CBL & Associates Properties, Inc. (CBL) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CBL & Associates Properties, Inc. third quarter 2014 conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded, Thursday, October 30, 2014. I now like to current the call over to Katie Reinsmidt, Senior Vice President Investor Relations and Corporate Investments. Please go ahead.

Thank you and good morning. We appreciate your participation in the CBL & Associates Properties, Inc. conference call to discuss third quarters results. Joining me are Stephen Lebovitz, President and CEO, and Farzana Mitchell, Executive Vice President and CFO. I'll begin by reading our Safe Harbor disclosure and then I will turn it over to Stephen for his remarks. This conference call contains forward-looking statements within the meaning 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 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 be available for replay on the internet through a link on our website at CBLproperties.com.

Thank you, Katie, and good morning everyone. Last quarter we reiterated that same center NOI growth is a top priority for CBL in 2014. This focus led to outstanding improvement in the third quarter with a 3% increase in the overall portfolio, and a 3.3% increase for the Malls. As a result of this strong performance, we're increasing FFO and NOI guidance for the full year. Improved NOI growth at our tier two and three Malls was a major driver of this quarter's successful results. In recent calls, we've emphasized the significant opportunities within our existing portfolio to generate growth through anchor redevelopment, expansions, and un upgraded merchandising mix.

A great example is at Monroeville Mall in Pittsburgh, a tier three property which is a strong contributor to same center NOI's this quarter. Lease spreads were strong as well with an average increase of 17.6%. Renewal leasing, in particular, showed improved results with an increased of 15.5% as we converted a number of below market deals to full rents. New lease rates continue to be very healthy with an increase of 23%. Pushing new and renewal lease spreads is a major component on our focus on improving NOI and results are translating into top line revenue growth.

Overall occupancy in the portfolio declined slightly by ten basis points to 93.7% from the prior year period. Occupancy in the same center mall pool increased 40 basis points in the second quarter and declined 30 basis points year-over-year to 93.3%. The decline was primarily a result of the timing of store openings. We have several Malls in the tier three portfolio where boxes under 20,000 square feet were not yet in occupancy at September 30th, but will open ahead of the holidays and in the first quarter. Sales improved as well with an increase of approximately 1% in the quarter, bringing our rolling 12-month sales to a decline of 1.9% or $358 per square foot.

Many retailers posted healthy results for the back to school sales season. These same results were mirrored in our portfolio, with our athletic footwear, high wear, home furnishings and jewelry performing well, and junior, children and women's apparel still struggling. September sales were particularly encouraging with most of our malls posting their best month of growth this year. Most predictions for the holidays are optimistic with projections in the range of 2% to as high as 4%. Our expectations are closer to the lower end of the range which should result in roughly flat sales for the year.

There is ongoing speculation about the future of Sears and JCPenney and their impact on our portfolio. JCPenney is generated encouraging improvement in their sales, margin and balance sheet this year. Despite this progress, we continue to anticipate a limited number of store closures in 2015 and have three specific lease stores that we're target for redevelopment with strong retail demand for these locations. Sears recently announced two store closings in our portfolio, Cary, North Carolina, and Forsyth, Illinois, both of which we had anticipated and we have been actively working our redevelopment plans.

As we have shown in numerous locations, redevelopment of low productivity anchors is a major opportunity for us to attract new retailers, increase traffic in sales, and generate accretive returns at malls in all tiers of our portfolio. A great example is at college square in Morristown, Tennessee, a tier three property where earlier this year we replaced Sears with a new TJ Maxx's and Longhorn Steakhouse, driving additional sales and traffic. Finally, I'd like to spend a few moments with an update on our strategic portfolio transformation.

We have several transactions that are in various stages. We closed on the sale of a Community Center in Vicksburg, Mississippi for $2 million. Discussions are continuing for the mall and associated center that we announced were under contract last quarter. This is a mall that involves a significant redevelopment, which has extended the due diligence period. We are also working on a contract for the sale of Community Center and expect to have that executed this week. We anticipate 2015 closings for both.

These transactions are not binding until due diligence is complete, so there is risk that they may not come to fruition. We will provide additional details as they are available. For the remaining malls we are marketing, investors are in various stages of underwriting portfolios range in size. The recent publicity regarding Sears has made underwriting by buyers more challenging, and in certain cases we have delayed the marketing of properties in our disposition portfolio to finalize leasing with retailers replacing vacating anchors.

We continue to receive interest from several new potential investors, which is encouraging. We are also at early stages of exploring potential joint venture opportunities for several assets. While our preference is to sell a hundred percent, a joint venture could provide benefits to a strategic partnership, as well as fee income. As we pursue our portfolio transformation, it's important to note that these are stable properties, generating healthy levels of free cash flow.

We are investing this cash flow back into our portfolio to generate growth. While the market is eager for us to complete the dispositions as quickly as possible, and we are as well, the NOIs on these properties are still improving and we are managing the portfolio to generate additional growth as we move through this process. I will now turn the call back over to Katie to provide an overview of our redevelopment and development pipeline.

Thank you. As Stephen discussed, some of our best value creation opportunities are within our existing portfolio. The progress at Monroeville Mall in Pittsburgh Pennsylvania that was previously mentioned is a perfect example. The property produces a tier three sales level. However, with the recent repositioning completed, it is well situated to become a tier two property over time. In total, since 2011, we've opened more than 370,000 square feet of new shopping and entertainment options including H&M, Forever 21, and a 12-screen CineMark theater. The latest opening was the 86,000 square foot Dicks Sporting Goods which celebrated its grand opening in August.

This is a great example of the types of opportunities we look for across all tiers of our existing portfolio. We're making solid progress replacing JCPenney stores that closed early there year. Confirming our emphasis on redeveloping underperforming anchors as a means to significantly revitalize our centers. In Janesville Wisconsin, we have executed leases with Ulta and Dicks Sporting goods to replace the former JCPenney that closed in May. We're working with one additional junior anchor retailer and expect to have that lease signed before year end. Construction is expected to begin in early 2015 for a fall opening. In Hickory Point Mall in Forsyth, Illinois, Hobby Lobby executed a lease for 60,000 square feet in the former JCPenney location and will open in fall of 2015. We recently opened Ross Dress for Less and Ulta at the Mall, and are in discussions with a number of other junior boxes for the Sears store redevelopment. Hickory Point is a prime example of our market dominant strategy.

The redevelopment of the JCPenney and Sears boxes has reinforced it's position as the location of choice for retailers in that market. We're actively adding H&M stores in many Malls, including a recent new store opening at Asheville Mall in Asheville, NC, and a new store that will open just ahead of the holiday season at Burnsville Mall in Burnsville, MN. Earlier this year, we opened H&M at three other Malls and we're working and on several additional H&M leases for openings in 2015. We recently celebrated another box opening with Burlington's 63,000 square foot store joining Northgate Mall here in Chattanooga. We're also continuing construction on the street scape project at Northgate with Old Chicago Pizza, and (inaudible) joining Old Navy which opened earlier this year. So far in 2014, we have opened 19 boxes and 14 restaurants across the CBL portfolio. We have made significant progress on the redevelopments of the two Sears stores we purchased last summer.

This week, Cheesecake Factory celebrated their grand opening at Fayette Mall in Lexington, Kentucky. Next week, a number of other store will join them, opening in the former Sears space including Eddie Bauer, Oakley, Clark's, Avea, H&M, Halter, (inaudible) and Vera Bradley. Additional stores and restaurants, such as Pink (inaudible) are under construction with an early 2015 opening. Construction is also underway on the Sears redevelopment at Cool Springs Galleria. Cheesecake Factory is opening this November. American Girl, H&M, (inaudible) and additional shops and restaurants are set to open in 2015. Turning to new development activities, our outlook program has become a major driver of growth and is enjoying tremendous success. On July 31st, we celebrated the grand opening of the outlet shops at the Bluegrass, between Louisville and Lexington Kentucky. The project opened 100% leased and enjoying strong sales and is an absolute home run [inaudible] story with additional unleveraged return on cost of 12%.

During the quarter, we opened expansion projects at two outlet centers. At the outlet shops at El Paso, the 45,000 square foot expansion includes Nautica, Motherhood Maternity, New York & Company, with H&M joining in November. Our expansion of the outlet shops of Oklahoma City includes Forever 21, (inaudible), and Toys R Us. We are also pre-leasing expansions at our Atlanta and Bluegrass projects. Phase two of (inaudible) Town Center in Slidell, Louisiana is under construction and will open in October of 2015. The 265,000 square foot project will be anchored by Dillards and will include a great lineup (inaudible). I'll now turn the call over to Farzana to provide an update on financing, as well as a review of our financial performance.

Thank you, Katie, and good morning. Since the last call, we have accomplished a number of significant goals as we execute our balance sheet strategy. On October 8th, we closed our second senior unsecured notes, raising $300 million at a 4.6% interest rate, a 65 basis point improvement (inaudible) offering one year ago. With the notes maturing in October 2024, we have maintained our well laddered maturity schedule.

We recently repaid a $113 million loan secured by one of our best properties, (inaudible) in Laredo, TX, adding to and upgrading the quality of our income pool of assets. During the quarter, we completed the conveyance of Chapel Hill Mall in Akron, OH to the lender, in lieu of foreclosure. An $18.3 million gain on extinguishment of debt, partially offset by non-cash default interest expense of $1.5 million was (inaudible). The $68.6 million debt balance was extinguished. This week, we completed the conveyance of Columbia Place Mall to the lender in Louisville. We anticipate a gain in the fourth quarter of approximately $27.1 million and our debt balance will be reduced by $27.3 million, consistent with our practice, we closing will exclude this gain from adjusted FFO.

At September 30th, variable rate debts represented 18.7% of our total debt and we had approximately $940 million available on our lines of credit. We used the proceeds from our $300 million bond issuance to pay down balances on the line, thereby reducing our exposure to floating rate debt. The increased availability of $1.2 billion allows to retire secured debt over the next 12 months. Our financial comments are sound, with a fixed (inaudible) coverage ratio of 2.2 times compared with 2.15 times in the prior year period.

The secured debt to gross book value ratio improved from 42% at year-end to 38.9% at quarter-end. Our bond covenants are well in excess of the minimum required and we expect continued improvements over time. Adjusted FFO in the third quarter increased 5.8% to $0.55 per share compared to the prior year period. Adjusted FFO excludes the $16.8 million net impact from the gain on the extinguishment of debt and (inaudible) interest. Rental growth in our existing wholly owned and joint venture properties, as well as income from newly developed properties, expansions and redevelopments contributed approximately $0.04 to FFO in the quarter.

This was offset by approximately $0.02 of lost income from sole property. FFO also benefited from slightly lower operating expenses and G&A. While our overall debt balance declined by more than $200 million year-over-year, interest expense net of the non-cash default interest was slightly higher as a result of the bonds issued in the fourth quarter of 2013. G&A as a percentage of total revenues was 3.7% for the quarter compared with 3.9% of the prior year period. G&A declined slightly from the prior year as a result of a one-time reversal of leisure expense allocations. Our cost recovery ratio for the third quarter was 99.8% compared with 94.9% in the prior year period.

Same center NOI growth in the quarter was 3% for the total portfolio and 3.3% in the Mall portfolio. Our growth this year is primarily driven by improvements in rental rates on new leases, as we replace under performing retailers, increase renewal lease spreads and revenue contributions from completed redevelopments and expansions. On the same center basis, minimum rent grew $3 million, percentage of rents turned positive in the quarter, increasing $0.1 million and tenant reimbursements were up $2.2 million. Property operating expenses and maintenance and repairs were down roughly $0.8 million, despite a rise of $0.5 million in bad debt expense.

These improvements were partially offset by $0.2 million increase in real estate taxes. Our strong year-to-date performance places us just above the high end of our previous guidance range. We anticipate a modest increase in interest expense in the fourth quarter from our recent bonds issuance. However, as we look to our projections for the fourth quarter, this should be exceeded by higher income from new properties, new stores and rent growth in renewals.

We are increasing our adjusted FFO guidance for 2014 to a range of $2.24 to $2.28 per share. Our guidance range includes a 25 basis points increase in same center NOI to a range of 1.25% to 2.25% for the year. We continue to anticipate a flat to positive 25 basis point increase in occupancy at year-end. Our guidance does not include any future unannounced asset sales or acquisitions. I'll now turn the call over to Stephen for concluding remarks.

Thank you, Farzana. Thank you again for joining us this morning. We are pleased with the third quarter's significant improvement in same center NOI growth and lease spreads and the strengthening of our balance sheet. As we move into the fourth quarter, our focus is on continuing the positive momentum we have built throughout the year. We look forward to visiting with many of you next week in Atlanta and are now happy to answer any questions you may have.

Thank you (Operator Instructions). Our first question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please go ahead with your question.

Hi, thanks, good morning. Stephen, you commented that the recent activity from Sears makes underwriting a little more challenging and that talks with buyers have been delayed to some extent. Can you just talk about what exactly has changed as you have discussions with potential buyers and does it change the way that you think at all about these assets maybe as you think about potential leasing opportunities or redevelopment if you were to get back a box?

Sure, Todd. Good morning, and thank you. I think as everyone has read the press about Sears has definitely gotten more negative in the past few months and while we are confident in Sears' abilities to go forward as an ongoing entity and to continue in their business and steps they've taken to sure up their liquidity has been positive, a number of buyers that we had been talking to have been more conservative as far as Sears. So, in a couple of cases, for example there were two stores that they announced they were going to be closing right after the first of the year, I talked about those, Cary, North Carolina, and Hickory Point Mall in Forsyth, Illinois.

In those cases, we found it's better to go ahead and put our redevelopment strategies in place and that will allow the buyers to underwrite the cash flow going forward to not have any co-tenancy concerns and it just allows for a more stable process, and so that's been the major factor that we've been encountering. And we work closely with these buyers in terms of talking about the centers, talking about the redevelopments, but in some cases they don't want to take the risk an we're confident in our abilities to do these redevelopments. We've had really good success. They make the centers stronger, but we've got to put the pieces in place to allow a few of these assets to move forward in the disposition process.

Okay. Then also regarding your comments on JCPenney. It actually sounded like you have some insight to potential closings for 2015 in your portfolio so I was just wondering if you could also maybe elaborate a bit more on those comments, specifically any color on the three stores that you expect to target for redevelopment next year?

Well, JCPenney hasn't made any announcements about store closings in 2015, so I want to be clear about that, but we've had a list of stores we're watching. We talk to them regularly and so we're always trying to be conservative, prepare for the worse. There's three that we targeted that we think has the highest probability that something might happen and that's where we're developing these redevelopment plans so that we'll be ready if something happens.

Okay. And a quick question for Katie. The yield on the two Sears redevelopments, Cool Springs, and Fayette, Cool Springs was up 60 basis points, Fayette was up also, slightly. Just wondering what's driving that increase?

Those are mostly better rents as they come in actuals than what we pro forma.

Okay. Great, thank you.

Thanks, Todd.

Our next question comes from the line of Christy McElroy with Citi. Please go ahead with your question.

This is Michael Bellerman with Christy. I wanted to go back to the comments you made about potentially exploring joint ventures for some of these assets that you outlined in April, and I'm just curious as you think back to that April call where you talk about the 25 malls much it was really a strategy of those malls that you wanted to enhance the growth profile of the Company by selling or foreclosing on those 25 assets because they were lower sales productivity, they were lower growth. And I guess I know you have a desire, you want to raise capital and the fee income would be good, but to me it sounded more like this was hiving these assets off. You want to get good execution, good pricing, but you didn't want to continue managing them and you didn't want to lower your growth profile. I guess I'm confused a little bit with JV comment.

Sure, Michael, good morning. Like I said in my comments, our first choice is to sell 100% of the malls and we've been consistent and that continues to be the case. We have been approached by some different parties that have an interest in purchasing several properties, so it's more of a portfolio type transaction where they would like us to continue with management and leasing, and to have a minority interest in these properties, less than 20%, so that's something that we're considering. We feel like if we can execute at an attractive transaction, that it's still consistent with the goals that we outlined in our April call, our primary goal we said is to allow us to increase the growth rate for the remaining properties in the portfolio.

So we would view this as a majority sale, maybe not getting them completely out of the portfolio or hiving them off as you say, but it would allow the other properties in the portfolio to benefit from the higher growth rate that we have. Also, it's not really the fees that we're after. We think sharing some flexibility in this process can allow us to accomplish more sooner. When we did the sale of Community Centers back in the early 2000s, we sold off a large portfolio of community centers to (inaudible) an Australia REIT. We did it over a two-step process, sold a majority interest, retained 10%, then over time sold down and sold it to management and that was successful from our point of view in terms of the way it was executed. We're still considering different options and like I said, we want to sell a hundred percent and we have groups that are looking at portfolios and combinations of properties also to buy a hundred percent, so I don't mean to imply at all that that's not an opportunity we're pursuing.

And then maybe just from top down. If you go back to April, you talked about 1.35 billion to 1.6 billion to aggregate in size, and the SEC wanted sell the assets you wanted to foreclose on. It sounds like you have a $2 million Community Center that's been closed. I think you had one foreclosure as part of that already also. I can't remember what the amount of debt was. Then the other two things that are active are this one mall at an associated center that you're continuing to do due diligence with and one other Community Center. You can walk through the size of that just so that we can benchmark sort of progress relative to that billion 3, billion 6 goal?

We sold Lakeshore Mall, we announced that and that was done earlier in the year as well for $14 million, but we said this was going to be a two to three year process. We didn't say it was a going to be a six-month process, and realistically that's what it's going to take and a lot of cases the loans have to be assumed, the malls are complex, there's moving pieces, there's anchor redevelopments, and we never expected this to happen quickly. We were very clear in April that was going to happen over that timeframe and we feel very confident where we are in the process. We only want to announce things that have reality to them, where we have signed documents, but that doesn't mean that we aren't negotiating and in discussions with a lot of different parties and a lot of different assets, which is what we're doing. We feel like we're on track, we're very comfortable. We're committed to executing the plan and comfortable with where we stand.

I think back to April, you had four assets that were all ready on the market for a little while and you talked about negotiating the private sale of seven assets, so I think that the marketplace, and I recognize what's changed and I recognize, as you look at what they had on the market, those 13 assets, they didn't get a bid on five assets, and six assets were not at a price that wanted to execute at so they only had two, so I recognize the marketplace and I recognize the difficulties. I just think the messaging in April was that even though the two to three year process, you had eleven that you felt more comfortable on that were moving through the process, that's all.

Okay, thanks, make Michael.

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

Thank you. Now that you're further along on the anchor repositioning and re-tenanting and something you've continued to pursue. I wonder how your discussions with some of the anchors, particularly Sears and Penny's are going, and suggested that they'll work with you on this process?

Hey, Craig. Well, we met with Sears recently. Coincidentally it was the same day that they announced their deal for seven locations, and Sears' priority right now is dealing with I'd say K-mart, which is where a majority of their losses are occurring and with improving their business at Sears, so they haven't indicated a willingness to sell more of their stores like we were able to buy last year when we bought the two at Fayette and Cool Springs. We continue to talk to them on a regular basis about opportunities, about joint ventures, about things that we could do together for redevelopment their stores or purchase their stores, and depending on what's happening with them on a corporate basis, then that will determine their receptivity.

But right now, it doesn't appear they're inclined to sell additional stores. JCPenney has made marketed improvement in their business. They're not looking to close stores. There's a few vulnerable locations, the three that I mentioned in my comments, but they are headed in the right direction in terms of preserving their operations and generating growth going forward.

Great. With regards to the outlet business, you've opened five so far. How many do you think you could open in the next three to four years?

We're really happy with the outlet centers, like Katie said, the one between Louisville and Lexington, just had a fantastic opening and a great return. We're working on expansions and we opened two expansions, we have expansions at the other outlet centers, so we're continuing to take advantage of the demand and success. Then as far as new projects, nothing really different than what I've said in the past. We're looking at a project every 12-18 months. We don't have one that will open in 2015 but we have one that we should be able to announce after the first of the year that would open in 2016, and we're hoping there could be a second project in 2016 as well. We continue to work closely with Horizon. They're doing a great job. They're a great partner. We appreciate that relationship a lot. It's competitive though. Simon, Tanger, other private companies are very active taking advantage of development opportunities in the space. So, it's competitive and we feel like we'll get our share but it's at that kind of pace that I've outlined.

Okay, thank you.

Thanks, Craig.

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

Good morning. Jeremy Metz on with Ross. Just following up on Michael's questions earlier. If your desire is to sell a 100% of the malls you identified and I respect you said it would be a two to three years process, but I'm wondering what is the delta is between your pricing expectation and where the market is to not show better traction yet on some of the sales?

Yes, Jeremy, it's really not a pricing issue or a delta that is holding things up, it's just the process and the length of time it takes to get people to underwrite. If a group is underwriting multiple malls, you think about most malls have at least a hundred tenants and temporary tenants and other types of income to underwrite and market, so it's a time consuming process. We said in the past we're not holding out for top, top dollar. We're not price insensitive, but our plan is to sell these properties based on market pricing and we're responsive to where that is.

Okay. So it's not you're looking for an ace on the markets saying they're twelve's and there's a huge discrepancy between the two sides. I think Ross also had a question.

Good morning. If I look at your story on growth this quarter, I'm looking at a separate sheet that tells me with the exception of one quarter back in 2011, this is the highest same store NOI growth you've had in eight years, which is good, but I'm wondering was there anything one time-ish that dragged down the same store number a year ago? Were there any true-ups on the expense or tax front this quarter that maybe this quarter's number perhaps a tad bit better than what perhaps the run rate might be?

Hey, Ross, this is Farzana. Good question, but I must say that this quarter, it was top line revenue growth all the way around. Rental growth was strong, recoveries were strong, percentage rents turned positive. We did have some improvement in operating expenses but it wasn't the driver. The driver was totally top line growth.

Okay. It's a reasonable question because you look at the run rate over the last six quarters and it's sort of been between negative .5 and 1.5%, then all of a sudden it jumps up north of 3, and the business doesn't move that quickly, so I guess it was pleasantly surprising to see it move that much.

Well also, the leasing and the boxes have kicked in. I think there was a lot of comments last year that there was a disconnect between positive lease growth and positive leasing in our NOI results and it's kicked in as this year has progressed. It's gotten better and better, and we're seeing the results of those openings, and it continued strong leasing environment where we had some fallout earlier in the year, but other than that, that's been muted because of the lack of new supply in the market. Thank you for the compliment and we're pleased as well with the improvements.

Thanks.

Our next question comes from the line of Haendel St. Juste of Morgan Stanley.

On the same store NOI growth, you talked about Farzana about 2.2 million in tenant reimbursements. What's driving that increase? In the past you've had lumpy tax reimbursement which is subsequently reversed. Any color you can provide on that? How should we think about that line item going forward?

Yes, it's gross rents. When we negotiate leases, it's combination of base rents, as well as common area and tenant reimbursements, real estate tax recoveries. So if you look at gross-to-gross, that's really where we have to look at it on a combined basis, so the revenue growth from malls line item, and additionally percentage rent is another line item which in the past has been a strong one, but this year it's been not as strong as we would like for it to be. So definitely top line growth includes gross rents, so therefore going forward, you should anticipate based on our leasing, strong leasing activity as Stephen pointed out, both from new leases as well as renewals, it will continue to add to the top line.

Okay. Couple of follow-ups. First on the JV comments earlier. Have any of your JV discussions to date involved selling pieces of your better assets in conjunction with some of the lower tier malls you've in the markets? Would be open to JV'ing some of your better assets like, say, Mall Del Norte to facilitate the process or will you exclusively focus on JV and your lower tier assets?

We've been focused on the properties that we announced that were a part of the disposition program. We did a $1.2 billion JV with teachers on our three of our top properties two or three years ago, and right now we're focused on tier three and a few of the tier two properties for the dispositions and any other discussions.

Do you have a target proceeds ballpark for this JV or is it too early to talk about that?

It's too early.

Last one, if I may. Question on the CMS financing environment for B&C malls given your presence in the market. We understand that LTV for larger established sponsors approached 60% to 70%. I was wondering what the LTV's for local private guys? What can they get? I'm thinking it's close tore 50% to 60% and I'm wondering if you think that is or has been a limiting factor for some of your lack of progress on the sale of lower tiered assets?

The CMBS loans are continuing to be active and they are back again as they've gone through the cycles, so definitely for stronger assets, there's no shortage, and even for the lower productivity malls, CMBS loans are available. I think it's a matter of leverage an a matter of pricing spreads, and if someone is buying at a low, in the nine cap rate to ten cap rate, they're still able to find CMBS loans at the 5% range, so they have a very strong arbitrage. As to our potential, if they're having any issues, I don't think that's an issue at all. When they want to get the financing whether CMBS, whether private financing, they're able to get it and also the banks are available to provide financing. Last year when we sold six properties we closed it for cash, then they put 70% financing on it and they were successful in getting the financing. There's plenty of monies out there, people are looking to place it in different pockets, whether it's equity or debt, bad debt, so I don't think that's a limiting factor at all.

Okay, fair enough. Thank you.

Our next question comes from the line of Lina Rudashevski with JP Morgan. Please go ahead with your question. Lina, your line is open, please go ahead.

Just go to the next question.

Okay. Our next question comes from the line of Richard Milligan with Raymond James & Associates. Please go ahead with your question.

Good morning, everyone. Stephen, I just want to follow-up on a few questions from the Q&A. On those two Sears closing announcements were those lease expirations or are they closing before the expirations?

One is a lease expiration that will occur next year. The other one is a ground lease actually, so that one they have more term but we're working with Sears on purchasing the fee for that so we own the building and we can proceed with the redevelopment plans that we have.

Okay. I guess the same question for the three JCPenneys that you're preparing for redevelopment. Would that be lease expirations or are there still term left on these leases as well?

Those are leases where they're expiring either within the next year or next two years. I can't tell you specifically, but if there's any term left, it's relatively short so that what we're looking at there.

To follow-up on Todd's questions about the malls being more difficult to underwrite, given the increased news on Sears or chatter about potential store closures. I'm curious if the Malls that you guys have decided to hold off on marketing are only exclusive to the ones where you've gotten announcements where there's going to be a closure, or have you seen less interest in lower productivity malls that includes a Sears or JC Penney in general?

These aren't long delays that we're putting in place, but for example, we had a mall on the market earlier this year where one of the anchors had a lease expiration next year that they had the notice date for, so we needed to go ahead and get some clarity as to their plans before we could really go ahead with the full blown marketing of that one.

It's those types of situations, Gainesville, like we said, JCPenney closed in May, we've got the accent off the sign, we have one more junior box that should be signed very quickly, we'll start construction next January, so now we'll go ahead and have discussions with buyers that there's leases signed that they can underwrite. They understand what the costs are going forward, so it just makes for a cleaner process.

Gotcha. One quick question on the joint ventures. Now that joint ventures are a consideration, are those conversations, or that thought process, specifically only for the assets that were previously ear marked for dispositions, or now does the discussions inclusive of some of the maybe the other higher productivity malls?

I feel like this joint venture discussion is getting a lot more focus than it should, and maybe I should just go back and reiterate that the majority of the discussions we're having on selling properties, and so that's really the focus. Everything we're doing is the portfolio we announced in April. It's primarily tier three with certain tier two properties like I said a few minutes ago. So the joint venture comment, maybe we never should have made it because that's really not what our primary focus is.

All right, thanks.

Thank you.

Your next question comes from the line of Daniel Busch of Green Street Advisors. Please, go ahead with your question.

Thank you. A follow-up on Hickory Point. You had gotten both the JCPenney and Sears boxes back this year, a mall of this productivity would have been reasonable to assume I guess that, that would have been the beginning of the end. What is it or what are the characteristics about Hickory Point that make you confident to continue to put capital into it and redevelopment, and is the yield that you get there, does that warrant the investment? Can you talk about it a little bit as a case study?

Yes. It's a good question. In that market, the Mall had succumbed the location of choice for not just mall retailers, but also for boxes. In that size market, given the location an the demand, we've had tremendous interest. We added Ross and Ulta into the mall, we signed Hobby Lobby to replace JCPenney.

We have other boxes that have come to us that have expressed interest in tagging on to the JCPenney box and going out into the parking lot able to do out parcel activity. We have a couple of prospects with the Sears building, and the returns are attractive. It's the type of property where we looked at the loan and the investment that we would make as part of the redevelopment and we felt like it made sense to continue to own the property, and then at some point we can position this to sell it once we get the redevelopment in place, and we feel like it will happen in accretive investment for us.

Would your decision have been a little bit different if those closing and announcements would have come together and are there going to be are or there any co-tenancy issues?

We looked at co-tenancy and there's minor co-tenancy impact that will be cured with the replacement. This Sears has been struggling for awhile. We anticipated that they would be something in terms of their closing, so it's been on our list for a while and we also knew that it was a weak store for JCPenney. It's something that we've had our eyes on, we've been working on redevelopment plans and that's allowed us to execute it a lot quicker, an it's an exciting project for that market.

Okay, thank you.

Thanks, C.J.

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

Hi, good morning, guys. On the expense recovery discussion that was going on, I'm curious about this more specifically. The third quarter, Farzana, third quarter this year was almost 100% on the recovery ratio versus 95% last year. Second quarter this year, you were 101%. Are we going to see more like that going forward or do we dip back down to more of an average, annual sort of recovery percentage?

I think our average recovery ratio for the whole year is going to somewhere in the mid to high 90s, and as we continue to negotiate gross leases and part of the gross lease includes the recoveries, we should continue to be in the -- you might see dips in the quarter, but at the end of the day for the full year, we should in the 98% range, approximately.

Okay, which would be pretty similar to most other years. So this third quarter, over third quarter that you had this time was a bit unique.

Yes. A little bit because we had a little bit lower expenses, and we had a little higher recovery, so the combination of the two, we had a higher recovery ratio.

To the positive, I guess yes, a little bit

Okay. That could revert a bit?

That could revert. It will normalize, yes.

Yes, right. And then Stephen, I think one of the things that's a little bit hard for me to get my hands around on this whole discussion about sales and Sears is it seems like Sears has kind of become more of an issue recently as you pointed out. There's a lot of local buyers most likely that are looking at the assets you have for sale and the Sears issue doesn't go away quickly, even if you guys do some things near-term to make it easier and a little bit more palatable to think about the Sears box. It seems like we have a pretty good delay in terms of these sales. If it involves any of your assets with a Sears box, which is most of the assets you probably have for sale. Isn't that true? Isn't this pushing down fairly substantially the timing on the sales?

No, no, not at all. Most of the Sears in our portfolio actually do well. We know their sales level. Sears customer is our market, the middle market, that's where they do the best, that's where they make the most money, and so for the majority of the properties that we want to sell, we show anyone who is interested the Sears sales, and also Sears owns two-thirds of their stores, so there's fewer leased stores in our portfolio, and they've indicated for their own stores that that's where they see the value and they're looking at subleasing in those locations.

It really isn't a major delay at all. There are these situations where either they've announced they're closing or where they're at risk, that we've had to work with buyers to walk them through the redevelopment opportunities, and how that would work an that's a short-term delay at most.

Okay. You don't think that the broader Sears talk is scaring potential buyers away, just the corporate Sears talk as opposed to individual assets that have a Sears at them?

There are a few people it's scaring away, but we're still seeing plenty of other people that would love to get the Sears back and say, gosh, we can get more of these back, that's better because it's the redevelopment and upside opportunity, so it cuts both ways.

Okay, great. Thanks, guys.

Thanks, Rich.

We would like to go back to Lina Rudashevski for her question. Please go ahead.

Hi. I apologize. I think we're having connection problems. I think our question on joint ventures was answered already. How many malls are being marketed a quarter or two ago and how many of those did you pull to reposition for a sale later?

We were marketing really ten malls and of those ten we pulled two to do the anchor redevelopments.

Okay. Thank you.

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

Good morning. (inaudible) it seems like the Forever 21's and the H&M are doing really well on signing leases. Are you seeing any of your tenants, particularly the juniors or the value oriented, not be excited when these retailers come in the mall and give you push back for fear they're stealing their customers?

Hi Carol. That's a good question. The juniors is, no question, competitive but H&M and Forever 21, it's not a new phenomenon, they've been coming for a couple of years. Aristotle and American Eagle and Abercrombie have had to respond and competition makes you stronger and better. Certain retailers have responded. Charlotte Ruse is a great example of a company that's in that same space that's turned their business around and had sales growth. There's little variation of it but, again, it's competing for that junior customer. So, there's a continual evolution of retailers in the mall in terms of who's doing well, who's not, where we're growing, where we're shrinking. Today, we're doing a ton with H&M, we've done a lot with Forever 21. It will continue to change. There will be new retailers that will be looking at our markets that will be expanding as well. That's just the way the business works and we see it continuing to do so.

Okay. Are you starting to see any of the yoga retailers come into the middle market malls?

We're doing our first (inaudible). So, yes, we're doing some deals with (inaudible). With Victoria Secret, they've added their VS Sport and they've rolled that out more within their stores. So, we're seeing some new retailers but we're also seeing existing retailers capitalize on that trend.

Can you say where Little Woman is going to come in?

No.

Okay. Thanks.

Our last question is a follow up from Christy McElroy with Citi. Please, go ahead.

It's Michael Bellerman again. Farzana, just a question on the balance sheet strategy as you head into next year. You did the $300 million notes, you repaid Mall Del Norte probably leaving about $185 million of excess proceeds. You look towards next year, you have about $700 million of mortgage debt between the consolidated and the unconsolidated assets at your share. How should we think about whether you're going to seek new mortgages on the secured side or seek to do a larger unsecured issuance as we think about what equity you need to raise into next year?

Hi Michael. Next year we have to separate between consolidated and unconsolidated debt so we have about $450 million consolidated debt that comes up next year so we expect we will use our lines of credit to pay those off. And then, as we have done recently, go out and issue another bond during that time frame when we get the lines of credit built up a little bit. As to our unconsolidated debt, we have (inaudible) that comes up next year. That's a big loan. That's a joint venture between us and Teachers. So we will be looking to secure secured debt. It could be institutional, it could be CMBS, at this time we're not close enough to go out to the market. So, that's really basically what we have left to do.

Okay. And then, Stephen, on the mall and the associated center that you continue on due diligence with and the one community center, can you just share at least goal post in terms of size? I think you talked about the $2 million that you sold, Lakeshore at 14, I'm just trying to get at least a near term sense of those seem to be more imminent potentially in terms of what size those are.

Yes. They're not huge at all. Between the two we're looking in the $35 million range, $35 million to $40 million.

That's helpful. And then, Stephen, as you step back, are you thinking broader strategic alternative at all? As you went forth with the April presentation I wasn't sure if something had pre-dated that process to say this is the route we want to go, we're going to sell off 25 assets and just be a bit of a smaller company and become a stronger company. Whether you thought of other ways, certainly, with the things that have happened in the mall space over the last few months, I just didn't know if that heightened interest at all to think about other ways to maximize shareholder value of which the family obviously is a large holder.

We're always evaluating strategic alternatives. That's a big part of our board discussions. (inaudible) That's an ongoing process and we're always working to find the best way to maximize shareholder value and returns and that's nothing that will change going forward.

Did you find that the buyers that were looking at the (inaudible) assets, the thirteen they had on the market, as that has now come back in and stopped, has that changed any of the discussions that you're having? Is it similar buyer pools or are these predominantly just local type of guys that wouldn't be competing with each other for those assets?

We've had discussions with certain people that were looking at (inaudible) assets but the fact that those assets aren't on the market now hasn't really changed. We've continued to have discussions that were maybe one or two parties that said they were looking at (inaudible) so they put us off for a month or two but it really hasn't anything at this point.

And just lastly on same store NOI growth. 1.25 to 2.25 for the year. How should we be thinking about the growth drivers for the fourth quarter and do you expect it to fall within that range or do you expect it to be closer to what was experienced in the third quarter?

We should see very similar results however we are paying particular attention to percentage rents and any bad debt expense so hoping that (inaudible) will be strong then we can expect similar quarter for the fourth quarter. However, if percentage rents don't come in and we have more bad debt expense, that might move the results.

Okay. Thank you.

Thanks, Michael.

We have one final question from the line off Jeff Donnelly with Wells Fargo Securities. Please, go ahead.

Stephen, I know this is going to sound like a JV question, but it's not. I had heard financial buyers are having difficulty finding management of leasing infrastructures since there really isn't a deep third party mall management business any more. I recognize it's the minority of situations you encounter but do you think the reason some buyers are asking for a JV isn't necessarily because they need the capital, maybe they do, but it's because they really need the infrastructure support?

Yes. I think that's part of it. The types of buyers are groups that are more financial. If they don't have the platform. We've gotten a lot of credit for our ability to operate the malls in these markets better than anyone else and they continue to have us as part of that equation going forward and so I think that is a part of it.

And, I'm a little surprised that the headlines on Sears and Penny's are sort of spooking buyers as you would think the uncertainty there is ultimately what is giving rise to their investment opportunity. If it was easy, they probably wouldn't be looking at it. Can you talk about the character in any depth of the buyers for malls? Maybe where it was 6-12 months ago? I'm curious if these were local buyers or real estate firms or financial buyers?

It's a combination of private groups, regional groups, financial groups. They're not living in the space every day as close as we are so it just takes time for us to walk them through what the redevelopment opportunities are and what the costs are to get them comfortable with co-tenancy and impacts like that. Like I said, it's more the process that we have to go through in terms of more hand holding. To your point, it is something that people view as a positive down the road because it brings in stronger uses and energizes the mall. So, we think it's a selling point, we just have to give some more clarity to how it's going to unfold.

And just a last question maybe for you, Farzana. I might have just missed this in your response to Michael. If same store NOI this quarter is strong and wasn't based on anything one time in nature, is it fair to say we should generally see that growth repeat in Q4 and if so the Q4 same store NOI that's kind of implied by annual guidance seems fairly low. I'm curious, if our logic is correct, why would it decelerate? What might be a wild card that would push it there?

I gave you two components that might move the results. One being the percentage rents and the second being bad debt expense. Other than that, if everything flows like it flowed in third quarter, we should have similar results and we just need to be conscious of things that might happen whether related or unusual that we didn't anticipate.

Thank you.

Thanks Jeff.

Mr. Lebovitz, there are no further questions at this time. I will turn the call back to you.

Okay. I'd again like to thank everyone and we look forward to visiting with you at (inaudible) in Atlanta next week and any other opportunity that you would like. Thank you very much.

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