CBL & Associates Properties, Inc. (CBL) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CBL & Associates Properties Inc. fourth quarter 2012 conference call. During the presentation all participants will be in a listen-only mode, after which, we'll conduct a question-and-answer session. (Operator Instructions).

As a reminder, this conference is being recorded, Wednesday, February 6, 2013. 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 fourth quarter results. Joining me today is Farzana Mitchell, Executive Vice President and Chief Financial Officer, and Katie Reinsmidt, Senior Vice President Investor Relations and Corporate Investments, 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 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. 2012 was a successful year for CBL on all fronts with major new strategic financing initiatives, attractive acquisitions, a growing pipeline of redevelopments, expansions and new development opportunities, and accelerating operational strength. We were pleased to achieve our same center NOI growth goal with a 2% increase for the year, meeting the top end of our guidance range. This growth was the product of occupancy gains, positive leasing spreads and sales growth as well as expense efficiencies. Portfolio occupancy increased 100 basis points year-over-year. Mall leasing spreads increased 8.4% for the year and comp store sales grew 3.6%. This strong performance plus interest savings generated from loan repayments, refinancings and improvements in our line of credit spreads brought our adjusted FFO to $0.62 per share for the quarter and $2.17 for the year, a 5.9% increase over last year. A key contributor to our strong results in 2012 was the ongoing improvement in our leasing spreads. We added more than a dozen first-time retailers to our portfolio including Lego, Armani Exchange, Tilly's, Clark's, Microsoft, Garage, Michael Kors, Pandora, Crocks, Plow and Hearth, Altered State and Love Culture. Demand from these retailers as well as expansion of our existing retailer base allowed us to improve our results steadily over the year.

For the fourth quarter, leases for stabilized malls were signed at a 6.8% increase over the prior gross rent per square foot. Renewal rents were signed at a 4.2% increase and new leases were signed at an 18.6% increase. For the quarter, leases three years or less comprised 42% of the leasing activity. Our goal is to continue to convert short-term leases to longer terms, which will benefit our future growth. For the full year, leases for stabilized malls were signed at an 8.4% increase over the prior gross rent per square foot, renewal rents were signed at a 4.7% increase, and new leases were signed at a 23.4% increase. This continued demand from new and existing retailers generated year-over-year occupancy increases across our entire portfolio, with occupancy improving 100 basis points to 94.6% and stabilized mall occupancy improving 30 basis points to 94.5%. Our occupancy has now returned to pre-recession levels, showing the resilient nature of the mall business and our portfolio. The holiday shopping season was solid and in line with industry expectations.

For the year, CBL portfolio mall sales increased 3.6% to $346 per square foot compared with $334 in the prior-year period. This year most of our malls opened at midnight on Black Friday to very strong traffic, especially from younger shoppers. Black Friday sales were strong and continued over the entire weekend with targeted promotions, making for a strong November. December was slower overall but traffic and sales picked up near the Christmas holiday. Regionally we saw strength from our border malls which was partially fueled by the favorable exchange rate. As we look forward to 2013, the steady economy and an improving job picture in our markets, which have benefited from strength in the energy and manufacturing sectors, lead us to project sales growth similar to what we experienced in 2012. The continuation of the lower tax rates on middle income consumers was particularly welcome news to shoppers in our markets. We were pleased to complete two off-market acquisitions in December for a total investment of $96.1 million, including the assumption of our share of debt.

We completed the acquisition of a 49% interest in Kirkwood Mall in Bismarck, North Dakota, and executed an agreement to acquire the remaining 51%, which we expect to close following approval by the lender. The aggregate purchase price for Kirkwood Mall is $121.5 million, including a $40.4 million nonrecourse loan with a fixed interest rate of 5.75% maturing in April 2018. Kirkwood Mall is a terrific acquisition for us and complements Dakota Square Mall in Minot, South Dakota, which we acquired earlier in 2012. The mall enjoys tremendous growth with its proximity to the Bakken formation and benefits from the stability afforded from its location in the capital city. The mall sales were up double digits in 2012 to over $400 per square foot. Occupancy costs are low at around 9%, and we see significant upside potential in this center. Additionally in December we acquired the remaining 40% interest in Imperial Valley Mall and Commons in El Centro, California, from our joint venture partner. We developed this center in 2005 and since that time it has enjoyed strong growth in NOI. 2012 sales were $392 per square foot, and occupancy was 95.5%. The mall is well-positioned for growth in the future from both its local market and shoppers from the Mexican border town of Mexicali. I'll now turn it over to Katie for her comments.

Thank you, Stephen. During the fourth quarter we completed the sale of several properties including Hickory Hollow Mall in Nashville, Tennessee, Town Mall in Franklin, Ohio, and Willowbrook Plaza, a community center in Houston. The properties were sold for an aggregate sales price of $26.5 million. Subsequent to the end of the quarter we completed the sale of two office buildings in Greensboro, North Carolina for a sales price of $30 million. The collective proceeds from these dispositions match off well with the equity needs from our recent acquisitions. We are pursuing additional opportunities to prune non-core and mature assets from our portfolio where we can achieve attractive pricing and hope to have additional announcements to make in the near future. During the fourth quarter we completed several development projects including Waynesville Commons, our community center in Waynesville, North Carolina. This center opened 100% leased anchored by Belk and Petco. At Southhaven Towne Center we opened a 15,000 square foot expansion with Men's Warehouse and College Station. This month we will begin construction on the second phase, adding another 18,000 square feet to be occupied by Opera Cosmetics and (Bersona). Last month we announced a new 6535 joint venture development project in Slidell, Louisiana with Sterling Properties. Phase one of Fremaux Town Center is a 295,000 square foot power center development with Dick's Sporting Goods, Michael's, Kohl's, PetSmart, T.J. Maxx, Ulta and additional shops and restaurants.

The project is located on the Northern shore of Lake Pontchartrain across from the city of New Orleans. This area experienced tremendous growth following Hurricane Katrina. The project is already 70% leased or committed with construction scheduled to begin in March and a grand opening slated for the second quarter of 2014. A second phase is in the planning process. During the fourth quarter we announced a new expansion project at our Cross Creek Mall in Fayetteville, North Carolina. Cross Creek is one of our most productive centers, maintaining a full occupancy rate and generating sales well over $500 per square foot. In 2012, the mall underwent an interior and exterior renovation with updated entrances, lighting, flooring, new seating areas and amenities package. The 46,000 square foot exterior expansion will allow us to accommodate a number of retailers that are in demand by the market but we currently don't have space for.

The expansion is 89% leased or committed with Chico's, Loft, White House Black Market, Men's Wharehouse, Reeds Jewelers and Lane Bryant. Construction is under way with an opening planned for late this year. With the overall high occupancy rate at our malls and the increased demand by retailers for new stores we are focusing even greater attention on redevelopments and expansions at our existing properties and expect this activity to accelerate in 2013 and 2014. With construction progressing ahead of schedule we were able to recently announce an accelerated opening date for the Outlet Shops at Atlanta in Woodstock, Georgia. The project is now slated to open weeks earlier on July 18. The center is approximately 85% leased or committed with great retail names including Saks Fifth Avenue Off Fifth, Nike and recently announced new additions such as Asics, Coach, Colombia Sportswear, Oshkosh Begosh, and Waterford Wedgewood. Atlanta will represent the fourth outlet center in our portfolio and we expect continued opportunities for expansion at existing centers and new developments with our joint venture partner Horizon Group.

Construction continues on the Crossings at Marshall Creek, our 103,000 square foot shopping center development in Strasberg, Pennsylvania. The 85% leased or committed shopping center development 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. Continually improving our shopping centers to ensure their ongoing market dominance has always been a priority for CBL. In 2012 we added more than 20 junior anchors and 15 restaurants to our centers. We also completed renovations on four centers and just recently announced our program for 2013. This year we will renovate four centers including Friendly Center in Greensboro, North Carolina, Mall of Acadiana in Lafayette, Louisiana, Greenbrier Mall in Chesapeake, Virginia, and Northgate Mall in Chattanooga, Tennessee. We are also doing upgrade work at Mid Rivers Mall in St. Louis, Missouri. Renovation work is beginning over the coming months and scheduled for a completion before the holiday season. I will now turn the call over to Farzana to provide a financing update as well as a review of fourth quarter financial performance.

Thank you, Katie. Our financing strategy going forward centers on positioning our balance sheet to achieve an investment grade rating. As part of this process, we are paying off property specific loans as they mature to increase the size of our unencumbered NOI and gross asset value. While we believe most of our key financial ratios would already meet the investment grade criteria, due to the laddering of our maturities, achieving the necessary ratio of encumbered NOI to secure an investment grade rating will take us 18 to 24 months. Initially we plan to use the capacity available on the lines of credit as well as the term loans to help mitigate maturity and interest rate risk. Ultimately, once we achieve an investment grade rating we will have the flexibility to access the public debt markets to achieve longer term fixed rate financing as well as continue to access the secured debt markets selectively. During the quarter, we made significant progress towards our balance sheet goals. We closed on the extension and modification of our two largest credit facilities. The facilities were converted from secured to unsecured and expanded by $155 million to an aggregate capacity of $1.2 billion. The maturities of the facilities were extended to 2016 and 2017, including extension options and the average spreads reduced by 60 basis points across the leverage grid.

In December, we closed a new loan secured by West County Center in St. Louis, Missouri. This property is owned in a joint venture with TIAA CREF, the new 10 year, nonrecourse, $190 million loan has a fixed interest rate of 3.4%, representing the lowest coupon CBL has achieved to date. Our share of the loan was $95 million, which generated excess proceeds to CBL of approximately $23 million after payoff of the existing loan. In November we retired the $167 million unsecured bank term loan. We also retired the loan on Monroeville Mall, which was scheduled to mature in January. In January, we retired the loan secured by West Moreland Mall which was scheduled to mature in March. We are taking advantage of the open to prepayment at par date to retire maturing debt and save on interest expense. After the payoff of the loan secured by Monroeville and West Moreland Mall, this year we have approximately $187 million remaining of maturing property-specific mortgages. We plan to retire the loans secured by wholly owned properties using our lines of credit. The loans secured by joint venture properties including Friendly Center in Greensboro, North Carolina, will be refinanced. We will announce details of the new financing activities as they become available.

We ended the quarter with $818 million available on our lines of credit, providing ample capacity and flexibility. Our financial covenant ratios remain very sound with an interest coverage ratio of 2.6 times, and fixed charge coverage of 2 times. Our debt to GAV ratio was 52.7% at year end. Our debt to total market capitalization was 54.7% at December 31, 2012, versus 59.7% at the prior-year end. Fourth quarter 2012 adjusted FFO was $0.62 per share, a 3.3% increase over the prior-year period. Adjusted FFO for the year grew 5.9% to $2.17 per share compared with $2.05 in the prior-year period-- in the prior year. FFO in the year and-- in the quarter and the year was reduced by a $3.8 million charge related to the Preferred C redemption in November. FFO during the quarter and full year was positively impacted by growth in the same center NOI as well as lower interest expense resulting from our recent loan repayments, favorable financings and lower rates on the lines of credit as compared with the prior-year period. FFO was also favorably impacted by contributions from our 2012 acquisitions. G&A as a percentage of revenue was 4.9% for the year compared with 4.3% in the prior year. G&A in the fourth quarter included severance expense as well as normal compensation increases and higher state taxes.

Our cost recovery ratio for 2012 was 99.7% compared with 101.7% in the prior year, as a result of lower tenant reimbursements. As Stephen mentioned earlier, we acquired the remaining 40% interest in Imperial Valley Mall. Because we acquired a controlling interest as a result of this transaction, we will begin accounting for this property on a consolidated basis and will no longer account for it as an unconsolidated equity method investment. This change in accounting required that we adjust the historical carrying value of our investment in this property to fair value upon consolidation, which resulted in a gain on investment of $45 million. We also acquired the remaining 40% interest in land that is available for the future expansion of Imperial Valley Commons, which is already accounted for on an consolidated basis. During the course of our quarterly review we determined that an impairment of $21 million was necessary to write down the carrying value of this land to its estimated fair value. We were pleased to achieve 2% same center NOI growth for the year, which met the high end of our guidance range of 1% to 2%. Same center NOI in the mall portfolio increased 1.7% over 2011. Total same center NOI in the fourth quarter increased 2.2%. Total and same center NOI growth for the quarter was driven by top-line revenue growth as a result of the occupancy gains and positive leasing spreads with operating expenses in the malls staying generally flat year-over-year on a same-center basis. Other NOI benefited from lower operating expenses for our subsidiary that provides security and janitorial services. Bad debt expense was $181,000 for the quarter compared with a reversal of $279,000 for the prior-year period.

We have a positive outlook on our growth expectations for 2013 and are providing initial FFO guidance in the range of $2.18 per share to $2.26 per share. The guidance incorporates same center NOI growth forecast of 1% to 3% and portfolio occupancy improvements of 25 to 50 basis points for the year, nearing 95%. While our occupancy growth is lower compared with 2012, we will benefit from the continued conversion of our shorter term leases. Our guidance also assumes the payoff of the (Westfield) preferred by mid year. As always, our guidance does not include any unannounced acquisitions or disposition activity. As we have said in previous calls, we continue to be focused on reducing our overall leverage. Our strategy is to access the most attractive sources of capital to accomplish this and all equity options available to us including-- today, including joint ventures. We have been successful in completing non-core dispositions, which has helped raise equity as well as improve our portfolio. And we plan to be aggressive in continuing these efforts. Additionally, at the right valuation level, we would view common equity as an option and would consider an ATM program which offers the lowest execution cost and allows us to be selective on pricing. Now I'll turn the call back to Stephen for closing remarks.

At the beginning of 2012 our corporate goal was to continue the momentum in our operating results from the second half of 2011 into the new year. I am proud of our entire organization for pulling together and achieving this goal. Our results for the year show the underlying strength of our portfolio and validate our market dominant mall strategy. We also saw renewed external growth and see even greater opportunities for acquisitions, redevelopments and expansions in the years to come. The supply/demand dynamic in 2013 bodes well for continued improvement in our leasing results. With little or no new development under way, retailers should continue to channel into the dominant retail facilities that we own and operate. Retailers now are focused on broadening their omni-channel strategies which encourage shopping in their stores. Bricks and mortar stores continue to play a critical role and these trends will continue to fuel the demand for new stores. 2012 also marked a fundamental change in our balance sheet strategy that will allow us even greater financial flexibility and strength in the future. Our operational improvements, combined with historic low interest rate environment, have allowed us to reduce our overall cost of debt, positively impacting our outlook. We are looking forward to another year of strong results for CBL. We would now be happy to answer any questions you may have.

Thank you, sir.

(Operator Instructions).

Todd Thomas with KeyBanc Capital Markets.

I'm on with Jordan Sadler as well. Hi. Just a question. As we think about the Company's goal of obtaining investment grade rating, the non-core retail and office properties on the market, if you completed all of those sales that you're contemplating would that potentially be enough to keep the Company from issuing equity or is it right to assume some capital raising, some issuance as part of the road to get to that investment grade rating?

Sure. I think like we said in the call that we feel like it's important to raise cash through a combination of methods and that includes the disposition of the non-core and the office, continuing to work on potential joint ventures and potentially equity, depending on what happens with our stock price. And now we feel like we have the lowest multiple in our peer group and we think there's room in our stock price. So today we feel like equity would be dilutive on that basis. But we think down the road it makes sense. Really, the investment grade is almost a separate issue and we look hard at the ratios. We met with the different agencies and really what's driving the investment grade is the timing of unencumberring enough assets so that we can have a higher ratio of unencumbered NOI and gross asset value to what we have now and our leverage-- there are companies out there, several companies that have higher levels of leverage that are investment grade. So the leverage is really a goal that we've had internally. It goes back to 2009 when we raised equity to the Teachers joint venture that we did to the dispositions and we've made tremendous progress and we want to continue to do that. But it's a corporate goal. It's not something that's being forced on it-- on us. Also, we have the luxury of being patient on that. With the new line of credit we've got more than ample capacity to handle all of our payoffs for this year, the Westville preferred that we would like to pay off later this year, this summer. So we feel like there's really all the different alternatives available to us without a gun to our head or anything pressuring us to do something immediately.

And then I know that the guidance excludes any future unannounced acquisitions or dispositions, but can you just clarify, is there any capital raising either common stock or preferred issuance in the 2013 guidance?

No, there's nothing in the guidance from a capital raising point of view. And like I think Farzana made the point in her comments, the dispositions that we did really match off with the acquisitions. So we're able to hold our leverage level at the comparable level because of that and we would view that as our strategy going forward.

And then just lastly, I may have missed it but did you talk about where your occupancy costs ended the year and then I was wondering if you expect to see similar leasing spreads on gross rents in 2013 relative to the 8% to 9% increase you saw in 2012? Maybe you could just talk about some of the trends you're seeing so far in 2013 here.

Well, sure. First, on the occupancy cost, we don't have that yet. We'll have it in our 10-K, but we're still collecting that information. We anticipate some modest improvement there, given the increase in sales that we had this year. As far as leasing spreads, our goal is double-digit across the board. We were 8.4% average this year. With the new leasing that we're doing, picking up and the new leasing spreads are high teens or even north of 20%, we think that's realistic and also with the higher percentage of longer term leases that we're doing on renewals, we should see better leasing spreads. So we're pushing to make that goal. At the same time, there's always some retailers that for whatever reason have their individual struggles that we work with and those impact us on a quarterly basis. But on the whole we feel positive as far as our outlook for the year.

Paul Morgan with Morgan Stanley.

In terms of same store guidance, is there any-- should we expect any shift in the mix? You were 1% or so in the malls, but big numbers in the other retail which has bounced around quite a bit over the past few years. Should we think of your guidance as more what you would expect for the malls or is it being boosted by, again, higher numbers from the associated community center?

The majority of our same center NOI growth comes from our malls. So we expect and hope that that's really where our growth will come from, because if you look at our rental income, majority of it all comes from malls. So we expect that that's where we'll get the pick-up.

In this particular quarter, for example, it doubled, the rest even though it is a small proportion. It was 1.2 and 2.2, and 30 basis points of so. But when you give the guidance range you do expect a core acceleration in the mall absent it-- what goes on in the rest of the portfolio?

Yes, absolutely. Because on a quarter-by-quarter basis it's really hard to determine that that's really where your growth will be. This quarter, yes, we had a larger increase in the community center but really on an overall basis our growth really is in the mall sector and that's really the majority of where the revenues come from.

And then just to be clear, 42%, what is that number exactly? That's the leases that are three years or less across the whole portfolio or is that on your new activity?

That was just leases signed this quarter, not necessarily occupied, but just the leasing activity for the quarter that was signed.

So across all new and renewal in the malls?

Correct.

And what was that number pre-recession? What should we expect it to converge to over time?

We didn't really track it pre-recession. We started tracking it. It had been up as high as 60% or even higher than that during the immediate years during the recession and after and our goal is to push that down into the 30%, 30% to 35% range. There's always going to be moving parts. We're always doing short-term renewals to make room for other tenants and waiting for retailers to figure out long-term strategies. So it's important and we encourage it in certain situations to give ourselves the flexibility, especially with the redevelopment activity that we're working on and like we said in the call, that's an even bigger priority in the short-term leasing in many cases necessary to allow that to happen.

Maybe do you have any color behind what the dialogue is with retailers who have been thus far reluctant to commit? Is it they don't feel like they're in a capital position to put money into a new store? I assume this is like a lot of cases. They're not rolling into a new store format but if they would do a longer term deal they would want to do that. Maybe that's an obstacle to doing a longer term deal. Is it that or are they just not sure about where they want to be from an overall store count perspective and how might that be evolving?

It's really a combination. Sometimes you have retailers that are in a corporate situation where they're not making long-term commitments. They might be transitioning from a strategy point of view. Other times we're trying to maintain our flexibility. We'll do a short-term renewal while we're working to replace someone but we might not have the deal ready or it might not be able to happen in the current year. That happens a lot. That's probably the biggest reason behind them.

Then do you think that as you look at your TIs, the number goes down. Should we expect a meaningful boost in that number versus the $57 million in 2012?

Well, the TIs increase this year really because of the additional leasing that we did across the portfolio and some of it was driven by some big box activity that we did because, like we said, we did over 20 boxes throughout the portfolio and that usually involves TI and CapEx as part of that. And looking ahead, we feel like 2013 will be comparable to what we had this year.

Christine McElroy with UBS.

In Q3 you talked about a lower recovery ratio year over year, putting pressure on your same store NOI growth. In Q4 it seems like the recovery ratio is much higher year over year. Can you quantify what impact the difference in recovery rate had on your same store NOI growth or can you break out the same store revenue growth versus the same store expense growth in the quarter?

Hey, Christie, it's Katie. We actually saw operating expenses in the malls stay flat year over year, which Farzana mentioned that in her comments. So it was really the other categories that saw the boost in same-center NOI resulting from a reduction in our operating expenses, which you saw that in the recovery ratio. It wasn't actually coming through the malls. It was just a benefit we had in lower expenses from our subsidiary that does maintenance and janitorial services.

Was that sort of a one time thing?

Yes.

I'm just thinking about what it should look like in 2013.

Yes, it was definitely a one time thing and I think next year we're-- or this year, 2013, we're going to be in the same range as we were for this year overall. So in the high 90s.

How many of your JC Penney stores are being outfitted with the new store in store concept and has JC Penney or Sears approached you about buying back any space?

Sure. With JC Penney, it's roughly 60 of the 70 are scheduled to have the full renovations for the shops that they're working on and on the other 10, they're putting in the merchandise from the retailers that they're bringing in. They're just not spending the CapEx to actually create the full new look with the Main Street and all that. So that's where that stands. They have not approached-- JC Penney has not approached us about any type of closings or buybacks for any of their stores, and there have been several renewals within the portfolio that we've had this year that they've gone forward with per the lease. Sears is ongoing as far as discussions with them about their stores. They have really a variety of strategies as far as their stores that they're working to execute. We talked about in the past but one of our centers, Friendly Center in Greensboro, they subleased to Whole Foods. They own the store and they down sized and renovated and Whole Foods has been a great addition to the center so that was a win-win for us. In certain locations we're working with Sears to work with their box to take back portions of it because of over-capacity that they have and to bring in other retailers. So we're fortunate. We have a great relationship with them and we think that it will give us some opportunities to add GLA, which is good given our occupancy levels and our interest in just bringing in the new retailers to our different centers.

It's Ross Nussbaum here with Christie. First question. I'm looking at your supplemental. Your average base rent for your stabilized malls was effectively flat at year end year over year. And I'm trying to understand that number given the contractual rent increases that you have combined with the positive re-leasing spreads. Why was that number flat? It was $29.72 versus $29.68 the year before.

The majority-- the centers this year, the average base rent this year includes our outlet centers. They have lower base rents. So we have El Paso, we have Gettysburg and also Dakota Square Malls, their rents have been-- the average rents, because of these three properties, the average base rents are lower so that's really what has driven the overall average rents down. So comparatively next year it will be a different number.

Ross, if you actually take the outlet centers out of our average base rent number in our year over year comparison, our rents would have been up $0.33.

That's helpful. The second question is on your earnings guidance. I want to make sure I'm understanding what is or isn't in there, because you talked about possible equity issuance, joint ventures, dispositions. Is any of that in the guidance?

None of the new acquisitions will be-- if we acquire any other property that's not included. The only property that we have included is Kirkwood Mall. It does not include any future disposition. It does not include any equity offering. It does include that we are paying off Westville preferred mid-year so that's baked into the guidance.

So it includes the payoff of the Westville preferred, but how-- what is the assumption in terms of the capital using to take that out?

We will use our lines of credit to pay that off initially.

So we should assume that there might be an adjustment to guidance to account for capital activity, sales or joint ventures at some point during the year? Would that be an unreasonable thing to assume?

Yes. We will update that every quarter whenever we have new activity, whether it's equity, whether it's acquisition, whether it's disposition, we'll update our guidance every quarter to include that.

Quentin Velleley with Citigroup.

In some of your prepared remarks, you spoke about the expanding pipeline of growth opportunities and I know you've mentioned an acceleration in center expansion plans. Could you maybe talk about some of the other components of this growing pipeline. How many outlet projects might you be looking at, but I guess more importantly, what are some of the acquisition opportunities and what are some of the-- I guess the potential volume of acquisition opportunities?

Well, we're-- I think, as you know, we don't project the dollar amount of acquisitions that we're planning on doing and also we don't really project any type of redevelopments until we announce them because there's a lot of work to do to make sure they're real and we don't want to announce anything until we feel like it's ready to go forward. But just in general there, last year we were pleased with the acquisitions we were able to do, both the Minot was a marketed deal but Kirkwood was not and because of our relationships and our reputation, we were able to make that happen and that was, we think. a terrific acquisition for us to complement Dakota Square in Minot and also to give us another mall with sales above $400 a foot and with an NOI growth profile that's very attractive. And there's more properties coming available this year than last year. So we're always looking. And we're also pursuing off-market transactions that fit with our strategy. So I think it's just a function, Quentin, of a more robust economy. The progress that we made on our operating fundamentals, the capital markets, all these different aspects play into it and give us a better external growth profile. And on the redevelopment, as we've-- we're close to 95% occupancy. So for us to accommodate the retailers that want to come into the markets, we need to pursue expansions and redevelopments and we announced Cross Creek Mall in Fayetteville, North Carolina, like we said in the call and that's the kind of project that we're trying to execute. We can add 45,000, 50,000 square feet. There really are very few new developments happening. That allows the center to increase its market share and increase its dominance and that's the formula that we're looking to execute. We see continued opportunities there and that's what we're pursuing internally.

And then just -- and I'm not sure if I missed this but the cap rates just for the model in terms of the $30 million of office assets you sold and also on your acquisition of Imperial Valley.

We didn't-- you didn't miss them. (laughter) We didn't state them. The buyer on the office buildings is another public company, so you're welcome to ask them. They requested that we not disclose it and on the JV acquisition, we did not disclose that at our partner's request. And also, it was the mall-- it was the-- there was some vacant land, out-parcels, vacant land at the associated center, so a cap rate would kind of be misleading because it includes the land in addition to just the income.

And it is that land-- is there a longer term development opportunity with that land or is that something near term?

It's going to be over time. The out-parcels are around the mall and also adjacent to the associated center and there's ongoing one or two deals a year that gets done and then the associated center we're starting to see more activity there than we've had the past few years. That area got hit by the recession and the mall held up really well but as far as any new retailer interest, it wasn't that strong. But now we're seeing some activity in terms-- so we're hoping it will be near term versus long term.

Craig Schmidt with Bank of America Merrill Lynch.

Most of my questions have been asked but in the fourth quarter was there any outlet NOI in the same center NOI calculations?

No, there wasn't any.

So Oklahoma City opening I thought late summer in 2011. That still didn't qualify?

That's correct. We have-- our qualification is that they have to be open two full years and that's the comparable.

And will you be reporting that separately or will that fall into one of your other existing buckets?

No, we will include that in our malls.

Nathan Isbee with Stifel Nicolaus.

Going back to the same store NOI discussion for this past quarter. Katie, you mentioned that the rents, if I heard correctly, were flat?

No, it was the operating expenses that were flat. The rents were definitely up.

No, no, no, I'm sorry, operating expenses were flat.

Yes, yes, the operating expenses were flat.

So I'm just trying to figure out, with contractual rent bumps, higher occupancy, positive leasing spreads, why was same store NOI only 1.2%? What was weighing down?

I think there's a few things that go into it. A quarterly anomaly is always the first thing where the rents start coming in at maybe the end of the quarter, there's always a lag effect that goes into that. So I think it's better to look at the same center mall NOI on a yearly basis instead of a quarterly basis but it was-- I think that will be a better number to look at it. It was 1.7% for the year which was just right next to the 2% that we reported for the overall portfolio. That there's always lags that come in, percentage rents and things like that that may fall in the first quarter instead of the fourth quarter, different things like that.

Okay. And then just on the same store NOI guidance for next year, it's a pretty wide range. Can you just talk a little about what it can take to get you to the bottom or the top? Are there any specific things you are allowing for on either end?

His, Nate. This is Farzana. You hope for the best. That's really what we're trying to project at the top end of the guidance. The unexpected, we just wanted to account for the unexpected and that's the bottom end of our guidance. That's just really how we view this in terms of projection and also depending on leasing and we want to-- we hope to have a continued strong leasing effort and with that, the 1%, 2%, 3% range gives us that-- the range that helps us to project where the guidance-- the FFO will end up being. Just like we had in this-- in past-- in 2012. We had some strong results that got us to the top end.

In your guidance, as you look at the first quarter and the typical seasonal move-outs, you really have not seen any significant announced retailer bankruptcies. How are you seeing that for your portfolio this year? Do you think it's going to be below years past? In line?

The last couple of years have been pretty low, so-- and we expect this year to be similar. We haven't seen anyone. But there's retailers like Wet Seal or GameStop or Radio Shack or some retailers like that that continue to have their challenges. It seems like there's always someone and over the past couple years there have been some retailers that we were worried about that have made good improvements. PacSun was really struggling and they've made some good progress and Charlotte Russe we had on our watch list a couple years ago and their sales were up over 20% last year. We're always monitoring it but I'd agree in general with your comment that the first quarter started out pretty benign and with the trends in the economy we feel like it will be a good year from that point of view.

Rich Moore with RBE capital markets.

Question for you again on the lines of credit. It seems like you're going to add-- you've already got $700 million plus on the lines right now and then you're going to add $185 million to unencumber some mortgages and another $400 million plus to put the preferred units-- the Westville preferred units on there. It strikes me that maybe the guidance is a bit aggressive at the moment given that you haven't given-- obviously you've got to clear those lines somehow and so I'm thinking that the guidance as it stands, as it includes the adding to the lines but not the clearing out of the line, is pretty aggressive maybe. Is that true?

Rich, the-- actually, our lines of credit balance is a little over $400 million. So our capacity is around $800 million now. So I think you might be including the $228 million that's scheduled to be paid off later this year. So I think we have looked at all the pluses and minuses in our guidance numbers, and we feel comfortable with where we are in projecting our $2.18 to $2.26 guidance.

And Farzana, on that, would you at some point, maybe in the middle of the year, consider an unsecured term loan? Does that fit into the investment grade strategy and maybe clear the interim balances that you have as you're going forward with an unsecured term loan?

That's correct, Rich. As we fill up the bucket on the lines of credit, we will look to issue term loans in order to clear, as you just mentioned, we'll be paying off the Westville preferred and as we move forward, looking back at the lines of credit, we will make those decisions. But at this point, we are comfortable with the $800 million or so that we have-- it's available to us. We've already paid off two of the loans that mature-- were scheduled to mature this year. So we really have a couple of other loans to pay off and we have another loan which is a joint venture loan, Friendly Center, that we expect to refinance that. There will be nominal incremental increase on that loan. But so far we have taken all of those into account in our projections.

There's obviously product out on the marketplace as you guys are well aware, malls that are for sale out there. Is there anything-- or how would you assess that, I guess, what are you seeing in terms of interesting product in the market, if any?

Well, there's-- you're right, there's definitely product out there and I think our criteria is to be selective, to look for properties like the ones we bought last year that are going to be additive to our portfolio, raise our sales per square foot, raise our NOI growth. That's really the logic behind the dispositions is to recycle capital from assets where there might not be the growth opportunity going forward. And there's definitely some things out there that are of interest to us. There's a lot that isn't of interest to us that from a fit point of view. We've always been opportunistic in terms of acquisitions and found opportunities that made sense for us and we'll continue to do that this year.

Ben Yang with Evercore Partners.

Just a question on the investment grade rating goal. Obviously, there's no urgency to get there as you had mentioned. But do you have any thoughts on how much equity you would need to get there from the combination of sources you had previously referred to?

Ben, I think investment grade rating looks at the debt-to-gross asset ratio as opposed to where-- how you would look at the leverage ratio. So the criteria is different. The important thing that they're looking at is really the unencumbered NOI. That's where we are focused on. We are-- as we're moving forward, we are unencumberring our secured debt and creating the unencumbered NOI pool. That's where we're focused on. All of our other ratios are quite favorable and, as Stephen mentioned to you that-- mentioned earlier, that compared to other companies our ratios are really solid. So that's really our focus, to unencumber the NOI-- to create the unencumbered NOI pool going forward and as we pay these loans off we will have that pool to actually illustrate and demonstrate and then they will also look at what our future expectation is compared to the loans that are coming due next year. So--

Sure. But you do need to do equity to unencumber the pool of assets. I think it's clear that whether through joint ventures, asset sales or new equity, that has to be part of the game plan. Hypothetically, if you did have a gun to your head and had to do a secondary offering tonight, I'm just curious about what the size of that would look like, hypothetically.

We're-- I don't think we're in the position where we would-- where we can state a hypothetical number. We do a lot of sensitivity analysis to project different amounts and it depends on a lot of factors including what dispositions we can execute, joint ventures, and there's a lot of private equity money out there that's looking to invest in malls. So there's good potential for us there to explore joint ventures for malls in the $250 to $350 range. So that would be something that we're definitely interested in looking at and given where we are today, like we said, we've got a lot of flexibility. We have capacity. We have lots of room under our lines. We have the ability to do term loans if we feel like that's the best thing from an interim strategic point of view. So that's really the way we're looking at it.

Just last question. Do you have any thoughts on the outlet market in Columbus? Your partner Horizon is trying to build something there. Do you think you might team up with them to develop an outlet center in that market or is there any reason that give you pause in terms of trying to do something there?

We've got a great relationship with Horizon. Everything we've done with them has worked out well. Columbus is competitive, like you pointed out. But we're evaluating it. Horizon is in there with their site and we're going to study it and see where it goes.

Michael Mueller with JPMorgan.

It sounds like you're pretty confident you'll have some asset sales hit this year. How confident are you about acquisitions? Are you pretty optimistic that you'll be able to execute some other acquisitions?

It's really hard to say. This time last year we didn't anticipate doing the acquisitions like we did and we don't feel any pressure to do acquisitions. If something comes our way, then we'll do it. But we're not desperate to do anything by any means. So we don't feel like we have to force ourselves to overpay or to chase competitive assets that are part of a competitive process and we'll just evaluate each thing individually and see where it goes.

Next question, it seems like a lot of questions on the call are all trying to get to an idea of how much deleveraging could we expect. So if we're thinking about-- I know you don't want to talk about equity and that's fine. But if we're thinking about either third party dispositions or sale of JV interest, what's a real rough number of-- real rough range in terms of the number-- dollar amount that you would like to achieve? And do you think of this internally as more a 2013 priority or is it something that's-- it takes multiple years to knock out?

I give you credit for being creative in the way you asked the question. (laughter) But we can't announce a certain amount. We've never done that and it really doesn't make sense. It's not-- it's definitely not something that we feel like we have to do in 2013. It's a longer term-- two to three years or-- we've got with the lines of credit we've got, we've got some time. We've got some room. And you can look at where our leverage has come down. We do-- we have about $80 million a year of amortization, so you can count on that. And even beyond that, we've said we're committed to it. We've made progress the last few years and we'll continue. You look at where our peer group is and everyone has really made good progress in deleveraging and we want to continue to do so as well. Sorry for not being more specific, but that's just really as much as we can say right now.

Jeff Donnelly from Wells Fargo.

I guess I'll l be a bit more direct maybe than Rich. Do you guys have any interest in the portfolio properties that [May Search] has had on the market? As a follow-up, just more generally, where do you think cap rates are on malls today? I know they range all over the place but brokers we've talked to have told us that malls that do around $400 a square foot in sales are about a 7 cap today and those in the $300 to $400 range center around an 8 cap. I was just curious how that compares with your observations.

I think that's pretty comparable to where we see things. That's where the trades that have been done in terms of malls that have been sold have gone in that cap rate range. There's always individual circumstances in any transaction and it depends on the level of debt in today's market, because of just where interest rates are and that's definitely a factor. Certain buyers are willing to be more aggressive because they can use higher levels of leverage and, if anything, that's going to drive cap rates down from where they are now. So we see cap rates compressed over the past year and that's going to continue just because of how attractive interest rates are and the ability to generate accretion from that and lock in these rates for longer terms.

And what about the first part of my question? Did you guys look at all of the May Search portfolio? Is there any interest there for you in that-- in those assets that they might be marketing?

Oh, I forgot about that part of the question. (laughter) No, we-- yes, we look, like we say, we look at everything. That's a mixed bag. There's some malls in there that would be a good fit, some that aren't. But we're continuing to look and like a lot of people are and I think there's still a while to go before that gets played out.

And then I had a follow-up to I think it was Christie's earlier question on Penney's, maybe from a different angle is have you guys considered, particularly in the case of the 10 properties you said that are not getting the full JC Penney's treatment, have you guys considered approaching Penney's to take unprofitable stores off their hands or buy in stores where you just think you're going to be better served in the long run with it in the hands of another retailer rather than waiting for them to approach you?

That's a good question. We've always been proactive with department stores. We had a number of centers where Belk and Dillard had multiple stores and we worked with them to replace them over time in an orderly basis and same thing with Penney. We have dialogue with them going all the time. If for some reason we get the sense from them or we see an opportunity to replace them in a center where they're not doing as well, then we're proactive to do that. Now this year, we've got a Dick's under construction at South Park Mall where Dillard's was in that. They weren't doing a particularly strong volume so we approached them about buying the store and did and had the replacement lined up to do that. That's something we're always doing and it's not just Penney. It's with other stores. The good news is that over the past few years we've worked through a lot of that with the other stores and you look at Belk and Dillard's and Macy's and Bon-Ton's performance has really strengthened this year and the department stores are stronger than ever.

I'm curious because I'm sure you talked to your peers in the mall business, is there a threshold of pain you think out there on Penney's reinvention where the declines in cross-shopping traffic and sales cause you and other landlords to, for lack of a better term, cry uncle and push back on them or has that already happened?

I think we've all gone to Dallas. We've seen their prototype for their-- the new JCP with the shops within the store concept. It's a great vision and the execution of it this year has certainly been painful. We're all going to be anxiously looking at their earnings when they come out the end of February and we're not-- we don't have high expectations. But they have a vision for the company going forward that's very compelling and we're working-- talking to them and being patient to see it executed, because over the long term it will be a stronger anchor at our properties.

Just one housekeeping question, I'm sorry if I missed it. I think the short-term leases finished in 2012 at around 42% of the portfolio, I think you said. Do you have a sense of how that's going to trend in 2013? Do you have a target where you'd like it to be in a year or two?

Yes, we said our target is in the 30% to 35% range. It's a little too early to see the trend. But we saw progress that we started the year in the high 40%s and moved down into the low 40%s. So we feel optimistic that we'll be able to continue to make progress there.

Carol Kemple with Hilliard Lyons.

I have a couple questions on the outlet side. How many sites are you all currently looking at?

We're looking at several sites. I can't be specific with a number but Horizon is-- has great relationships with retailers and we feel really good about some of the opportunities that they have in front of us and we're hoping that in the next quarter or so we'll be able to announce our next project with them.

In a little market, just take for example Columbus, Ohio, where I think there's four companies looking to build there, if another one of your competitors actually put a shovel in the ground first would you all drop out if you entered that market or would you try to be a second outlet center in one market?

We haven't said anything about Columbus one way or another. Horizon is in the mix there. Like I said earlier, because of our relationship with Horizon we're evaluating it. But I don't think Columbus has room for two outlet centers and it just depends on who gets the retailers and I don't think anyone wants to see another St. Louis. I don't think there are any winners in that situation where two centers are getting built. Hopefully the retailers will be able to work with the developers to have some discipline in the market.

And do you all have a specific threshold with Horizon that, say, once they get [ballots] and are 50% pre-leased then you'll come in? What kind of criteria is there before you all will get involved in a site?

We don't have a fixed criteria. We've got a great relationship with them. We're talking about new opportunities and really it's a case by case basis. We've been lucky. Both Oklahoma City and Atlanta had over 60% pre-leasing before we came into the projects and that was really fortunate from our point of view and we were very pleased with that. But that doesn't mean that that's set in stone or anything going forward.

We have no further questions registered.

All right. We would again like to thank everyone for their participation and, like I said, we're really pleased with our results for the fourth quarter for 2012, and we're even more excited for this year and continuing the momentum from last year and continuing our strong performance. So thank you all.

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.