CBL & Associates Properties, Inc. (CBL) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the CBL & Associates Properties, Inc. third-quarter 2012 conference call. During the presentation, all participants will be in a listen-only mode. Afterward, we will conduct a question and answer session.

(Operator Instructions)

As a reminder this, conference is being recorded, Wednesday, November 7, 2012. I would now like to turn the conference over to Stephen Lebovitz, President and Chief Executive Officer. Please go ahead, sir.

Thank you, and good morning. We appreciate your participation in the CBL & Associates Properties, Inc. conference call to discuss third-quarter results. Joining me today is Farzana Mitchell, CBL's recently appointed Chief Financial Officer and Katie Reinsmidt, also recently promoted to Senior Vice President, Investor Relations and Corporate Investments.

Before I hand it over to Katie, I would like to formally welcome Farzana as CFO and as part of our quarterly calls. Most of you have met Farzana at ICSC or other conferences that she has attended during her 12 years with the Company and know that she has long been an integral part of the CBL senior management team.

Also in the room with us today is Vice Chairman, John Foy. While this is the first call since our IPO in 1993 that John will not actively participate in, he's listening intently so he can provide a full critique after we are done. I'll now turn it over to Katie, 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. 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 also be available for replay on the Internet through a link on our website at cblproperties.com.

Thank you, Katie. While the broader economy continues to stage a slow and somewhat uneven recovery, we are seeing solid and steady improvements within the CBL portfolio. Our operational results for the third quarter demonstrated the significant strength of our market-dominant mall portfolio. Same-center NOI increased 1.2%. Mall occupancy improved 180 basis points year over year. Year-to-date mall sales increased 4.1%, and FFO per share was $0.54, representing a 12.5% increase over the prior-year quarter.

We are also experiencing the benefit of the short-term leasing strategy we took during the recession. We are converting many of the lessee's leases to long-term at significant rental increases either through executing renewals or bringing in new tenants. This is best evidenced by the year-to-date increase of more than 25% in new leasing spreads, which will directly contribute to our NOI growth rate going forward.

We continue to add new retail names to the CBL portfolio, as well as expand our presence with existing retailers that are performing well. This quarter, we signed a number of deals with Clarks, a shoe store, which is a new tenant for our malls. We opened the first new Build-A-Bear prototype at our West County Center in St. Louis and have expanded our relationship with Francesca's, Maurice's and H&M.

As a result of these and other store additions, year-over-year occupancy increased across our entire portfolio with total portfolio occupancy improving 170 basis points to 93%, and stabilized mall occupancy improving 180 basis points to 93%. Leasing spreads demonstrated sustained retail demand for space, with overall leases for stabilized malls during the quarter signed at a 9.2% increase over the prior gross rent per square foot. For the quarter, renewal rents increased 6.7% and new leases were signed at a 17.1% increase over prior gross rents.

The back-to-school shopping season was healthy, with our mall sales increasing 4.1% year to date through September. For the trailing 12 months, our sales have increased 4.2% to $344 per square foot compared with $330 in the prior-year period. As we look toward the fast-approaching holiday season, we are encouraged by the recent strong gains in consumer confidence, as lower gas prices, a recovering housing market, and improved jobs reports resonate with the shopper.

While some are pleased with the outcome of the election and others are disappointed, we are confident that the economy is headed in the right direction and that our malls will benefit going forward. I'll now turn it over to Katie for a few comments.

Thank you, Stephen. Construction continues on the Outlet Shops at Atlanta, our development in Woodstock, Georgia. Retail demand is strong and we are approximately 81% leased or committed, with great retail names, including Saks Fifth Avenue Off Fifth, Nike, Brooks Brothers, Under Armour, J.Crew, and Fossil. The grand opening is scheduled for August 2013.

In October, we started construction on the Crossings at Marshalls Creek, our 103,000 square foot shopping center development in Strasburg, Pennsylvania. The 80% leased or committed shopping center, will be anchored by Price Chopper supermarket and Rite Aid and will feature approximately 22,000 square feet of stores and restaurants. The grand opening is scheduled for June 2013.

Later this week, we will celebrate the opening of the second phase of the Outlet Shops at Oklahoma City. Opening just in time for the holiday season, phase II is 100% leased and will encompass approximately 30,000 square feet, with great new stores such as Ann Taylor Loft, Waterford, Lucky Jeans and Coach Men.

Waynesville Commons, our community center project in Waynesville, North Carolina, opened 100% leased the first week of October. The 127,000 square foot community center is anchored by Belk, PetSmart, and Michaels, along with 11,000 square feet of small shops, including Rack Room Shoes.

At Monroeville Mall, JC Penney opened their new 110,000 square foot prototype store in October, relocating from their existing store in the mall. Their former building is being redeveloped into a new 12-screen Cinemark theater opening Fall 2013.

Moving on to dispositions, subsequent to the end of the third quarter, we completed the sale of two of our non-core properties, Hickory Hollow Mall in Antioch, Tennessee, and Town Mall in Franklin, Ohio, to two separate buyers. We also have the community center, Willow Brooke Plaza in Houston, under contract to sell, which is still contingent on due diligence. We determined it was necessary to take impairment charges and net income in the quarter to reflect the fair value of these properties.

As these sales demonstrate, we are executing on our strategy of pruning non-core and mature assets from our portfolio. While we are not comfortable providing a disposition target, we have become more aggressive in this area as the credit markets have improved. Buyers are able to obtain financing to pursue transactions and cap rates have compressed across the quality spectrum.

In late September, we took advantage of favorable market conditions to launch a new preferred offering. Including the exercise of the full over-allotment option we priced 172.5 million of our new series E preferred stock, during a CBL record low coupon of 6.625%.

With the redemption of our 7.75 series C preferred stock that was completed on November 5, we were able to save more than 100 basis points on the base coupon. The offering also provided us with approximately $50 million of excess proceeds to apply towards reducing the balances on our lines of credit. I will turn the call over to Farzana now to discuss our financial strategy, as well as third quarter financial performance.

Thank you, Katie. Following my appointment to CFO, many of you have inquired if there would be any major changes to CBL's financial strategy. John has certainly left very large shoes to fill. During his more than 40 years with CBL, he has been responsible for successfully managing CBL's balance sheet through a variety of economic cycles. His foresight has ensured that the Company operated in a position of financial strength and could execute on favorable opportunities. It is my goal to maintain and improve that flexibility, as we look forward to addressing our future capital needs.

With the increasing volatility of the debt markets, our priority is to ensure that we have multiple capital sources available to us. This means that we will continue our focus on reducing overall leverage and explore opportunities to diversify our financing structure. We are working to put our balance sheet in a position to achieve an investment grade rating, providing CBL with access to a broader market of corporate securities.

While achieving an investment grade rating is a process and it is not without risk, we believe it is obtainable over time. Attaining an investment grade rating will lead to a more diversified and flexible balance sheet and a lower overall cost of capital.

We are pleased with the positive response and support we have received from our banks, as we pursue this process. What this will mean for CBL's balance sheet going forward, is we will be taking steps to grow our unencumbered pool of properties, as well as continual focus on reducing overall leverage. We will also lower our percentage of secured debt over time as loans mature, allowing us to increase our access to unsecured debt.

As a first step, yesterday we announced that we have received fully executed lender commitments to extend and modify our two largest credit facilities. The facilities are being converted from secured to unsecured and will be expanded by $155 million, to an aggregate capacity of $1.2 billion. We are extending the maturities of both facilities by three years, with one $600 million facility having an outside maturity date in 2016, and the other $600 million facility having an outside maturity date in 2017. The average spreads on both facilities are being reduced by 60 basis points across the leverage grid. Closing is expected by mid-month.

Converting our facilities to unsecured has several immediate benefits. It eliminates significant administrative costs and provides us with maximum flexibility with our unencumbered property pool. These new facilities are another example of the tremendous strides we have made this year in reducing our average borrowing costs. This has positively impacted our FFO and allows us to fully take advantage of the current favorable interest rate environment.

All of our property level mortgage maturities for 2012 have been successfully addressed. Our $167 million unsecured term loan will be retired later this month. Looking into next year, we are currently in the market to refinance our early 2013 joint venture maturities and will report additional details as they become available.

We ended the quarter with only $256 million outstanding on our lines of credit, providing ample capacity and flexibility. This amount was further reduced subsequent to the quarter end, with net proceeds from our preferred offering. Our financial covenant ratios remain very sound, with an interest coverage ratio of 2.6 times and fixed charge coverage ratio of two times. Our debt to GAB ratio was 52.5% at quarter end.

As John discussed last quarter, we have a call option for the Westfield preferred units available to us beginning next year. We anticipate redeeming the units mid-year, using a combination of capital sources. We have more than enough capacity on our lines to retire the entire amount as a short-term solution. However, we anticipate our longer-term solution will include a combination of asset sales, excess refinancing, and other capital sources.

Third-quarter 2012 FFO grew 12.5% to $0.54 per share, compared with $0.48 per share in the prior-year period. FFO in the quarter was positively impacted by the 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 third quarter 2012 was 97.8%, compared with 101.4% in the prior-year period, as a result of lower tenant reimbursements. G&A as a percentage of revenue was 3.9% for the third quarter, compared with 3.8% in the prior-year period. G&A as a percentage of revenues will be slightly higher going forward, due to lower revenues from the deconsolidation of the TIA joint venture properties.

We had discussed last quarter that we anticipated a more difficult comp period for the second half of the year versus the first half. While still very healthy with the 2% increase year to date, our same-center NOI growth decelerated from second quarter to an increase of 1.2% for the third quarter 2012 over the prior-year period. Same-center NOI in the mall portfolio was up 30 basis points.

Total in-mall same-center NOI were positively impacted by increases in rent as a result of the occupancy gains and positive leasing spreads, as well as lower bad debt expense of $193,000 versus $573,000 in the prior-year period. Same-center NOI in the mall portfolio was affected by higher operating expenses, such as property level payroll expense, as well as increases in janitorial and maintenance expense.

Based on our current outlook and expectations, we are providing guidance for 2012 FFO in the range of $2 to $2.10 per share. While this guidance is consistent with last quarter, it is effectively being increased due to lower interest expense, as well as increased contributions from new properties, offset by the preferred redemption charge that we will record in the fourth quarter.

The guidance incorporates our same-center NOI growth forecast of 1% to 2% and portfolio occupancy improvements of 100 to 150 basis points for the year, to a range of 94.6% to 95.1%. This is 50 basis points higher than our previous occupancy target.

In previous quarters, we reviewed a number of headwinds that could potentially decelerate the growth rate we have been posting this year. While we know we are facing harder comparable numbers in the fourth quarter, our entire Company is focused on doing what it takes to end 2012 at the high end of our NOI guidance range. Now, I'll turn the call back to Stephen for closing remarks.

As Farzana outlined, we are working on some very exciting initiatives that will both improve our financial strength and create flexibility as we pursue future growth opportunities. The third quarter was extremely productive for CBL and exemplified the strength of our market-dominant portfolio. As we are nearly halfway through the fourth quarter, we are looking ahead to our objectives for 2013 and we are building on the progress we've experienced this year.

External growth opportunities, including our recently opened development/ redevelopment projects, acquisitions, and our current development pipeline will contribute to future growth. Retail conditions remain very favorable for the CBL portfolio, with healthy retail expansion plans and virtually no new supply in our markets.

These positive conditions, the advantageous operational position of our portfolio, and the improvements we have made and continue to make to our capital structure bode well for us achieving our goals in 2013 and beyond. We look forward to seeing everyone at NAREIT next week and will now be happy to answer any questions you may have.

(Operator Instructions)

And our first question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed.

Good morning, Todd.

Good morning. Hi, thank you. First question, in terms of guidance for the remainder of the year. It seems that the range implies a much more muted seasonable uptick in the fourth quarter and even if you normalize for the preferred redemption charge. I'm wondering if there's anything baked into the fourth quarter forecast?

Thank you, Todd, for your question. There are several items that are going into our fourth quarter numbers that is keeping our FFO muted. Not only is the $3.8 million preferred charge, that you will see in the preferred dividend that will show up in the fourth quarter, we will also have higher preferred dividends because we have issued additional preferred shares. In addition, we will be retiring our $167 million term loan that has a lower coupon of 1.35% interest rate and we will be retiring it with our lines of credit, unsecured lines of credit. So that also increases our interest expense, so that's the reason. And we also have some bad debt provisions and also anticipate a bit higher G&A expense. So combination of all of that makes up the FFO that we are giving guidance to.

Okay, and then do you expect stabilized mall same-store NOI growth to be negative in the fourth quarter?

I hope not. We think it will be positive.

Okay. And then just in terms of leasing, how much of the new leasing GLA was attributable to the conversion of short-term leases and what would have the new lease spreads looked like, excluding those short-term conversions?

Todd, I don't have a number to give you on the square footage, but there was a number of conversion that occurred in the new leasing that we did. We also had a little bit of benefit in the renewal leasing, where we were able to convert some of those shorter term deals into longer-term deals as the retailers' performance has improved. But overall in our new leasing, we had positive lease spreads across the -- across the -- double-digit positive lease spreads across the whole portfolio of new leasing that we did. So it was really a strong performance and a really strong result. So I don't have the square footage to give you, though.

Okay, and then just a last question. I was just wondering if you and -- either on your own or with Horizon, if you had looked at the Charlotte market at all for an outlet project and whether you have any thoughts about that market.

No, we haven't looked at it and we think there is already plenty of competition there. So, our strategy so far has been to fly under the radar as much as we can. It is competitive in the outlet space, no question, but in Oklahoma City, we were able to come into that project and Horizon had gotten the project to the point where we didn't have competition. Atlanta, which is under construction and is going really well, and roughly 80% leased and committed right now. [Talman] came in, but they really came in late and we had all the major leasing done at that point. And we've got other opportunities we're working on and trying to stay out of the way of other people as much as possible. Thanks, Todd.

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

Yes, hi, good morning. Couple of things.

Good morning.

Good morning.

Hey, good morning. Sticking with guidance for a second, I mean, out of curiosity, how much in incremental bad debts do you have in there? I hear what you're saying about having a little bit extra preferred dividends, because of timing and some other things. But if you look at the past couple of quarters, the quarter-over-quarter numbers were up. I mean, the year-over-year numbers were up probably $0.03, $0.04 in each of the quarters. And if you look at the implied guidance, even with the preferred charges in there, you got a pretty significant year-over-year decline baked in there, just to even get to the high end of the range. So I was just curious what else may be in there. Any more color would be appreciated.

I think it's mostly in the interest expense. There is a big -- there is going to be increase because we had paid off some of our properties earlier from our lines of credit. And the full interest expense when we did the new financing is also coming into play in the third and fourth quarter. So bad debt may not be a bigger (inaudible) number, but more importantly, it's the interest expense and the additional preferred dividends.

Okay. And shifting gears for a second, in terms of mortgages, when lenders are going out and underwriting the properties for refinancings, what sort of cap rates are they applying to your portfolio? What's a range of cap rates that they are using for underwriting?

It varies. I don't think there's any specific -- we can give you a specific answer as to what that cap rate might be. It just depends on the property, its position in the marketplace, of course our sponsorship has a tremendous value, so they look at all different aspects of the property. And more so, it's the debt yield they use and -- and the cap rates have compressed, overall. So, there's not a specific answer.

Okay. I mean, are you generally seeing cap rates being utilized in the 6s, or are they in the 7s?

Again, it depends on the property we are financing.

Okay.

Sales per square foot, occupancy, its market dominance, so it is in the 6% to 7% range.

Okay, and last question. Just wondering if you're seeing any more product hit the market in terms of middle market malls?

Yes, sure. We're seeing some product, but still not a lot. There's a few properties out there that have kind of been in and out of the market this year, but -- and then there's some things being talked about, but it really hasn't hit the market. We think there will be a steady flow going into next year and we think we'll have good opportunities. There seemed to be -- there's a package that just came out that's more of a distress portfolio that is an REO -- an REO portfolio that came out that's being marketed. But, there are also, we think, some good middle market malls for us to take a look at.

Okay, okay. Thank you.

Thanks.

Our next question comes from the line of Ross Nussbaum with UBS. Please go ahead.

Hi, guys. Good morning.

Hey, Ross.

Good morning.

I was hoping you could clarify the same-store NOI growth for the mall portfolio at 0.3% this quarter, because I was a little confused by some of the comments. I heard that there was a little bit of impact from higher operating expense, but I would have thought that would have been reimbursed by tenants. Is that not the case?

We are on fixed CAM, Ross. So as you noted, the cost recovery ratio is lower compared to last year, last period. However, our year-to-date same-center NOI is 2% compared to 1.6% from last year, and mall same-center NOI year-to-date is 1.9% compared to 1.7%. So you can't look at any one quarter year-to-date. We have done -- it has really improved.

So what percentage of your leases are now on fixed CAM?

About 85 to 90%.

Okay. So if I think about the same-store revenue growth rate, and I'm just thinking out loud, you had decent year-over-year occupancy gains, contractual rent growth, positive leasing spreads. Can you break out what the same-store revenue growth was versus the same-store expense growth? I'm wondering how much of a negative impact that truly was to offset the revenue side.

Well, there is there's a lag on the revenue side, because we're reporting for lease spreads, or leases signed. There's a time frame before those leases kick in, in terms of the higher rents, and the sales also takes longer to filter through. But the expense increases happen immediately and so that's, I think, accounting for the comparable impact really more than anything else.

Okay. Farzana, if I could shift over to the balance sheet for a minute, two questions. The first is, just looking at the [Starmount] loans, is it your intention to pay off not just the November maturity, but the April '13 maturity with the line of credit?

That's correct. We will be paying that off next year, the 228.

So that would probably bring you up to somewhere around, call it half drawn, on the new capacity and line of credit? Is that about ballpark, right?

No. We really have total capacity of $1.3 billion with the $1.2 billion that we recently have -- the lenders have committed and we hope to close fairly soon. So we should be well below the half that you mentioned.

But if I just take the 4 -- give or take the nearly $400 million on Starmount, plus what you had outstanding at the end of the third quarter, that gets me, I think, north of $600 million. Is that--

Right. And we also had a reduction, because of the excess proceeds from the preferred offering that we recently completed.

Okay. And then the final question is, toward your longer-term goal of investment grade rating, so what's the, what are the interim steps as you have the secured mortgages maturing? What do you plan on replacing those with? I assume the rating agencies are going to want to see a lower amount of secured debt on your books. So is it -- is it bank term debt that replaces those mortgages? What's the thinking on how to get to that goal?

That's correct. We will start off by using our unsecured lines of credit and then as we proceed forward, we will retire the secured debt through lines of credit and then term loans, and we will have -- it's a process we will go through, and then we also hopefully, will execute on asset sales and use those proceeds to reduce our secured debt.

So should we make an assumption then, that usually the bank term market doesn't want to go out 10 years, that you're going to be shortening up the maturity schedule in the interim, with three and five-year term loans and obviously the line of credit as an interim step to getting more unencumbered assets?

Yes, we will be laddering our maturities. The two -- term loan -- the unsecured lines of credit that we have, we will be closing shortly will have a laddered maturity for $600 million and will come due in '16 and the other $600 million in '17. And then we'll try and do the same thing with term loans. We'll ladder it such that we'll keep getting the stepping-- stepping up of the ladder in terms of maturities. So, yes, those term loans would be five years, but our goal would be hopefully, within 18 to 24 months, or in that timeframe, be able to obtain the investment grade rating and then access other capital sources. And we can also access private placement markets as well.

Okay, and not to drag on, but this is a pretty notable shift in financing strategy for CBL, which has gone the generally non-recourse secured mortgage front for the better part of the Company history. And obviously, you're taking over the CFO role -- can you talk maybe -- Stephen, can you sort of address why the sudden, maybe sudden is not the right word, but this is a pretty dramatic shift in how this company has been financed historically.

Yes, I mean, we -- it is, I guess, sudden in terms of the announcement, but it's something we've talked about and thought about for a long time and one of the benefits of being a public company is having access to all the public markets, equity and debt. And we, we just feel like now we've been able to get our balance sheet in the position where this is a realistic option for us to pursue. It's been a goal that we talked about internally for awhile. And it is a change from the property-specific secured non-recourse debt, but that doesn't preclude us from continuing to access that market, as long as we can do it within the parameters of the rating agencies.

So I'm not trying to downplay it at all, because it's -- I think, it's a really exciting change for us, that we're going to move in this direction, and, we've -- we've been talking about how important we feel it is to have a strong balance sheet to delever and have strong ratios, to make sure that our dividend is safe. And I think this will allow CBL to be a stronger company financially for a long time into the future.

Thank you.

Thanks, Ross.

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

Thank you. Just to follow on Ross. It is indeed a very big change in how you finance your company, moving from secured to unsecured. Are you able to complete that process without issuing new equity?

We have all options on the table, so we are exploring all sources of capital in order to achieve our goal.

Okay. I mean, so exploring is one thing, but in terms of the specific question as to whether or not you can fully complete a transition to unsecured without issuing equity, is it something that is doable at this point? Or is issuing equity at some point in the future a necessity, so as to please the rating agencies in regards to your leverage ratios?

Well, I would say raising equity is, is going to be a prerequisite. But issuing new stock isn't the only way to get there and we talk about it with the joint venture that we did, was with Teachers was a major step in terms of raising equity for the Company and delevering and the joint venture markets are -- there's more money today out there for joint ventures than at any point in the past five years, and the dispositions we have, non-core properties, office buildings, community centers, and certain malls that we think make sense for dispositions. So, we don't feel like we're backed into a corner. And the rating process also -- we have the time to do it right. So we feel like it's important to make the market aware of this change in our strategy and this direction, but we feel like it gives us more options going forward.

Are you in negotiations with any potential joint venture partners on some of your assets?

We are not at this moment.

Okay. Just moving to the operations, when I look at the average base rents in your portfolio on Page 13, for stabilized malls, the average base rent has declined over the last couple of years and yet new leases -- and including the lag in terms of what you report in terms of when it is signed and when it starts, but new leases over the last, almost two years now have been at a positive re-leasing spread. What explains the decline in the average base rent?

Cedrik, this is Katie. The average base rent declines year-over-year, just because we've increased the pool to include the outlets that we've acquired or have developed.

Okay. And what's the impact from selling some of the properties you've sold, which clearly are below average quality?

Most of the properties we sold were considered non-core, so they weren't included in the calculation anyway.

Okay, great. Thank you.

Thanks.

And our next question comes from the line of Quentin Velleley with Citigroup. Please go ahead.

Hi, good morning. Going back to Cedrik's first question, in terms of delevering. What's your expectation, how much delevering would you need to do? Whether that come from issuing equity or asset sales? Do you need sort of $500 million to get an investment grade rating, at count leverage ratios?

Well, we -- it's not just -- the deleveraging is one metric. There are so many other metrics that focus on -- and we -- our other metrics are very strong and as time goes on with asset sales and we -- our plan is to continue to deleverage, but doesn't have to be overnight. It takes time and that's what they would like to see, is the trend, the trajectory and our commitment.

Can you sort of give us a sense of what your expectation on timing would be? Is it a two-year process or could it be something longer than that?

It will definitely be at least a two-year process and I think we have a really good window of opportunity to do that, with low interest rate environment. And this whole strategy will also reduce our overall cost of capital and that's important to us.

Okay, great. Then just in terms of the assets that you've sold, Hickory Hollow, Town Mall, and Willow Brooke. How much annualized NOI was coming from those assets?

Actually, they were -- the three of them were generating negative NOI, if you add them all together.

Okay, and what was that, like negative a $1 million, or was it something more than that?

Very -- really not much. I mean, it was just a slight thing. It made sense for us to go ahead and sell these. We took the impairment on Town and Hickory Hollow in '09. So these are properties that we've signaled and told people for awhile, that have issues and challenges. And it took a while to sell them, but we're really pleased we were able to do so. And Willow Brooke is a community center that has had some ups and downs too, and we've got a buyer on that who's got a plan to do some redevelopment and rework, so it works for them.

Okay. Thank you.

Thank you.

And our next question comes from the line of Craig Schmidt with Bank of America. Please go ahead.

Thank you.

Good morning.

Good morning.

Good morning. How long might the higher operating expenses be a limit to your same-store NOI metrics?

I would say there is more pressure today than we've experienced in the past two years. We've been able to ride that down, really since the recession. And now we are seeing pressure with healthcare costs coming up, with people having taken wage cuts, but now wage pressures and salaries going up, and utility costs. So, it's the type of thing where we're going to -- we're anticipating seeing reasonable increases.

The thing is, that we are able to build in increases in CAM, into the coming year. So as the expenses go up, we can build that into our recoveries, even though the leases are fixed, we're getting 3% to 5% increases on an annual basis, so that helps mitigate it as well. We feel like the recovery ratio that we're at, is something that we can maintain at this level. We don't see it being depressed further. But this quarter and next quarter, we're taking the hit on a comparable basis because we didn't have to recognize it last year.

Thanks. That's helpful. And then, just what percent of your leases are on three years or less? I think, after second quarter conference call, you pegged it around 45%.

Craig, this quarter, about 40% of the leases that we signed were three years or less. And that's of the total leases signed. (multiple speakers).

And is that sort of where you want to be, or do you want to be even lower than that?

Yes, I think we would like to see that come down. I think probably a more normalized rate is maybe a third of the leasing you do, just because you're always moving somebody around or you have a local or regional tenant that doesn't like to do longer term leases. So I think that will continue to come down, over time.

Okay, thank you.

Thanks.

Thank you.

(Operator Instructions)

Our next question comes from the line of Carol Kemple with Hilliard Lyons. Please go ahead.

Good morning.

Hi, Carol.

Hi, Carol.

Looking at our 2013 model, do you think the current leasing spreads are a good run rate for next year? Do you expect to be able to renew leases, that 8.6% better? New and renewals, or where would you look at 2013?

Yes, I think that's a good assumption to make. We would obviously like it to be higher, but I think, in the mid to high single digits, which is where we are so far year-to-date is a good number to use going forward. We've had consistent sales increases, that definitely plays into that. And then like we said earlier, we're able to convert the short-term leases to longer term and we've had good results on that. So, yes, I think, I think we'll be able to be consistent in that range.

Okay, and earlier in the call, you all said you were exploring more outlet opportunities. Are those on your own or with Horizon?

We are working with Horizon. We've got a great relationship with them and the partnership has been terrific and so we are continuing to work with them.

And with Horizon, do you wait till they get all the permits and every -- all of their ducks in a row before you announce any deal with them, or would you announce it earlier?

It's really a combination, Carol, and the -- we like to have the pre-leasing get to a certain level. And it depends on how controversial the permitting might be, but, we're typically more conservative as far as the announcements. And financing plays into it in terms of us getting our commitment for construction loan. So, we're -- we don't like to announce anything premature. We like to have a good, strong announcement when we announce a new project with them.

Is it realistic to assume you all could have one opening in 2014?

We're hoping to and we're hoping to have an announcement of the next one sometime in the first quarter too, of next year.

Okay, great. Thank you.

Thank you.

And our next question comes from the line of Ben Yang with Evercore Partners. Please go ahead.

Yes, hi. Good morning. Thanks. Maybe--

Hi, Ben.

Hi, good morning. You guys mentioned asset dispositions or joint ventures to raise equity, obviously for a variety of uses. And then you also mentioned the futures joint venture as one of your recent successes. So I guess the question is, could we see a similar partnership where you guys create liquidity by selling off pieces of your best assets going forward?

Yes, we -- I think with the joint ventures, the positive with the market is that the B mall category, which we don't like to actually use that terminology, but the market uses it, so we can't fight it. But I think the category has really gotten a lot stronger reception. And when we did the futures joint venture, the world was more conservative, the recession was fresher in everyone's mind, the capital markets were tighter. And we were still struggling with our metrics. We didn't have NOI growth across the portfolio. Our lease spreads were still break-even or negative.

So it's a different world today in terms of the broader portfolio and the performance. And that really has gotten the attention of investors. And then the other thing is yields are so low and the A, A-plus assets are trading at yields, as you know, that are sub-5. And cap rates have come down for malls in the 300s as well. But still on a relative basis, that's a very attractive investment. So I think from capital sources point of view, our entire portfolio is really attractive and it gives us a lot of options as we just explore the discussions with the different people out there.

So it sounds like something like the Teachers joint venture wasn't a one-off and that we could see something similar going forward? I guess I couldn't really get, -- I don't really understand what, whether the answer was yes or no based on that.

Well, it wasn't yes or no. I think you heard me. (laughter)

Well--

Correctly. We're, we didn't announce the Teachers joint venture until we had signed documents and it was real. And these deals, any deal, whether it's a joint venture or a disposition, have so many different ups and downs that -- conversations are at different levels. So I'm not answering your question yes or no. I'm just saying that we're -- we feel really good about the different options that we have available and, with our new line of credit, we've got a really low cost of debt there. And, equity, whether it's a joint venture or disposition, the places that we have to use that capital right now are, are only paying down lines. We don't have a lot of capacity to even do that. So we don't feel like we're rushed to do anything, which gives us options. Westfield, the preferred, is coming next year, but again, there's still time for that. So we feel like we're just in a good position, given where the markets are.

Okay. Fair enough. Everything's on the table at this point.

Exactly.

Just last question, as you go through your budgeting process, and I know it's only a small part of the portfolio today. Do you think the core growth can be better in outlets or your malls, maybe for next year and even longer term?

You know, it's-- I mean, the outlets are such a small piece that it's -- they are not going to meaningfully impact the overall growth. The outlets, though are -- the two that we bought in El Paso and Gettysburg, we think there's good opportunity to grow those. There's been new leasing activity and so that should translate into real strong growth there. And in Texas, El Paso, for example -- Texas is probably the area of the country where we're seeing the best sales growth, so the El Paso asset definitely has strong NOI growth potential. And Oklahoma City is 100% leased, so from leasing, we're not going to do get that much of an uptick, but we are continuing to see good sales results. And so that one will contribute as well. But it's hard to say on an apples to apples basis, because it's such a different kind of portfolio.

Yes. Well, I guess I was thinking as you grow your outlet platform, obviously it will become more meaningful and I guess longer term, is it your view that outlets are going to continue to be very attractive for the retailers as they think about growing their businesses?

It's definitely a goal for us to grow it and we see good opportunity. The new developments, the returns have been phenomenal. They have been double digit. And so they have been very accretive and when you're opening a new project in general, you get good growth as it stabilizes over the first three to five years. So, it's something that we're seeing. But also, the mall we bought in Minot has been a great acquisition and with the economy there and the sales growth, we're seeing tremendous increases in NOI budgeted going forward. So I'm just -- the outlets are great, but the core malls have tremendous potential too.

Okay, great. And then just last question actually for me. As you think about acquisitions, would you ever entertain going into Canada to take advantage of the opportunities up there, or is that a market that's just so foreign to you guys that you wouldn't even consider buying stuff up there?

Yes, I mean, we would consider it. I can't say we're looking at anything there, but there's really no reason not to. It's not -- the geographical distance isn't really a barrier to operating malls, as long as you have the retailer relationships. And North Dakota isn't that far from Canada.

Okay. Thanks, guys.

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

Hi, good morning, guys.

Hi, Rich.

Hi, John, miss hearing your voice, but look forward to seeing you very soon. My first question is on the NOI side of things, you guys were talking about a soft, or a tough comparison for the third and fourth quarter. In fact, when I look at first and second quarter of next year versus first and second quarter of this year, it actually looks harder. The fourth quarter doesn't look all that difficult. So I'm curious if this sort of softness, this sort of slowdown in the fourth quarter in same-store NOI growth spreads into the first half of next year.

Rich, if I'm getting your question right, you're asking whether our slowdown is going to go into next year, is that right?

Yes, you know, Katie, it's like the -- I know you've done a lot of your leasing already for, I'm sure, especially the first half of '13. And I look at -- I look at the quarterly comparisons for 4Q '12 versus 4Q '11 and it doesn't look that difficult to be honest with you. And then the first half comparison of 2013 versus '12 looks a lot more difficult, so, yes, exactly.

You're right, that we do have tough comparables going into next year. It's that I think we have a lot of wind at our backs going -- positive momentum that we've created through the positive lease spreads throughout the year. And you know those are always kind of lagged before the effect takes place. So we do -- we should see some more strength in 2013 hopefully and be able to, although we do have tough comparables, perform pretty well throughout the year. We -- last quarter when we talked on the conference call, we said that our second half of this year was going to be tough and there was a few reasons for that. We always hope that those things turn out better than we expect and are definitely pushing for that. But we do have a few things, little anomalies in the fourth quarter that will continue our tough comp period.

Okay. So the, the amount of leasing, guys, that you've done for 2013 so far, is that tracking, would you say pretty similarly to the amount of leasing you typically do at this time of the year for the following year?

Yes, you're correct, Rich. We are about in the same place that we normally do for 2012 and 2013 renewals. So we're about halfway through, I think, next year's renewals.

Okay, good. Thank you. And then on -- on the outlet side of things, again, if I could, you have, you have Steve Tanger who says he's looking at 20 different kinds of markets, 20 different markets in the country, in the US, and I guess Canada as well. And then you have Chelsea that I'm sure is doing the same thing. Do you guys have an approach sort of similar? I mean, are you kind of canvassing the US looking for opportunities with Horizon, or is it that you may find one here or there that sort of opportunistically pops up?

Horizon has a strategy and it's not like Horizon's new to the business. So, they have been looking at markets for quite some time and our goal is a new project every year to 18 months. So, we're not trying to do as many as Tanger or Simon. But we have a good pipeline and Horizon has great relationships with the retailers. And it's not that different in the outlets. It's really driven by the relationships. It's just different retailers that drive the projects, whether it's Saks off Fifth and Nike and Polo and Coach, those are really the key tenants in the outlet space. Horizon has those relationships for quite some time.

Okay, good, thank you. And then, Stephen, on the redevelopment side of things, does that pick up, you think, on the regional mall side of things, especially more in 2013 than it has to-date, or is it -- is it sort of same level of, say, 2012?

Yes, it's, it's definitely picking up. And it takes some time to implement these projects, but we've got a couple of malls where we focused on expansions that we're -- we'll look forward to announcing hopefully before year-end or early next year. And then there's always a consistent flow of redevelopments with the department stores. We're talking with Sears about some opportunities there, as part of their strategic initiatives. So there's, there's definitely going to be an acceleration there.

Okay, good, thank you. And then the last thing I had, guys, is I think you have one preferred left, the D, is that, I think, callable as well? Does that get taken out like the C did, do you think?

Yes, Rich, you're correct, that the D is callable at any time. I think, we took advantage of a nice window of opportunity in the market to price the 6 5/8. And if we saw some additional demand at nice coupons, we may consider taking out the D. But, right now we're pretty happy with where we are.

Okay, good. Thank you, guys.

Thanks.

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

Hi, good morning.

Hi, Nate.

Just going back onto this expense issue, if I remember correctly, did you have some visibility on the rising expenses, even to the beginning of the year when you issued your original guidance. Can you talk about as you went through your leasing process this year, what type of success you had in terms of perhaps increasing the CAM charge and the passing through of these expected expense increases?

Yes, you're right. We did have a sense that this was coming and insurance was really the thing we were most worried about earlier in the year. The security and maintenance is something that as the year's gone on, there's been more upwards pressure and also the utilities have continued. So -- but with the retailers, it's a negotiation and they are really focused on occupancy costs and gross rents and CAM is one element of that. So, it's a case by case basis. Obviously, we're trying to get as much as possible everywhere we can. And the retail environment, fortunately, is healthy for the most part. But there are also some retailers that are challenged for whatever reason. So it's a balance and we're pushing to do as well as we can.

Okay, thanks. And then Farzana, you had mentioned earlier on the going from the unsecured -- from the secured to unsecured, there was considerable administrative savings. Can you quantify that?

I can quantify it generally, not specifically, but here, there's a tremendous amount of legal costs, when you are securing assets, you have to post the collateral. You have recording deeds and taxes and legal opinions, appraisals, environmental. There's just a huge amount of expenses that goes along with each secured asset, so the costs of not having to post those as collateral saves a tremendous amount of investment dollars invested as well as time. There's a lot of time involved from all of us here in posting the collateral.

Okay, great. Thank you. See you next week.

Okay.

And our final question is a follow-up from the line of Quentin Velleley with Citigroup. Please go ahead.

Actually, it's Michael Bilerman. Is John in the room? I thought you said John's in the room.

John's in the room.

Hi, Michael.

How did you keep him muffled the entire call?

I was still savoring over that headline you did today. Thank you very much.

Oh, well, it is a great parting gift. And we definitely thank you for your 40 years of service, but I did have a question for you. And while I've only been covering the company for 16 years, for those 16 years, I've heard you probably give the whole secured debt strategy and why it makes sense for the assets in the Company, and was it a morning you woke up on the other side of the bed that you sort of decided, you know, what's been going right for 40 years is not the right thing for the next 40 years?

No, I think that we've got a great team in place and it was time for Farzana to take over and Katie to be recognized by the markets as well. And I think we always discussed all along that we wanted to put our balance sheet in that position where you could get an investment grade. And I think it was just time to recognize and to promote our people and to show the world what a great organization we have and the depth that we had. So it's been great and I'm still here.

And the press release, it talked about you staying on as Executive Vice Chair in the near term. What is that supposed to imply? How near is near term?

Well, near is nearest to your heart. So I'm still here.

He'll be in San Diego, Michael, so you can -- we can all talk about it there and you guys can have a nice hug fest.

Great. Thank you so much.

Thanks.

Thanks, Michael.

I will now turn the call back to you, Mr. Lebovitz.

All right. Again, we would like to thank everyone for joining us today and we're looking forward to seeing you in the fair weather in San Diego and having lots of good meetings out there. Thank you.

And, 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.