CBL & Associates Properties, Inc. (CBL) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CBL & Associates Properties Inc. second quarter 2013 conference call. (Operator instructions). As a reminder, this conference is being recorded Thursday, August 1, 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 second quarter results. Joining me today are 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, financal 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 these non-GAAP financial measure to the comparable GAAP financial measure will be included in today's earnings release that is furnished on Form 8-K along with a transcript of today's comments and additional supplemental schedules. This call will also be available for replay on the Internet through a link on our website at www.cblproperties.com.

Thank you, Katie. During the second quarter, the CBL team made excellent progress on each of our strategic priorities for this year. As a reminder, these priorities are to sustain a positive momentum in our operating portfolio, add value to our assets to re-developments and expansions, pursue selective new development opportunities, upgrade our portfolio through acquisitions and dispositions, and position our balance sheet to achieve an investment-grade rating.

Our operating performance for the quarter was solid against a tough comparable period with a 1.8% increase in same-center NOI, adjusted FFO per-share growth of 3.8%, and occupancy improvements of 70 basis points for the portfolio.

Our leasing spread results were encouraging with a double-digit increase overall and high single-digit renewal spreads. We spent a lot of time meeting with retailers this quarter including both existing and new to CBL Companies.

In May, we attended a very productive ISCS Recon in Las Vegas and followed that up here in Chattanooga in June with our own leasing conference connection which was attended by roughly 130 retail representatives. We met with representatives from major tenants in our portfolio such as Limited and ULTA as well as new faces such as Tommy Bahama, Losartan, and Kate Spade.

Our new development and re-development pipeline has grown considerably this year with the announcement of our newest outlet center development in Louisville and the acquisition of the Sears stores at two of our top malls, Fayette Mall and Cool Springs Galleria. In Las Vegas in that connection, we successfully advanced the leasing of these recently announced new development and re-development projects as well as the other projects we are pursuing. We also made significant headway leasing our existing portfolio with retailer demand continuing to be strong.

As a result of this favorable demand, our overall portfolio occupancy increased 70 basis points to 93% at quarter end. Stabilized mall occupancy increased 30 basis points from the prior year and 90 basis points from the first quarter to 92.7%. As we discussed last quarter, our leasing strategy has shifted to focus more on improving tenant quality. The sequential increase in occupancy reflects the success of this strategy as these higher-quality retailers begin to open which will also benefit NOI later this year and into 2014.

Our leasing spread results continue to improve. During the second quarter, leases for stabilized malls were signed at a 12.1% increase over the average prior gross rent per square foot.

New leases were signed at a 26.4% increase over prior rents. Excluding nine deals completed with Wet Seal in the quarter, renewal rents were signed at an 8.2% increase.

As we noted in the supplemental these Wet Seal deals were temporary in nature with terms of less than two years. Overall, the number of leases signed in the second quarter for terms of three years or less has declined again to 28% which is indicative of the ongoing improvement in the quality of our leasing. Sales growth decelerated in the second quarter and ended up flat compared with the second quarter last year.

Rolling 12-month portfolio mall sales increased by 3.2% to $356 per square foot compared with $345 per square foot in the prior-year period. Weather and a cautious attitude by consumers contributed to this result.

Additionally, certain malls were up against very strong results from the comparable quarter last year. Retailer performance across categories was uneven. For example, we saw strength in the moderately priced junior apparel retailers such as Maurice's and Rue 21.

Similarly, results for ladies' specialty retailers were mixed with names such as White House Black Market, Chris (inaudible) Bags and CJ Banks recording increases. Jewelry, sun glasses, and sit-down restaurants also performed well during the quarter. We are hopeful that we will see a rebound in the back-to-school sales season and are still projecting sales increases for the full year. I will now turn it over to Katie for her comments.

Thank you, Stephen. As Stephen said, one of our major priorities for the year has been to upgrade our balance sheet and keeping leverage in check as the key part of this strategy. During the second quarter, we were successful in generating nearly $150 million of additional equity through our ATM facility at a weighted average price of $25.83 per share.

This brings our total year-to-date to more than $209 million in net proceeds. These funds were generated prior to the markets becoming more volatile in mid May. We will monitor the market going forward and will be selective with our capital-raising activity to ensure that we are achieving fair pricing and minimizing dilution.

Another important source of equity capital for us is the sale of non-core or mature assets. Over the past couple of years, we have been successful in selling malls as well as office buildings and community centers. While we do not have any specifics to announce yet, we have had recent success marketing several lower-productivity mall assets which will allow us to improve the quality of the remaining portfolio.

We do not announce any pending sales until we have a financially committed buyer, but will certainly provide updates as transactions progress and are hopeful to have more details to announce within the next few months. Despite the competitive environment, we have made excellent progress growing our outlet portfolio.

We are thrilled with the results of our newest outlet center, The Outlet Shoppes at Atlanta in Woodstock, Georgia. The center opened in mid July, 97% leased or committed with 99 stores including Saks Fifth Avenue OFF Fifth, Nike, Coach, Asics, Columbia Sportswear, and Juicy Couture. The grand opening was a huge success with a jam-packed parking lot and traffic lined up for more than a mile on the highway throughout out the opening weekend.

It was really an amazing sight to see, and we are very pleased with this great start. Atlanta represents the fourth outlet -- the fourth operating outlet center in our portfolio, and as you can see in our supplemental, the initial returns are attractive.

Just prior to Recon in Las Vegas, we announced our latest outlet development with Horizon Group, The Outlet Shops in Louisville, in Simpsonville, Kentucky. As the only outlet center in the state of Kentucky, the 370,000 square foot project will be the premiere outlet destination for residents of Louisville, Lexington, Frankfurt, and the surrounding area. We broke ground on the center in June and already 83% leased and committed with a great lineup including (inaudible) Banana Republic, Brooks Brothers, Chico, Nike, Saks Fifth Avenue OFF Fifth, and more. The center is set to open next summer. With continued constraints on new supply, we are taking advantage of this window to aggressively pursue re-development and expansion opportunities within our existing portfolio.

Consistent with this strategy, we announced a number of new projects at our properties this quarter including the re-development of the Sears locations at two of our most productive properties. We have acquired the Sears stores at Fayette Mall in Lexington, Kentucky, and Cool Springs Galleria in Nashville, Tennessee. We are working on plans to redevelop both of these locations targeting higher-end small shops, restaurants, and junior anchor retailers that are not currently in the respective markets.

We marketed this space at Recon in Las Vegas to a very positive reception. We anticipate Sears will continue to operate both stores at least through the end of the year, and we will gain control of this space in the first half of 2014 with construction beginning soon after. These will be significant projects for both of the centers, creating value at stand-alone projects in addition to enhancing the value of the overall center.

We look forward to announcing retailers joining the projects and other details as we move forward. Our re-development projects include a new 50,000 square foot Dick's Sporting Goods at our South County Center in St. Louis, which commenced construction during the quarter. This free-standing building will be located on a pad site inside the ring road with an anticipated opening date in November of this year.

We also recently announced the re-development of the Dillard's store at Randolph Mall in Asheboro, North Carolina into a new Dunham's Sporting Goods store. Dillard's closed at the end of July, and we plan to begin construction within the next few weeks with an opening anticipated later this year. I will now turn the call over to Farzana, to provide an update on financing as well as a review of our second-quarter financial performance.

Thank you, Katie. We have significant progress to share with you today on our balance sheet strategies. Just eight months after we announced our intent to pursue an investment-grade strategy, we have received two investment-grade ratings.

After a very thorough portfolio and management review with Moody's Investors Services, we achieved our first investment-grade rating Ba3, with a stable outlook, just ahead of ICSC's Recon. We followed that accomplishment by engaging Fitch ratings and were able to move quickly with them as well.

Last week, we received our second investment-grade rating, a BBB- from Fitch also with a stable outlook. With this second rating, we are now in a position to access the public debt markets. We will continue to monitor the markets and rate to determine when the most favorable execution can be achieved, and depending on market conditions, would complete a transaction sometime this year.

Our intent would be to take advantage of the best execution window to lock-in longer-term debt at a fixed rate. While it is preliminary to provide firm estimates, we would expect a deal size in the $300 million to $500 million range depending on investor appetite and the price we can achieve. This week, we closed on a $400 million unsecured term loan.

Proceeds were used to pay down outstanding balances on our lines of credit and provide us with flexibility to continue to pay off maturing loans. Based on our current credit ratings, the term loan is well priced at 150 basis points over LIBOR with a five-year term. Similar to our credit lines, the spread improves as our credit rating is upgraded.

We have substantially completed the payoff of our 2013 loans, adding the properties to our growing pool of unencumbered assets. In December, we anticipate taking advantage of the open-to-par window and paying off the $33.4 million loan secured by North Park Mall due in March 2014.

This quarter, we were able -- we were also able to take advantage of an opportunity to retire the $88.4 million loan on Mid Rivers Mall that was scheduled to mature in 2021 and had an interest rate of 5.88%.

Since the loan had yet to be securitized, we negotiated with the original lender for pre-payment. We reported a loss on extinguishment of debt in the quarter of $8.7 million related to this pre-payment and $400,000 for the write-off of unamortized financing costs.

We have begun the process to redeem the Westfield Preferred units totaling roughly $408 million. Westfield Preferred distribution rate is currently at 5%. We expect to close and fund the redemption before the end of September.

We have raised more than $240 million through our ATM program and asset sales here to-date. We are also progressing with a number of additional asset sales and can issue equity under the ATM program, allowing us to keep this redemption leverage-neutral. In the interim, we have the availability on our lines of credit to fund the redemption.

We ended the quarter with more than $575 million available on our lines of credit plus cash. The $400 million term loan was closed subsequent to the quarter end, so our availability today is approximately $1 billion.

Our financial covenants remain very sound with a fixed-charge coverage ratio of 2.09 times as of June 30th, 2013 compared with 1.97 times as of June 30th, 2012.

Our debt to total market capitalization was 52.1% as of June 30th, 2013 compared with 55.9% as of the same period last year.

During the quarter, we began discussions with a special servicer on a loan secured by Citadel Mall in Charleston, South Carolina. We are presently exploring our options, but do not believe we will hold the asset long-term and anticipate that servicer will proceed with the foreclosure. It is early in the process, and we cannot provide a timeline, but will share updates as new information is available.

Based on the current probability of a foreclosure, we recorded a $20.4 million non-cash impairment charge to write-down the book value of the mall to its estimated fair value. This charge was included in net income but was not included in FFO. FFO in the second quarter as adjusted was $0.55 per share, a 3.8% increase over the prior-year period.

FFO in the second quarter 2013 was adjusted to exclude certain one-time items including the $9.1 million loss on extinguishment of debt as well as a $2.4 million gain on investment.

The gain was related to our investment in China where we received full payment on a note receivable that had previously been written down. Continued improvements in occupancy, new development, and re-development openings as well as contribution from 2012 acquisitions drove FFO growth in the quarter. In addition, we have been successful in reducing our overall weighted average interest rate as we have paid off high interest rate loans using our lines of credit.

Year-over-year, our weighted average interest rate was reduced by more than 20 basis points. G&A as a percentage of revenue was 4.9% for the quarter compared with 4.8% in the prior-year period.

Our cost recovery ratio for the second quarter was 102.4% compared with 99% in the prior-year period. The cost recovery ratio benefited from lower expenses in the quarter and new revenues from acquisitions and developments. Excluding a $1.5 million bankruptcy settlement received in the prior year, NOI growth for the second quarter was 1.8% for the portfolio and 1.2% in the mall category over the prior-year period.

NOI growth benefited from lower operating expenses from improved bad debt expense and real estate taxes in the same center pool as well as top line revenue growth from occupancy improvements and positive leasing spreads. We are reiterating our FFO guidance for 2013 in the range of $2.18 to $2.26 per share, despite the dilutive impact of the 5.8 million shares issued through the ATM program during the quarter. Interest expense savings and low bankruptcy activity has contributed to our ability to maintain guidance. FFO guidance includes the net impact of one-time items included in second-quarter results.

The guidance incorporates our same-center NOI growth forecast of 1% to 3% and portfolio occupancy improvements of 25 basis points to 50 basis points for the year end nearing 95%. Our guidance also assumes the redemption of the Westfield Preferred units by the end of September using availability on the lines of credit and cash on hand. As always our guidance does not include any unannounced transactions. Now, I will turn the call back to Stephen for closing remarks.

With the progress we have made this year, we are confident CBL is on the right track. We have made significant improvements to our balance sheet and are continuing to execute our plan to create a more balanced financing structure. We are pleased to see our progress recognized by the rating agencies with our two investment-grade ratings. We appreciate the market support of these efforts and are confident that this capital strategy positions CBL to access various pools of capital at attractive pricing.

Our focus is also on improving the quality of our overall portfolio through non-core dispositions, accretive acquisitions, new developments, and our growing value-added re-development expansion pipeline. We continue to experience strong demand from existing as well as new retailers and are looking forward to the back-to-school sale season. Supported by limited new supply and high occupancy levels, we are the landlord of choice for expanding retailers in our markets as they look to locate in our portfolio of dominant and growing properties. Thank you for your participation in today's call. We will now be happy to answer any questions you may have.

Thank you. (Operator Instructions). And our first question comes from the line of Christy McElroy with UBS. Please proceed.

Hello. Good morning everyone.

Good morning.

Katie, just wanted to follow up on your comments on efforts to sell lower-quality assets. Has the recent volatility in the CMBS market and rise in debt costs changed your expectations for the kind of cap rates that you are targeting on dispositions? And can you also give us a sense for the volume you think you can sell over the next six months and the level of cap rates that you are targeting?

Sure. Good morning. We have not really seen the CMBS market and the interest rate rises dislocate any of the dispositions that we have been working on so far. I think there is still a large spread between where interest rates are and where dispositions are being executed at. So there is enough room there to make money. It is still a historically wide spread. So it will probably be a little bit longer before we actually see some dislocation from interest rates rising. They would have to rise a little bit farther.

We cannot really give you a volume at this point. Dispositions are very fickle, and so we do not like to provide numbers. But we are working on a few things, and hopefully we will have something to announce here throughout the rest of the year. And I think -- was there another part to your question, Christy?

No. Just the volume and the cap rates. It sounds like you are not --. Operating expenses seemed a little light in the quarter. Wondering if there was anything one-time or seasonal that was impacting that. And can you also disclose what bad debt expense was in Q2, if you haven't already?

Bad debt expense in Q2 was somewhere around $200,000 compared with -- yes, $230,000. So we had a favorable variance this quarter. So about $400,000. So, not -- we had bad debt was really the main reason -- one of the main reasons expenses were down, and then we had other expenses down in different categories, but nothing that really makes the biggest noise.

Okay. So in terms of the sort of operating expense recovery ratio level, you would expect it to be a little bit more normal for the back half of the year?

That is correct.

Okay. And then just lastly with regard to re-leasing spreads. For a few years now, you have seen pretty meaningful difference between your new lease spreads and your renewal lease spreads, and your renewals have averaged about -- I think about 1.5% to 2% cash over the last eight quarters. Can you talk about why you think you are not getting much pricing power in renewals and whether or not you expect that to improve sort of as your occupation is closer to peak levels? And maybe put that notice context of your approach to new and renewal leasing. Stephen, you talked a lot last quarter about proactive replacement of under-performing tenants.

Sure. Well, there are a few different questions there. I guess on the new leasing, what I would say is that that benefits from some of the short-term leasing that we did at fairly low rents, and we are replacing those stores. So we are getting a good pickup in the increase by the new stores that are coming in. It is a lower comparable. So during the recession, we were preserving occupancy. We were rolling down rents. We were doing what we needed to do.

Now we are doing better quality new leasing with higher quality retailers, and we are seeing the benefit in our new leasing spreads. Renewals is more of a function of sales and when you factor in the last five years, we had the recession that really depressed sales for a couple of years there. So even though we have had recovery, when you look at it on an average basis, it is still not that significant, and you look at occupancy costs as a percent of sales when you are negotiating those renewals. And that is really the driver behind the flat to slight increases. We are making progress on leasing spreads.

Renewal spreads have consistently increased last year and then going into this year every quarter is getting better. This quarter when you exclude those -- the Wet Seal deals which we view as extenuating because of they are really trying to hang on and avoid bankruptcy, and we work with them to do the short-term renewals, but without those we had less than 20% of renewals that were three years or less. Our renewal spreads were high -- over 8% on and average basis. So we really -- we were really encouraged by the renewal results for this quarter.

Thank you.

Thank you.

Our next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed.

Hello. Good morning. I am on with Jordan Sadler as well.

Good morning, Todd.

Just a follow-up. I was just wondering if you could talk a little bit about the thinking around the Wet Seal leasing deal and your comments about taking a slightly more aggressive approach in terms of upgrading the quality of the portfolio. I guess my thought was that that meant taking a harder stance on pricing versus occupancy and looking to recapture space versus providing rent relief or, I guess, concessions. I was just wondering if you could clarify that strategy a little bit.

Yes. We're -- Wet Seal -- it is totally consistent with what we did, and what you our strategy is, which is we will do short-term renewals if we do not have a tenant in place to replace them. And then we will push really hard to bring in replacements so that we can either take the space back early. Because usually when we agree do these short-term renewals with the rent concession, we get control of the space, and we can terminate early or be in a position at the end to backfill with a better quality store.

So it is not a change at all. It is consistent with that, and we are just seeing more traction with the short-term renewals that we did back during the recession. Now, we have not been renewing those guys as they come up because we have better retailers to bring in, and also, several retailers as you work with them, they show progress.

Zales is a great case. Charlotte Russe is a great case. Where a couple years ago, they were really on the brink. And we worked with them, and the other mall landlords worked with them as well. And they recovered and now their sales are strong, and they are growing, and we benefit from the relationship that we developed during those tough times. So it is a partnership, and that is just the way that -- with the larger retailers the relationships work over time.

Okay. And then as you look across your portfolio and look at the schedule of expirations that are coming up now. Are there other retailers that you are having similar discussions with to provide rent relief or sort of portfolio leasing deals like this? Do you expect that will be other deals like this going forward in the near-term?

We are always doing portfolio renewals with retailers. That is really the way it has evolved. It doesn't matter if they are healthy or unhealthy. That is -- as we look, and we will get together with the retailer. We will look at the 13 or the 14 renewals at this time and work on them as a portfolio. And there is always back and forth with them in those negotiations.

Okay. And then regarding the Sears boxes that you acquired in the quarter, I was just wondering if you can give us a sense for how much additional capital you might expect to spend on re-developing those, and what kind of returns you are targeting.

Yes. We are not, like we said -- we are not in a position right now to give the total spend for those. We should be as the year goes on in the next few months. Our goal is to be in the position to start construction in spring of 2014 and roll these out in 2014, but that depends on the timing of pre-leasing, which we have been making good progress on. But we need to get to a certain point before we can start. The returns, though, are stand-alone. They will be consistent with our other re-development returns.

I will say that the budgets will be more significant than most of our re-developments because we are going to be taking those buildings and splitting them up into shops and restaurants and small boxes. So it is not like we are going to replace them with any big box or any other anchor. So that will involve more capital than we have typically spent on re-developments because it is just a more significant re-development. We are looking at these as a way to really upgrade the quality of the retailers, the malls, they are significant opportunities. Both Fayette and Cool Springs are close to 100% leased. So we do not have any capacity, and it is really a game-changer opportunity for us in both of these situations to upgrade these properties and create value.

Okay. Thanks. And just last question on guidance.

Just -- well, two quick things on guidance. I was wondering, first, is there anything baked into guidance for the dispositions that you are talking about? And then second, I just wanted to clarify the guidance that you have maintained; so the 218 to 226, that would correspond to the $0.51 that you did in the quarter. So $0.53 in the first quarter, $0.51 in the second quarter versus the $0.55 adjusted. Is that right?

Hello Todd. The guidance does not include any sales. We will update the guidance next quarter when we have -- if the sales come to fruition and the -- it is as adjusted. Our guidance takes out the gain on sale and also takes out the impairment as noted in the -- in our earnings release.

Okay. So it would be the $0.55 then in the quarter?

That is correct.

All right. Great. Thank you.

You are welcome.

Thank you.

Our next question comes from the line of Nathan Isbee with Stifel. Please proceed.

Hello. Good morning.

Morning.

Just focusing back on the same-store NOI numbers. The leasing spreads are up, occupancy is up, bad debt is down. Why would you say that it is not flowing through to the same-store growth? And you did reference it going up in the second half the year. What type of growth should we expect as we head into the second half of the year?

We -- I mean, I think -- we are right in the range of what we provided as guidance. We said for the year, we would be 1% to 3%. We were 1.8% this quarter, 1% in the first quarter.

We are, with the factors that you point out, looking to strengthen in the latter part of the year. And so we do not really see any questions about where -- why the guidance is -- or why the NOI growth is not any higher. I mean, it reflects a lot of the new leasing. When we sign the leases, that is when we report the spreads, but those stores have not all opened. Those are going to come online as the year goes on. And so we will see the benefit from them later this year even going into next year. The re-developments, as they -- as they kick in and the expansions, we will see that as the year progresses. I think the biggest thing is just a lag factor from when the leases get signed and when the stores open, and we start seeing more of a tangible benefit in same-center NOI.

But if you just focus on the mall portfolio alone, you did 1.2% and the good leasing news has not started this quarter. It seems like you pointed out earlier it has been going on for since last year. So that lag effect should be catching up at this point. I would think.

Yes, but, you know, the other thing is occupancy, like we talked around the first quarter, was flat. So we did not really pick up anything there. And the stores that are -- were opening this quarter are opening -- we are not really seeing any impact of that for the most of the quarter. So I just think it is still there and has -- it shows up in our -- in our NOI growth.

And then just focusing on the Sears transaction. Can you talk a little bit about how that came about? Did you go to them with a larger list, and they came back with those two? And what would you say differentiated those two that they were willing to part with them given that they have not been what I would call large sellers to date?

Sure. Well, I will say that we -- we talk to Sears all the time and we really focused in on those two because of the re-development opportunity that we saw, and we felt like they're two of our top five malls, that we were getting significant demand from quality retailers that we wanted to be able to accommodate. But we have had conversations with Sears about other situations and we are doing other things with them that will facilitate re-development. We have talked to them about a whole range of possibilities, subleasing part of their space, taking one floor of a two-level store, and then buying the stores. Sears has moved slow because they want to try to do the right thing over time for their company, and in these two situations, the timing worked for them and it worked for us.

Okay, and then, I am not sure if I missed this earlier. Can you give a status update on the Gulf Coast Town Center?

Yes. I will, Nate. On Gulf Coast Town Center we are working with a special servicer, and Tom will give you more information. But at the moment, we are working on trying to establish -- stabilize the center as well as work with the lender to -- on a potential restructure. That is really the status, and I really cannot share a whole lot of information because it is sensitive. But suffice to say, that we are hopeful that we can work this out.

Thank you so much.

Thank you, Nate.

You are welcome.

Our next question comes from the line of Michael Mueller with JPMorgan. Please proceed.

Yes. Hello. Couple things. First of all, going back to the renewal leasing spreads, 5% to 6% cash increase this quarter. That was a little bit better than prior quarters. If we are looking forward to the balance of 2013, 2014, do you see that continuing to increase directionally towards the double-digit levels?

That is our goal, and we have said we want to be double-digit for overall spreads. So for the quarter we were -- we exceeded that goal, and we just want to keep raising the bar and definitely want to get to double digits for the renewal spreads. And we think it is realistic because we have some sales increases over the past few years that are going to be embedded into the negotiations. Our occupancy cost is still low. And with the level of occupancy overall and the supply/demand dynamic being favorable to us, we think we have got good momentum and tailwind at our back.

Okay. Is there anything that you can give us in terms of the Sears boxes in terms of rough dollars paid either in aggregate or just in aggregate I guess?

No. We really can't. Sears did not want to disclose that. And so we have honored that request.

Okay. And in terms of bond pricing. If you would come to market today, what do you think is a roughy level that you could price a ten-year bond at? I apologize if you went over that. I may have missed it.

No. We did not mention the pricing on the bonds. It is -- if you look at the most recent executions on realty income and some others that have occurred. That will give you an indication of where the pricing is or where pricing may be. But it all depends on where the treasury is going. You know, the treasury has sort of moved up and down a little bit, but the spreads are ranging somewhere in the 200 basis points range. So you can impute that.

So the 200 basis you think you would get?

Well, that is the range that Realty Income traded at 205 and some of the others are trading in the 200 basis point range. So that is sort of proxy.

Got it. And then last question for me. The China investment. Do you still have an investment in China, or was that just -- I guess do you just have an investment in China still?

We do. We have a remaining value for a little over $5 million on our books. So we do have that investment in China continuing, and we hope to recover that later on. That is our written-down value.

Okay.

And what exactly was that in again? If you could, you know, refresh us?

These are deco malls in China. There is a portfolio of malls that (inaudible) owns and we are part of the owner of the portfolio. And these are malls that have, they have -- it is sort of like Home Depot type malls. They have small shops for different merchandises that -- for example if someone is building their apartment, and they want to furnish it, so they will go over there and buy their plumbing. They will by their materials -- kitchen materials and things like that to furnish the apartment, so -- or their homes. That is the type of deco malls we have invested in.

Okay. Great. Thank you.

Our next question comes from the line of Rich Moore with RBC Capital Markets. Please proceed.

Yes good morning, guys. First of all, congratulations on all the investment-grade work. I think that is terrific. I just want to make sure I understand, though, on the -- on what is happening here. As of the end of the quarter -- where we were at the end of the quarter, we do a $400 million term loan and clear some of the line. Is that right? Is that how that started?

That is correct, Rich.

Okay. And then -- then I assume you put, Farzana, the roughly $400 million of West Fields preferreds back on the line. But when those come due, and then take those out with a bond of about $400 million?

Yes. You have got it.

So do we end up with really $400 million of additional debt then at that point?

No. I --

And I am curious because -- go ahead.

Right. So we have, say, availability of $1 billion dollars, and then we will pay off the Westfield Preferred $400 million. So the debt goes down. We will dry it up, the debt goes up. And then we will do the bond issuance, and then we will take that bond and pay it down again.

Right. If I think of the preferred, though, as equity as opposed to debt, I think you got $400 million more of debt than you had at the end of the quarter. And I am wondering, A, how that sits with the rating agencies now that you guys have investment-grade ratings. And, B, if that is what you're really going to do, or if you are going to go from the end of the quarter and keep it leverage-neutral and I guess issue $400 million of equity to take out the $400 million of preferred.

So, Rich, we already issued $209 million in ATM -- under the ATM new issue -- new equity issue. So we have another $100 million left to go, and then we also have targeted some dispositions. So with all the cash that we should generate that should keep us leverage neutral.

Okay. But from the end of the quarter, I guess I am wondering, Farzana, because the $209 million was in Q2, was it not? The equity issuance?

Right that is correct.

Yes. So if I go from the end of the quarter, if I am looking at your metrics, I think I have roughly $400 million more of debt minus a little bit of cash. And of course if you guys make some asset sales, you take the equity from the asset sales. But it sounds like your debt metrics will soften to some extent -- at least some of them will, not fixed charge coverage, I guess -- but some of them will soften in the third quarter.

Okay. So are you comparing from -- if you take us from the end of the year, our debt is down by about $107 million, right? So at the end of the quarter, from quarter we had $5.3 billion today.

So if we have more equity issuance then and also have some sales that should neutralize us. Because we will use the $400 million to borrow to pay (inaudible) off, and then we will raise enough. So if you go back from 2012, the end of 2012, we should be debt-neutral.

Okay. Yes. I guess I was going from the end of 2Q 2013. So yes, I see what you are saying. And so really you will just -- you will just put those preferreds on the line and then take them out with the bond to get some of your capacity back?

Right. And also, not to forget that we will convert some of the floating-rate debt to fixed-rate debt. So that is our goal. Right now, floating-rate debt is a little bit higher, and we would like to bring that down by the issuance of our bonds.

Okay. Good. Got you. And then what are you guys -- do you feel good that you can go out and make acquisitions at this point? That the balance sheet is -- has the capacity to do some acquisitions with all this stuff you have going on? And if you do, what do you think about what is out there at the moment in terms of product and pricing?

Sure, Rich. Well, the reality is there is not a lot out there that fits the criteria that we are looking for, which is generally malls similar to what we bought last year, my out, Kirkwood, sales over $400 a foot, good NOI growth, that type of criteria.

So there is really not a lot of product. If we saw the opportunity, then we would -- we definitely feel like we could accommodate it. If a property -- it depends on who the owner is. In the past, we have used units or other internally generated equity as a way to find acquisitions. So depending on the opportunity, that is a possibility. And we have the ATM in place. So if we saw the right opportunity, we could access that to do it leverage-neutral.

So -- or there is a lot of joint venture capital in private equity that is looking to get into the mall business. So I do not think the funding would be the problem. The challenge is more finding the right opportunities.

Okay. All right. Good. Thank you, Stephen. And then I guess the last thing, guys, is Penney's has had a bit of a tough week. I am curious what you guys are thinking about, what you see in terms of the stores and how -- just from your point of view how they are doing not so much from their financials and all, but just from what you see as to how they are faring at this point?

Well, that report that came out yesterday was completely inaccurate. I don't know what Penney's stock has done today, but that was unfortunate and really unfair to them. And I would say we are very pleased with what we are seeing out of Penney. Their stores look great as a result of the new shops, and the investments that they made. And their advertising is something we really like for back-to-school. We are seeing better traffic, more shoppers with JCPenney bags in the malls. So we are encouraged. Does not mean that they don't still have a ways to go to recover from the past 18 months, but we feel positive in general about them.

Great. Thanks, guys.

Thanks, Rich.

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

Hello. It is Michael Bilerman here with Quentin. Just want to get back to -- just come back to sort of capital sources and uses.

So you did tap the ATM the first half of the year. Katie, you mentioned the fact that you did it prior to the May decline. So your average price in the quarter was 26, year-to-date your average price is 25. I think you talked about how given where you are going to be sensitive to where the stock is. So clearly at these levels it does not appear to be that you would be interested, that the hurdle rate would be at least back to where the stock was for that remaining $100 million on the ATM? Is that the way we should be thinking about it?

I think it is -- there is a range that we live within, Michael. I mean we actually executed in the first quarter a little closer to 23 something. I believe the high 23s. In the second quarter our average was 25, low 25.

So we have executed at a little bit lower of a stock price than you mentioned, but it is all about value and the opportunities that we see and how we can use that capital. So we will be cautious with how we execute. We want to minimize dilution, and we definitely want to get the best value for our stock that we issue. So it's just a -- it all goes into the formula.

And I guess why are you guys being so cagey on just the volume of potential asset sales, right? You have a $10 billion portfolio. Why can't you just say look, our idea here is to sell $300 million of assets. We may put more on the market to reach that goal, but we are targeting in asset sales versus what we have in the market and our anticipated hit rate, we can sell $150 million to $200 million. Why not give a little bit more confidence and clarity to the Street?

Hello, Michael. It is Stephen. There is different approaches different companies take.

Some companies go right up front and say we are listing these malls, and these are roughly the values and take the approach that you are recommending. And we just have not been comfortable doing that. And we would rather wait when we have certainty as far as deal execution because our experience with dispositions -- like Katie says, it is very fickle. You can have $200 million teed up and then something happens in the market and buyers go away. So we do not see any reason really to get ahead of ourselves. Our guidance does not include any dispositions. So once we announce things, we will put it out there and make the adjustments to the numbers. But it is just philosophical and what you are comfortable with and what you are not, and this is just the approach that we choose to take whether it is right or wrong.

I mean I can understand there is two ends of the spectrum. And the spectrum of naming names and individual assets and prices clearly is a very aggressive approach, but you are sort of at the other end of the spectrum without any color whatsoever, right? So I am not asking you to name names, I am not asking for individual values. But I do think that it would be helpful because at some point you do need to de-lever, and this is part of the de-leveraging exercise. And the market clearly is concerned that you are just going to flood the market with equity even though you have been disciplined. But the people view more perception than reality. So trying to get more comfort as to, look we are in the market with a handful of malls or with our office buildings or with our community centers, to at least give people some semblance of what is being targeted. I think some direction would be helpful, and clearly with the questions on this call, it seems that has been merited.

Look, those are good points, and we appreciate your input, and we definitely listen to investors and people with a lot of credibility in the market like you. So we appreciate the feedback, and what we said is that we are going to stay leverage-neutral through a combination of sources, the ATM, joint ventures, and dispositions. And with the $400 plus million of Westfield Preferred coming up that is something that we know we need to replace. And between the 240 we have done year-to-date and the other dispositions and the availability under our ATM, we are confident that we are go going to be able to achieve that. And the rating agencies have been very comfortable with the projections that we have given them. And they have done through in detail. So hopefully that gives everyone else some comfort.

And just thinking about the targeted unsecured bond. I assume you are -- because it is a debut issuance, we should be thinking about a ten-year deal. You are not going to do like a five or a seven?

You are right. We will be targeting a ten-year bond, and that -- we think that is where the best execution will occur.

And then from I guess, again, sources and uses, the payoff, the Westfield Preferreds with this new term loan that you got and drawing on some of your existing lines which have well over $500 million in capacity. You will issue the bonds at the end of the year. Would that go directly to repay this $400 million term loan, or would you access some of your later maturity term loans? Do you view this term loan as a short-term measure to get the unsecured bond effectively?

What we will do when we issue the bonds, we will pay down the lines of credit, and then the lines of credit is what gives us the flexibility to pay off the loans as they come due. And I just also want to remind -- remind everyone, that we have been investing in a lot of development and expansions and they have been from our cash. So our asset base is growing as well. So it is not just this -- you may see the debt balance not coming down as much, but you have to realize we are investing a lot of cash in our expansions and developments and that just improves our asset base and our unencumbered pool.

Is any of the credit facilities -- do you have any hedges or swaps on that floating rate or should we think about once you start fixing with $400 million that that effectively from -- as we think about 2014 FFO, put aside the sales for a second and potential equity. We should think about effectively debt coming in at 4.7 replacing existing debt, call it, 1.5% to 2%, correct?

That is correct. The goal is to replace the floating-rate debt with the long-term. Now if you go back and look at all the debt that we have been paying off they have been well over 5%. And the loans that are coming up are also well over 5%. So technically what we are doing is replacing the long-term rate. The higher 5% rate, the bond issuance. But if you blend our short-term and long-term, we should continue to bring that weighted average interest rate down.

And just a last question from me. Just on the Starwood relationship as (inaudible) seen sort of as ramping up that entity. Can you talk a little bit about what has been going on with the centers, and will that grow, or do you view once they are able to build-up their own platform that things will transition over?

Yes. Things are going to transition over. Their goal has always been to build up their platform and get critical mass so they can execute on their own. And our contract was originally two years, which would bring us -- we are roughly a year into it now, and we do not anticipate it going any longer beyond that. And it could even be a little bit shorter depending on their pace of acquisitions.

There is a buyer for more assets. See, we do not know. Maybe you are going to sell $1 billion of assets versus $200. Another reason to put out more disclosure, but I will stop there. Thank you.

Well, you never know.

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

Good morning.

Morning.

Hello, Carol.

Earlier in the call you mentioned -- I think you all said some of the better or higher quality retailers are starting to open in your malls. Can you let us know what some of those retailers are?

Sure, Carol. Well, we -- we have had a lot of success working with some really good retailers in terms of leasing. Some of the names are Oakley. The jewelry category has been really strong; we have done a lot with Pandora, Kay, and Zales I mentioned who have had real renaissance. We are doing a lot with Francesca's, Chico's, White House Black Market, Michael Kors. So those are just some of the examples. I would say that we are talking about -- and then with the re-developments of the Sears buildings at Cool Springs in Fayette, it has opened us up to an even higher-end range of retailers that we are in discussions with, and we look forward to announcing those as well.

Okay. And then regarding the Citadel Mall in Charleston. What kind of happened to that center? Did the town demographics change, or why is it with a special servicer now? Where is the struggle?

Well, just in terms of the asset, Charleston has a lot of retail and Citadel was in an area that had counted on some growth that really did not materialize. There is just too much competition in the market and given the loan balance on the property, there is just too much financing in place. So it is a combination of where the debt balance stands and just the property not performing to the expectations.

Okay. Thank you.

You are welcome.

Our next question comes from the line of Ben Yang with Evercore. Please proceed.

Hello Good morning. Thanks.

Morning.

Good morning, Ben.

Just another question on guidance, the 1% to 3% same-store NOI. Obviously that is for the total portfolio not just for malls. But it sounds like, Stephen, based on some your earlier comments, you compared the 1.8% result which excluded that bankruptcy income to the 1% to 3% forecast to basically infer that you are meeting expectations. So just to be clear does that guidance exclude the impact of that bankruptcy settlement from last year?

So for example maybe the foot-noted 1.4% year-to-date result is more comparable to the 1% to 3%? And maybe not the 1% that is included -- including that income. And maybe our interpretation should be that you are, indeed, within budget and not maybe tracking towards that low end of guidance? A little confusing, but do you understand kind of what I am asking there?

Yes, Ben. If you look at the lower end of the guidance, that will include that $1.5 million, but if you exclude that we would be in the middle of the guidance

I know, but what does guidance include? Does that include it, or does that exclude it? I am just trying to figure out whether you are truly meeting your budget or if you are tracking towards that low end of your budget.

We have excluded lease termination fees in our guidance, and when we announced this recapture of the bankruptcy last year which we pointed out in our call, we pointed out that it was a kind of a special item. So that is why we felt like it was appropriate to go ahead and pull that out basically when we were figuring our same-store NOI and reporting that for the quarter. But your -- I mean over the course of the full year when you factor in the magnitude of the NOI, it will be will become less material. In the one quarter, it makes a difference, but it should not make that big of a difference in our full-year-results as we go on because it will be just -- the denominator is bigger.

Okay. That makes sense. And just final question. You mentioned the impairment on Citadel. And given your previous comment that you intend to sell obviously some more malls, have you gone through the impairment check recently for all the malls that you plan to sell? Or can we expect that maybe we can see some additional impairments as you move through that disposition process?

Yes, Ben. I will try and answer that question for you. Every quarter, we go through impairment analysis for all our properties, not just the ones that we might be considering disposing. So based on assumptions that go into the impairment analysis, that is what determines what assets are impaired.

It is a probability of those inputs. So in the case, for example, for Citadel Mall our input for a potential return to the lender was much greater. So based on that analysis based on that probability it created an impairment. So we go through the same analysis, and if the probability is high that we would sell and then the undiscounted cash flow against the book value gives us a result that is impaired and we would impair it. So as of this quarter Citadel Mall is the only asset that created and impairment.

Great. Thank you.

Thank you, Ben.

You are welcome.

Our next question comes from the line of Caitlin Burrows with Goldman Sachs. Please proceed.

Hello Just a quick question. You mentioned that you wanted to lower your amount of floating rate debt. Do you have an idea what share you would like the amount of floating rate debt to get to? I think right now it is around 23%.

We do not really have any specific percentage in mind, but obviously we are -- we look ahead on the curve, and we look to always keep the (inaudible) So our goal would be to continuously recycle out of the short-term debt to long-term, but also maintain a balance because it does give us the flexibility on our lines of credit. That is where mostly where the floating rate -- floating rate interest rate is.

Okay. That is all. Thanks.

Thank you.

Our next question is a follow-up question from the line of Quentin Vellelley with Citi. Please proceed.

Hello there. I might have missed this, so I apologize. You had a lot of re-tenanting going on in the first quarter. Can you talk a little bit about that , and it that continue into the second quarter ? And when is that going to stop flowing into NOI growth?

Yes. No. It is definitely part of our new leasing results, and like I said earlier, there is a lag because we report in re-leasing when leases are signed. So the new leasing will kick in three, six months even a year down the road. So we will see it in the second part of this year and into next year.

Okay. Thank you.

Thanks, Quentin.

There are no further questions at this time. I would like to turn the call back over to Mr. Lebovitz.

Thank you, everyone. We appreciate your participation, and have a good rest of the summer.

Bye.

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.