Are you seeing any signs of compression?

We are definitely seeing some signs of compression. We think we got a great deal on Dakota Square. There has probably been 100 basis points movement in the market since then.

Great, thanks.

Jeffrey Donnelly with Wells Fargo.

A follow-up on Christy's question. I was curious about the Starwood transaction, and why they didn't hire you for leasing. Did they give you guys a chance to get that assignment, or was that really just a deal from the start when you started working with them?

That was the deal from the start. One of the things Starwood is looking to do is to build a platform for regional malls. This was the first of what hopefully will be other acquisitions for them. Leasing is something that they wanted to control. So, when they talked to us and other potential management groups, it was never about leasing. It was only about management.

We will, obviously, work with them. The partnership has gotten off to a great start, in terms of our cooperation, and we will help them with leasing where we can with our relationships. But that was just never part of the discussion.

That's helpful. And then just in the quarter, how much of your leasing activity was the continuation of those short-term leases converting to long-term leases? Do you have an update on the statistics of what those rent increases are, as you convert folks?

It has come down a little. It's about 45%, three years and less, which is down from about 50% last year this time. So, it's slowly working it's way down. I think, like we said in the last call, our goal is to push it down, but it's not going to happen immediately. There continues to be retailers where it's in our interest to do shorter term, either because we are continuing to negotiate with them on a longer-term deal, and it's just a way to -- the best way to move the negotiation forward. Or flexibility in moving people around, and we are working on some larger users. For example, we are working with H&M in a number of malls, and to create the 20,000 square foot boxes that we need, we need the flexibility to move tenants around. So, a lot of it is intentional on our part to give us that flexibility to bring in those better tenants.

Do you have a sense, though, of what the gap has been on the leases you did during the quarter between the rents they were paying when they were on the short term, and when you did choose to convert them to the longer-term lease?

No. That's really hard to say. This quarter, the renewal leasing and the new leasing was a lot tighter in terms of the percentages than it was last quarter. So, it just varies, depending on the deals that are happening in that quarter.

Just one last question. I wanted your take on the St. Louis market. There's a lot of activity there with outlets, and certainly you have a big presence there. Do you think you have enough demand? Is consumer demand in the market to support that level of growth in retail square footage? How do you think about what the impact could be on you guys?

We are announcing our outlet center, because we don't think there's enough. No, just kidding. (laughter) We are watching the same way everyone else is watching. We are focused on Chesterfield mall, which is our asset that's closest to the outlet centers. We think that the mall has a great future, that it's complementary to the outlet centers. We just opened the American Girl doll store there earlier in the year. Their sales are phenomenal, just like off the charts, really strong. We can't say exact numbers, but it's something that we are really excited about, because it just shows the potential for the mall and for the trade area.

Look, I think it's crazy for both those outlet centers to be built. But it seems like that's the path that it's going down. They will fight it out among themselves, and the mall will attract the local customer and have its position in the market, and we feel like it has got a strong future. I don't know if I can really give you any other color on it.

Is there one of the two that you would rather see -- if you had to choose -- see get completed or not?

I don't think so. They are both -- Taubman is three miles away, and Simon is five miles away from the mall. But they are both designed to serve the entire market, the entire St. Louis market. So, from our point of view, we are indifferent as to which one gets built. It appears, from their conference calls and from their activities, they are both planning on building. Good luck to them.

Thanks, guys.

Todd Thomas, KeyBanc Capital Markets.

Stephen, you mentioned that leasing traffic, and discussions at ICSC and the event you hold in Chattanooga were both positive. But I was just wondering, given some of the macro headwinds, and some uncertainty surrounding the fiscal cliff here, are you seeing any retailers talk about delaying their plans to open stores or make commitments at this point?

We haven't seen any of that affect us, at this point. We are hoping it doesn't. But the retailers are continuing to make deals. They haven't shown any indications of slowing down. Hopefully, that will continue to be the case.

Okay. And then, just a question, looking on the leasing -- looking over the leasing stats. Your gross rents were up 10% in the quarter, but average base rents were up less than 1% relative to last year. I was just wondering when you think you'll see an inflection in base rents?

Are you talking about total base rents? I think the average base rents, there's just a lag because of the impact of the lease spreads. Looking back, the lease spreads are based on leases signed during the quarter. So, those stores aren't actually going to open for one or two quarters out into the future. There is just a lag between when the lease spreads come into play with the average rents. We should see continued growth in the average rents as we go into the next few quarters.

Okay. All right. Great. One last question. John, just a clarification, I guess, regarding the Westfield warrants. I was just wondering whether you could clarify if Westfield has an actual put option on the preferreds? I'm asking because I'm just wondering whether there is any scenario where you could ultimately endure 9% on the preferreds for three years, but then end up with 6% perpetual preferreds?

There's no put-in in the Westfield documentation. It was a very negotiated transaction with many lawyers involved. So, there is definitely no put provision in it. That was one of the things that they wanted, as well as we wanted. So, we feel very comfortable with it, and we think that that was the right strategy for both of us when we concluded this transaction to start with.

So, is that a potential outcome that you are evaluating, where you end up paying 9% for three years, but then end up with a pretty attractive preferred at 6%?

No, probably not. Probably not. I think where we are is we would envision that when they come due, all our plans are basically to pay them off or to by those preferreds back and retire them. So, I would not envision that. That's where we are. It's a good plan. It's something that we can always fall back on, but it's not our intention to do so at this time.

Okay. Thank you.

Nathan Isbee with Stifel Nicolaus.

You are replacing the Dillards at Rivergate with Dick's. Can you just talk in perhaps a little more broader terms what your plan is to try to proactively re-tenant some of your other boxes of anchors in the portfolio?

Sure, Nate. Well, it's Southpark where we are doing that, and it's a store that we have been talking to Dillards about for a number of years. It's not that productive. So, we have been working with them -- or with other prospective users, and we were able to get Dick's to step up and commit, so we made a deal to buy the store from Dillards, and then they will close this Fall, and we will redevelop them. I would say there's a couple of other Dillards and Belk stores where we are in conversations with them. Over time, we look to do the same. We replaced Belk with a theater at Foothills Mall earlier this year. Carmike just opened. It's ongoing.

We've had a pretty steady amount of, I would say, two to three department stores a year that we've redeveloped, where we have either bought them back, or they have closed and consolidated where they have two stores in a mall. We are having conversations with Sears about certain of their locations; there is no surprise there, either subleasing or taking back stores. Another one, one of our biggest projects is Monroeville Mall in Pittsburgh this year, where we are replacing a former Boscovs, and putting in a -- moving JCPenney into the former Boscovs, replacing the JCPenney, and adding a theater in there. So, there's a lot of moving pieces, and it is happening at a lot of the malls. We have got that kind of activity or discussion underway.

Do you see the two to three a year that you have been doing accelerating?

If it accelerated, it would be to four to five. It's not like it's going to go up dramatically. The department store business is very healthy. They have gone through a lot of their rationalization over the past two years. So, we don't see, with Dillards, and Belk, and Macy's, it's slowing in terms of the opportunity. With Sears and Penney, there is probably more of it looking forward.

Okay. Thanks. Just on the Starwood deal. $2 million, I think that's a gross number. What would flow through to the bottom line for you guys?

There will be $200,000 in expenses. It depends on how we end up finalizing the set-up of everything. But as the NOIs grow, hopefully the income will grow, as well. There's definitely some incentives for us to do that. One of the benefits, we are decentralized in our management structure, we have our regionals in place. These properties are spread out around the country, so it's a good way for us to be able to absorb them.

Okay. Thanks.

Thanks, Nate.

Michael Mueller, JPMorgan.

A couple questions. First of all, back on Dakota Square. Why was the occupancy cost so low at 9%? Is it a function of sales are growing so fast -- because I know they are up at around $500 -- and you just can't mark to market? Is it, in I guess North Dakota, you can't necessarily push the same level of occupancy costs that you would have other places? Any color on that?

Well, I think it's really just because the sales have increased so much over the past year. So, just the catch-up and the lag. We can only roll the leases as they turn. There's not a huge amount of small shop GLA. So, it just takes time for us to be able to absorb those increases, and for them to show up in higher rents. But we are definitely looking to make some improvements. We brought in some better tenants. Chico's just signed their lease and is under construction. So, we will be able to upgrade the tenant mix, and definitely see some upside there through that.

Okay. John, you talked about lower recovery ratios for the second half of the year, in third and fourth quarter. What's roughly the magnitude, about how many percent lower?

I think where we will be, Michael, is about the high 90%s on recoveries by year-end for the year. We normally have been running over 100%. We are seeing it coming down a little.

High 90%s on a full-year basis?

Correct.

Great. Last question -- the cash renewal spreads, 6% to 7%. Can you talk about an expectation for the back half of the year, what you're seeing? Does it feel like -- and obviously, that number could bounce around from quarter-to-quarter. But the trend line has been positive. Do you still see that happening in the back half of the year?

Yes. I mean, we said our goal is to end up high-single digits for the year. So, we are getting there. I think it will be pretty similar to what you are seeing in this quarter, in terms of the rest of the year.

Okay. Thanks.

Carol Kemple, Hilliard Lyons.

Good morning. Congrats on a great quarter.

Thank you.

Have you all had any more discussions with Horizon about either any other outlets that they have announced interested, or any additional outlet development?

Yes, we have. We are constantly in communications together. It's been a great partnership for both of us, we think. I think the results at Oklahoma City, and then what's happening in El Paso, and ultimately the expansion at Gettysburg, I think we are really making a mark in the outlet business for both Horizon, as well as ourselves. I think there's a lot of new opportunities they're seeing. Atlanta's going to be a great opportunity for us, as well. I think those relationships they have with those retailers just gives us that ability to see the expansion of the outlet business continue. We have had other conversations with them, and we think we would like to see one new outlet mall developed every 12 months to 18 months. So, that, we think, is achievable and within -- our partners, likewise feel that way.

And have you all given any thought to retiring the current preferreds and issuing new preferreds? Is there enough of an interest spread where that would make sense at this point?

Yes. We look at it constantly. The markets are getting favorable. We play poker pretty close. We basically are waiting to see how low we can get that.

Okay. Thank you.

Michael Bilerman, Citigroup.

Good morning. Quentin Velleley is sitting with me, here. Question going back to the Starwood joint venture -- management contract. I'm just curious. As you think about receiving, whether it's $1.25 million, $1.5 million, whatever it is in terms of fee income, relative to the time that, even if you are a decentralized organization, the time that your people are spending in the field on those assets, relative to the time they could be spending on your owned assets in driving productivity for shareholders, and even management's time in terms of negotiating the contract and dealing with the partnership. How do you balance that?

Well, I think, we actually felt it was a great opportunity for us. It wasn't something that we had planned for. We have really good relationships with the senior guys at Starwood. That really laid the groundwork for the negotiations. It wasn't a long, protracted negotiation. From our organization's point of view, they are excited about the opportunity. There are some good malls that they've acquired that we are managing for them. Yes, there's an opportunity cost. We think about it. But we think the benefits far outweigh that.

But what are the benefits? Other than [getting in] $1.5 million of income, how is this value enhancing to CBL and their shareholders?

I think our systems are in place, Michael. So, a lot of it is basically systems driven, the accounting, et cetera. In addition to that, we do the specialty and the branding income. When our guys are out selling our malls, it doesn't cost us anything for them to basically sell branding on these malls, as well. We looked at it. We spent a lot of time from the standpoint of analyzing it to make certain that we were going to make money.

We think that Starwood is basically in a great position to acquire more assets. Basically, that could be additional management fee income for us, as well. I don't know that we are diverting any attention from our existing portfolio. So, we looked at it from the standpoint of dollars and cents, and we expect it to grow. We think with the branding and the other opportunities, it makes sense.

Is there any assets that are in close proximity to each other?

They're in close proximity to our existing properties.

There are?

Yes.

So, does it make sense to sell those assets to Starwood? Is that being explored in terms of the next stage of this partnership?

I think all of those things are possibilities. The relationships that we have developed with the folks at Starwood over the years, knowing them for years and years, that's a possibility, as well as relationships with other parties, as well.

Starwood, they just closed in the middle of June. I think right now they are absorbing and setting up their systems for this pool of properties. And then down the road, they will look at growing it. But we have our platform of management services in our organization. So, we are really leveraging off that platform. It's very efficient from that point of view. I am kind of surprised that you are questioning it like you are.

Well, I'm just curious about how -- what it eventually leads to, and whether it was just one transaction, or part of a larger go-forward relationship that you are going to have with them. Obviously, we are speaking a lot on this call about these Westfield preferreds and funding them. Clearly, you have a deep-pocketed investor that wants to grow in the mall platform. You own a lot of malls that would fit within that category. You own malls that are close to these malls. If I were to draw a line one to the other, it would seem that would be a natural extension of doing a management contract with them.

We agree.

Just in terms of rank ordering of the capital that you are raising, obviously it was a pretty bitter pill to swallow three Summers ago, when you had to raise the equity at where you did. The equity today is still trading at a discount, relative to asset value. But obviously, selling common equity to de-lever is one way that you could narrow, perhaps, that gap. I'm just curious how you think about your stock today as a source of de-leveraging.

It is a source. It's something we look at. We weigh all of the alternatives to it, and it's something that's on the table, but we never cross any of our alternatives off. We think our plans in place today are to, as we've discussed, get rid of some of the non-core assets and the availability under the lines. We had our joint venture with Teachers. There's a tremendous amount of other opportunities. Common is something that is a possibility in the market today, as well as preferreds. But it's a pretty expensive way of doing it. If there's other ways of accomplishing it, we will accomplish it, while at the same time de-levering the Company.

Management still is a huge owner of the Company, at 13%. We continue to buy shares. I do, personally. I think we are going to do what we think gets the best return to our shareholders. We are not going to rule anything off the table. I haven't mentioned non-recourse debt in this whole conversation, but we do love non-recourse debt, and it is project specific.

Great. Thank you.

Rich Moore, RBC Capital Markets.

A question for you, first, John, on the Monroeville mortgage that comes due, I think, in January. Is that an issue, or do you have to put that on the line, given that you are doing an expansion there, as well?

I think where we are on that with -- Stephen mentioned it earlier on -- is that we are redoing the Penney's deal with the theater, and its impact upon the restaurants, et cetera. So, I think we are weighing as to where the best place to do that, that refinancing on that. I think we are still working on that, and looking at all of our alternatives there, as well. We haven't come to any direct conclusion on that. We have different alternatives, and we are weighing each of those, as well.

Okay. So, more broadly, with the about $700 million that you have coming due next year, in terms of different kinds of debt. Are you going to do the same strategy you did this year, where you put the bulk of that on the line of credit before looking for permanent funding sources?

No. I would think we would basically look at that and watch the markets, and see what the best alternative is. If we can see that we are adding value to a property, and it is going to take just a few more months, or six months or whatever, then we would probably put that on the line for a short period of time, and then put permanent financing in place on that. But we do, as I mentioned just a minute ago, and got a lot of smiles from our team here, we do like non-recourse, project-specific financing.

Right. So, you could do some of these mortgages more as they mature, as opposed to putting them on the line, and waiting for a later date to take care of them?

Exactly.

Okay. Good. And then, a question for you guys on traffic at your centers. There's obviously concern out there that the economy is slowing to some extent. What are you guys seeing in terms of traffic, broadly, I guess, throughout your portfolio?

Rich, we have seen good traffic and good sales. Like I said in the call, April was not the best month for sales, because Easter was early. But May and June were both strong, in that 4% to 5% range. We expect things to continue. Where we are heading, we've got back to school now. We've got tax-free shopping in a lot of the states where we operate. We are seeing restaurants, which is a good proxy for traffic, and their businesses is strong. So, we haven't seen it. You get a lot of these macro headlines out there that are in the New York Times or the Wall Street Journal, but in the local markets, there's a lot of good things happening with job growth and economy strengthening, and housing is starting to come back. So, we are seeing some positive signs.

Okay. Good. Thank you. One last thing, John. Did you mention that the bad debt would be higher through the last half of the year?

Yes, we did. We think that that should mitigate some of the growth that we have seen, or the acceleration, because we are coming off such a low comp last year. So, that bad debt expense number could impact us somewhat.

So, is it anything in particular that you are looking at, or do you think the generally low level of last year is not sustainable?

Yes, I think it's last year's low number is not sustainable, is probably more the case. Yes.

Thank you, guys.

Cedrik Lachance, Green Street Advisors.

You talked a little bit about non-core asset sales for repaying the Westfield press. Are any malls part of your non-core assets? Or do you really focus on non-mall properties here?

Yes, I think we would look at certain malls, as well. It's just not office, or community centers, or associated centers. It could be certain malls, et cetera.

Could you give us a general description, I guess, of those malls that fit a certain sales activity or regional breakdown?

Yes, I would say that those centers where we see minimal growth, or no growth at all, would probably be the ones that we would look and focus on.

Okay. And Stephen, you made the comment that cap rates might have compressed 100 basis points since you bought Minot. Do you mean cap rates for similar assets, or do you mean that Minot itself, or the Minot Mall could be sold at a cap rate that's 100 basis points lower than what you bought it at?

The only reason I say that is just from what we've heard about some other malls that are on the market, and sales are lower than Minot, and they don't have the upside. But cap rates are 50 basis points, probably lower. There is more art to science in this. As you know, there's not a lot of transaction activity. But you look at where the Westfield Mall is traded, and then, based on some things we are hearing, that was the reason I said that. It might not be 100 basis points, probably 50 to 100, but there has definitely, I'd say, been some compression, just because interest rates have stayed low. I think the expectation, now, is that that's going to continue, versus maybe six months ago people were worried that they would spike back up.

Then, final question. I think Moody's had the somewhat negative view on adding malls to CMBS pools recently, and has crafted some rules that make it more difficult to add malls to CMBS pools. What have you heard from the CMBA, or the banks that you deal with, in terms of your ability to use CMBS financing going forward to finance the kind of malls that you have been financing in the CMBS world?

Yes, we have had discussions with the groups, as well, on that, and with a number of CMBS groups that basically lead a lot of those transactions. We are reviewing those, and taking all of those into consideration in our refinancing opportunities that are coming available for us next year. As you know, we only have the one mall left to refinance this year. It's at an 8% interest rate. We think that it's a good opportunity to refinance that.

We are aware of that, and looking at that, as far as our planning for next year, and those maturities that are coming available next year. I think that we will figure out a way to satisfy them on those. We have basically done it thus far with where we are. Granted, they are trying to raise the standards -- they are raising the standards. But we have some good assets that should fit within those portfolios, and within those standards as well. So, there are also additional other people, not just the CMBS market, that's available to us as well.

So, for assets that don't fit the standard, you would be looking at, what, regional banks or alternative sources of financing?

Yes, I think there's all of that. And I think the creativity in the financial markets today will recognize and realize that just because a center doesn't do $300 a square foot, that it's still a good, solid asset. And that they can basically make good money off of that. I have never felt that the financial community in this country is lacking in the creativity to take care of these types of situations.

Okay. Thank you.

[Caitlin Bowles], Goldman Sachs.

Sorry, it's Andrew Rosivach, and I apologize for asking a question this late in the call. There has been all this Westfield preferred refinancing conversation. Nobody has talked about the potential for up-financing. Could you potentially discuss the debt that you have due through 2013, and the potential excess proceeds you could pull out of them, given the performance that you've had so far this year?

Thanks, Andrew. There is that opportunity. And as we have done this year, we were very fortunate in pulling out some excess proceeds. The portfolio, basically, for '13 and '14 going forward, has additional opportunities in at, as well. So, right, there is that, as well as we just don't have to sell assets to a certain extent to cover it. That is part of the plan, as well. I appreciate you pointing that out, though. Thank you very much.

Thanks for that. And also, for the rollover that you have through 2013, I have to give credit to Katie for pointing this out, as well. Of the malls that you have rolling, it's only Monroeville that is under $300 a foot.

That's correct. And there, we think with the addition of the theater and what we are doing with the Penney's, that should grow, as well. Theaters have an incredible ability to help those restaurants, and drive sales in those restaurants. We think what we are doing in repositioning that Boscovs store, and putting the Penney's in there and the new theater will have just a great opportunity for it. Again, you are the best for pointing that out for us. Thanks.

Is Alamance kind of a go-by? When you refi-ed that last year at [a low sales profile that] was going through a redevelopment, and you managed to get a financier that got the point that you couldn't look just at the trailing 12 months, and there was more value there?

That's correct. We have opened up the expansion of that center with the BJ's Wholesale Club, and the Kohl's, and the performance is starting to perform better. That market area is coming back, as well. The Carolinas were probably impacted fairly significantly with the economy. Now, we are starting to see more signs of life, and better traffic there. So, it's an asset that we have our eyes on, and our marketing folks have special attention on it, as well.

Terrific. Thanks for that.

Mr. Lebovitz, there are no further questions at this time. I will turn the call back to you. Please proceed with your closing remarks.

Sure. We would again like to thank everyone for joining us today. We are really pleased with the improvements that we have shown in our operating results, and we are looking forward to continuing that over the rest of this year. Thank you, and have a good day.

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