CBL & Associates Properties, Inc. (CBL) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CBL & Associates Properties fourth-quarter and full-year 2014 conference call.

(Operator Instructions)

As a reminder, this conference is being recorded, Wednesday, February 4, 2015. I would now like to turn the conference over to Katie Reinsmidt, Senior Vice President of Investor Relations and Corporate Investments. Please go ahead, ma'am.

Thank you and good morning. We appreciate your participation in the CBL & Associates Properties, Inc. conference call to discuss fourth-quarter results. Joining me today 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'll turn it over to Stephen for his remarks.

This conference call contains forward-looking statements within the meaning of the federal securities laws. Such statements are inherently subject to risks and uncertainties. Future events and actual results, financial and otherwise, may differ materially from the events and results discussed in the forward-looking statements. We direct you to the Company's various filings with the Securities and Exchange Commission, including without limitation, the Company's most recent annual report on Form 10-K.

During our discussion today, references made to per-share amounts are based on a fully diluted converted share basis. During this call, the Company may discuss non-GAAP financial measures as defined by SEC Regulation G. A reconciliation of each non-GAAP financial measure to the comparable GAAP financial measure will be included in 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 cblproperties.com.

Thank you, Katie, and good morning, everyone. 2014 was a tremendous year across the board for CBL, as we reached and exceeded the lofty goals we set out for our Company. We surpassed the top end of our increased guidance range for same-center NOI, with growth of 2.4% for the year and 2.9% for the quarter. FFO was at the top of our guidance range, at $2.28 per share, representing a 3% increase for the year.

We progressed on our balance sheet strategy, by growing our unencumbered pool, as well as decreasing our percentage of secured debt, as we issued our second bond offering in October. We invested heavily in our core portfolio, opening several successful redevelopments and expansions, as well as new projects that added substantial value. We made headway on our disposition targets, selling one mall and two non-core centers and entering into new contracts, which I'll discuss in more detail, shortly.

NOI growth in 2014 was generated from properties across all tiers, indicative of the strength of our market-dominant strategy. Throughout the year, we've discussed new stores, restaurants, and boxes that have opened in our portfolio. A few examples include Kate Spade, Tumi, and Gucci at The Outlet Shoppes of the Bluegrass; Williams-Sonoma at The Outlet Shoppes of El Paso; J. Crew at Hamilton Place; Cheesecake Factory at CoolSprings Galleria and Fayette Mall; Burlington at Northgate Mall; T.J. Maxx at College Square; Dick's Sporting Goods at Monroeville Mall; and Ross Dress For Less and Ulta at Hickory Point. We also opened seven new H&M stores across the portfolio.

All of this leasing activity helped drive the growth we produced in 2014. We saw stellar results in our lease spreads, on both new and renewal leases, with an average increase of 12.6% during the quarter and for the full year. Spreads on renewal leases were 8% for the quarter, and new lease spreads were healthy at 30.4%. For the full year, renewal spreads were 7.1% and new spreads were 29.6%.

Occupancy maintained a high level throughout the year. We ended 2014 with a 150 basis-points increase from the third quarter in the same-center pool to 94.8%, flat with year-end 2013. Overall portfolio occupancy remained constant at 94.9% from the prior year.

As we moved into the first quarter, the industry saw a higher level of bankruptcy activity than we've seen in many years. Deb Shops, Wet Seal, and Body Central all filed. There are also news reports speculating store closures from other retailers, including RadioShack and Cache, which just filed this morning.

The total gross rev from these retailers in our portfolio is material, at over $15 million on an annual basis. For reference, our average bankruptcy loss for the past five years has been $5 million to $7 million. In response our leasing division has formed special teams to focus on reducing the 2015 bankruptcy impact as much as possible. Also, high occupancy rates, the improving sales environment, and positive consumer sentiment should spur ongoing retailer expansions into our markets.

The consumer was out and shopping at our malls in November and December. Categories that outperformed included accessories and eyewear, specialty women's and children's, and non-athletic footwear. We were pleased to end the year with a strong rebound in sales growth. Sales during the fourth quarter improved with an increase of 3.9%, bringing our 2014 sales to $360 per square foot.

Tier 1 added two malls as a result of positive sales growth and represents 34% of our total mall NOI. As we move further into 2015, we expect a favorable sales climate, given the positive impact from low gas prices on consumer spending.

Before I move on to dispositions, I will talk briefly about JCPenney. As we anticipated, JCPenney announced the closure of three leased locations and a fourth owned location in our portfolio. We have already made significant progress on plans to redevelop each location and will announce formal redevelopment plans as leases are signed. More broadly, we continue to be encouraged by JCPenney's improvement in sales, traffic, and profitability, and are optimistic that their recovery will continue.

Our disposition program is very active. I'm pleased to share news on several pending transactions. Due diligence has been completed on the community center we have under contract for sale. We anticipate this transaction to close next quarter, subject to the loan assumption. The total purchase price of the center is $22.8 million, including the assumption of the loan.

Regarding the mall and associated center that were under contract at our last call, we are now working with a new buyer on the mall and feel confident that the deal will move forward. The associated center is being marketed and will be sold separately. We are also under contract for the sale of Triangle Town Center and its associated center in Raleigh, North Carolina, to an institutional investor for $181 million, including assumption of the loan. This sale represents a cap rate in the mid-7% range.

We currently own these properties in a 50%/50% joint venture with the Richard E. Jacobs Group. The properties will be sold into a new joint venture, of which we will own 15% and provide leasing and management services, earning customary fees. Triangle Town Center produced sales of $319 per square foot in 2014. The impact of this transaction has been included in our guidance range.

Moving on to new announcements, we recently entered into a contract for the sale of three malls. The pricing on these malls is in the low 9% range. All three malls are encumbered by CMBS mortgages, so the completion of this transaction is subject to lender approval, and we are in the early stages of qualifying the regional buyer with the lenders. Since the sale is largely dependent on the loan assumptions, we are not able to project a closing date, and have not included this transaction in our current guidance.

As you recall, last April, we announced our strategic portfolio transformation and targeted 25 assets for disposition, including four lender transactions. Including the above transactions, and others closed in 2014, we have 17 malls remaining to sell. Of these, five involve JCPenney or other anchor redevelopments, which has delayed their marketing while we put replacement stores in place.

For the remaining 12, we are either marketing through brokers or having off-market discussions with respective purchasers. We are confident that we will make significant headway on this plan in 2015. I will now turn the call back over to Katie to provide an overview of our redevelopment and development pipeline.

Thank you, Stephen. We have started construction on the redevelopment of the former JCPenney stores at Janesville Mall in Janesville, Wisconsin, and Hickory Point Mall in Forsyth, Illinois. Janesville Mall will welcome Ulta and Dick's Sporting Goods to the center in the fall. A 60,000 square-foot Hobby Lobby will join Hickory Point in the fall, as well.

Fueled by healthy retailer demand, we added nearly 30 boxes and over 20 restaurants to our centers in 2014. As Stephen mentioned earlier, we added seven H&M stores in 2014 and have more than a dozen of their stores on tap for openings in 2015 and 2016 across our portfolio. Additionally, we have leases executed with Ulta, Dick's Sporting Goods, T.J. Maxx, and other boxes to open throughout this year.

For those of you that joined us on our tour of The Outlet Shoppes at Atlanta during NAREIT, you may recall seeing the expansion sites that are now under development. We have a 33,000-square foot Phase II expansion that will bring Gap, Banana Republic, and other great retailers to the project. These new stores will start construction next month for an opening before the holiday season. We are also adding a 9,600-square foot out-parcel location, which will open later this year.

During the fourth quarter we celebrated the grand opening of the Sears redevelopment at Fayette Mall in Lexington, Kentucky. Cheesecake Factory and other new-to-the-market stores, such as Oakley, Clarks, Aveda, H&M, Altar'd State, and Vera Bradley opened to a fantastic reception. Additional shops and restaurants, including PINK, Newk's, and Travinia Italian Kitchen, are currently under construction with a spring 2015 opening.

We will soon celebrate the opening of the Sears redevelopment at CoolSprings Galleria. Cheesecake Factory opened in November. And American Girl, H&M, Belk Home, and other additional shops and restaurants are set to open this year. At Hammock Landing, our open-air center in West Melbourne, Florida, Academy Sports is set to open in the spring, joining Carmike, which opened in August 2014.

At The Pavilion at Port Orange in Port Orange, Florida, we partnered with a multi-family developer, and just completed a 306-unit Class A apartment complex on land we own adjacent to our center. This complex is under contract for sale and we expect to record a gain on the transaction when it closes in the second quarter. We are also looking across the portfolio for other multi-family opportunities to create value in underutilized land parcels.

Moving on to new developments, Phase II of Fremaux Town Center in Slidell, Louisiana, is under construction and will open in October 2015. The 265,000 square-foot project will be anchored by Dillard's, and will include a great line-up of fashion-oriented shops, including Ann Taylor Loft, Chico's, Aveda, and Francesca's. This project is developed in a joint venture with Stirling Properties.

We also commenced construction on a new joint-venture project with Stirling in Lafayette, Louisiana. The 425,000 square-foot center will be anchored by Costco, Dick's Sporting Goods, Field & Stream, Marshalls, HomeGoods, and Nordstrom Rack. The majority of the retailers committed to the project are opening their first locations in Lafayette or Louisiana or both. The grand opening is anticipated in March 2016.

I will now turn the call over to Farzana for an update on financing, as well as a review of our financial performance.

Thank you, Katie, and good morning. Before I begin, I would like to take a moment to congratulate Stephen on his nomination for the ICSC Chairmanship. It's quite an honor to be chosen and I know I speak for the entire Company when I say how proud we are of this recognition for Stephen and CBL. Congratulations.

Thank you, Farzana.

Now for our recent balance sheet achievements. During the quarter, we retired three secured loans totaling $165 million, and for the year, retired four loans totaling $285 million, adding $464 million of gross asset value to our unencumbered pool. We also completed the conveyance of Columbia Place to the lender in lieu of foreclosure, reducing outstanding balance by $27.3 million, and recognizing a gain on extinguishment in the fourth quarter of approximately $23 million.

We ended 2014 with a decline of more than $160 million in our total debt balance compared with the prior year. As we look forward into 2015, we have $465 million of loans secured by consolidated properties maturing at a weighted average interest rate of 5.6%. Our plan is to unencumber these high-quality assets using the availability under our lines of credit, and then convert to long-term fixed-rate unsecured debt based on market conditions.

We also have our share of $231 million in joint-venture loans maturing this year, which we plan to refinance at lower rates. We used the proceeds from our $300 million bond issuance in October 2014 to pay down balances on the lines, reducing our exposure to floating-rate debt to 14.6% of total debt at year-end. Our line availability of $1.1 billion gives us tremendous dry powder to execute our plan to convert secured debt to unsecured borrowings.

Our financial covenants remain strong, with a fixed charge coverage ratio constant from the prior year at 2.2 times, and an interest coverage ratio of 2.9 times. Secured debt-to-gross book value improved to 37% at year-end from 41% at prior year-end. The consolidated unencumbered NOI has increased to 36% at year-end compared with 28% at prior year-end. With the significant payoffs of secured debt, we expect consolidated unencumbered NOI will reach 46% by the end of 2015. Our bond covenants are well in excess of the minimum required and we expect continued improvements over time.

We are pleased to achieve the high end of our guidance range. For the full year, adjusted FFO reached $2.28 per share, representing an increase of 2.7%. Adjusted FFO in the fourth quarter increased 6.3% to $0.67 per share compared with the prior-year period. These results exclude gains on extinguishment of debt and litigation settlements.

Similar to the full year, we generated robust top-line growth during the fourth quarter, with contributions from increased rental rates on new and renewal leases, as well as rents generated from expansions and new developments. FFO also benefited from lower operating expenses and maintenance and repairs compared with the prior year. While we lowered our overall debt balance, we did record slightly higher interest expense for the quarter and year, as we reduced balances and lowered exposure to floating interest rates on the lines of credit through the 10-year fixed-rate bond offering.

G&A as a percentage of total revenues was 5.2% for the quarter compared with 4.4% in the prior year. G&A increased in the quarter due to normal salary and stock grant increases, as well as increased investments in technology upgrades and litigation expense. For the full year, G&A was flat at 4.7% of revenues.

Our cost recovery ratio for the fourth quarter was 102.1% compared with 98.4% in the prior period, primarily due to lower snow removal expense in the fourth quarter 2014. For the full year, our recovery ratio was on target at 98.9%, similar to the prior year.

Same-center NOI growth in the quarter was 2.9% for the total portfolio and 2.6% in the mall portfolio. Our growth for the quarter was driven by increased rental rates on new leases as we replaced underperforming retailers, increased renewal lease spreads, and revenue contributions from completed redevelopments and expansions. Additionally, we benefited from improved property operating and maintenance and repair expenses.

On a same-center basis, minimum rents grew $2.8 million and tenant reimbursements were up $1.9 million. While we ended the year with basically flat sales, percentage rents declined $0.4 million quarter-over-quarter. Real estate taxes increased by $1.1 million during the quarter.

For 2015, we expect continued contribution from high releasing spreads and tenant upgrades to fuel top-line revenue growth. We also anticipate benefiting from the low interest-rate environment, as we retire wholly-owned property mortgages and refinance maturing joint-venture loans. While sales are difficult to predict, with a positive economic environment, we should expect to benefit from growth in percentage rents.

To account for the impact of bankruptcy announcements that Stephen detailed earlier, we have included a $10 million bankruptcy reserve in our guidance at the low end. This bankruptcy reserve reduces our guidance by $0.05 per share of FFO or 1.5% of NOI. We're working on replacing tenants in many locations and recovering as much of this lost income as possible during the year.

We believe that it is prudent to reflect a conservative assumption of lease-up at the low end of guidance and progressively move to a more aggressive assumption for lease-up of this space to achieve the high end of the range. As a result, we are providing FFO guidance for 2015 in a range of $2.24 to $2.31 per share, which assumes same-center NOI growth of 0% to 2% for the year.

We anticipate a flat to positive 25 basis-point increase in occupancy at year-end, although we do expect there could be declines in occupancy as we start the year until we can absorb the tenant closures. Consistent with our practice, guidance does not include any future unannounced asset sales or acquisitions. Guidance does include the impact of the Triangle and community center transactions.

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 to deliver such strong results for 2014, but even more importantly, we are looking to achieve a successful 2015. Retail demand is strong and our entire Company is focused on executing on the initiatives we have set forth. We are now happy to answer any questions you may have.

Thank you.

(Operator Instructions)

Christy McElroy.

Hi, thank you, good morning.

Good morning.

Stephen, on the three malls under contract did you mention the contracted price and can you disclose which three malls?

Good morning, Christy. No, I did not mention the price and I can't mention the names right now. Like I said during my comments, these three are all subject to lender assumption and we really have just started that process, so we feel like it's premature to announce those details at this point.

Triangle is not subject to lender assumption, which is why we were comfortable going ahead and announcing that. Also, one other factor, Triangle is with an institutional investor. The three malls are really more of a regional buyer so there will be more of a process in terms of getting the loans assumed in that case.

So when should we expect to hear more details on it and what would you gauge as the probability of closure at this point?

We wouldn't have signed the contract if we didn't think it's got a good chance of going forward and the buyer has a track record of other successful acquisitions, so we're optimistic on that front. The loan assumption process has taken anywhere from 60 to 90 days to five to six months.

It just depends on the nature of the asset, the servicer, how many hoops they make us jump through in doing that. But as soon as we have any information, we'll share it. Also, the way the deal is structured, if one of the assets clears faster then we can close on each one individually, so it's not -- they don't all three have to close together.

Can you comment on whether or not you're open to doing acquisitions at this juncture? Is there anything that you're working on currently? What cap rates are you comfortable with? And as you start to generate more proceeds from asset sales, how do you weigh the use of those proceeds in terms of acquisitions versus redevelopment versus debt pay down?

Sure. We look at acquisitions, we continue to look at acquisitions, and we're open if we found an opportunity that we felt like would fit with our strategy, a Tier 1 mall that would have growth potential going forward, and that we see either redevelopment or expansion potential going forward. So that's the kind of property. When we look, there's a lot of property out there, although I can't say that there's much that we found that attractive.

Cap rates, it really just depends on whether there's debt in place on the asset or it's free and clear, what the growth potential is, whether it's a redevelopment or a relatively new property. But cap rates have continued to compress. We saw just this morning the Westfield transaction, the cap rates were very attractive on that deal. Cap rates are not going up; they seem to be going down. That would definitely be a factor in any acquisition that we would consider.

What was the other part? How to use the proceeds from the dispositions. I'm sorry. We still think redevelopment is the best use of proceeds, in terms of the returns that we're generating. Just standalone returns, Fayette, we got up to an 8%, and we've been in the 7% to 10% range on the redevelopments, some even higher, depending on the nature of the project.

That's just standalone. That doesn't even give credit to what benefits it causes in the mall from the redevelopment: increased sales, traffic, other leasing we can do. That's our number one priority from a capital deployment point of view, and we're constantly looking at opportunities as part of the anchor redevelopment strategy, which we think can really drive opportunity and sales of properties if we can accomplish more of those. So that's a big priority for us.

One last question on retailers if I could. We've been hearing that a few retailers are experimenting with converting some of their stores in C malls into outlet concepts. I'm wondering if you've seen this in any of your C malls and what are your thoughts around that idea?

We have seen that, Christy. It's interesting you would ask. There are several retailers that have been doing that. We actually had Abercrombie do that in one of our malls, a Tier 2 mall, a few years ago, and sales have improved. The J. Crew store in Chattanooga is a factory store and it's doing really well. And that's not a C mall -- so it's not just C malls.

They opened a dozen across the country -- I'm sorry, they opened eight, not a dozen, they opened eight across the country. So that's something they are testing, but they've done phenomenal here. And we've had it in a couple of other malls, where retailers have done that kind of conversion. What I understand the logic is that just looking at their price points in the market, they feel like it allows them to be more competitive with either other retailers that are operating and to offer their merchandise at a more compelling price and drive more value with the customer, so it's probably something we'll see more of.

Thank you so much.

Okay, thank you, Christy.

Todd Thomas, KeyBanc Capital Markets.

Hi, thanks, good morning. Just first question regarding Triangle Town Center, I was just wondering if you could talk about what the go-forward plan is there with regard to operating the assets and handling the $175 million debt maturity coming up in December and what CBL's remaining capital exposure is going forward?

Hi, Todd. I'll answer the one part of your question and Stephen can answer the second part of your question. The loan is coming due. There is open to par date in September so our expectation is that we would be refinancing and the loan amount will be less, approximately $125 million, so there will be some equity infusion from our end. That equity infusion is somewhere around $8 million on a gross basis, on a net basis $4 million, because the sale of this transaction will generates us about $4 million net proceeds.

And then, Todd, I did speak not accurately. There is a loan assumption, but it's a very short-term loan assumption because the loan is due later this year, so we expect that to go very quickly and smoothly. Then as far as why we want to stay in the mall, Triangle is in Raleigh-Durham, it's a strong market, sales are around $320 a foot, but they're growing.

It has very strong anchors. Saks is an anchor there and their business has been growing nicely the last few years. So it's a very attractive asset. The demographics around the mall flattened out, but now they've started to show improvement. There's also a redevelopment opportunity. There's an outdoor part of the center that really needed capital, and because of the loan amount, the ownership, us and the venture with Jacobs, we're in the position to invest capital until we could figure out a new strategy for the property.

But this redevelopment, now, under the new ownership will go forward and should really drive more success in that outdoor area and create more value at the center. So we view it as an asset that we think fits well with our strategy and will have good growth going forward.

Okay. And a question then for Farzana. The $10 million provision for closures and bankruptcies, you mentioned that the annualized gross rent for the at-risk retailers totals about $15 million. That's offset by leasing and new commencements, but how much of the $10 million is already spoken for, if you will, and how much is allocated for unknown, unanticipated closures that might still take place from here? What does the cushion look like that's built in from here?

We feel comfortable with a $10 million reserve that we have established. We have taken into consideration the store closures, some backfilling that's already will be occurring, and with the momentum we have in our centers, with strong demand from retailers, we should feel pretty good about this $10 million reserve. Our goal is to really beat it, not really even have the $10 million fully be baked in. We hope that we can recover this and come away with the high end of our guidance range.

Just one other thing, Todd, we just don't know, of the $15 million, not all the retailers have told us which stores they're keeping and which they are closing. So we just said we would put the total amount out there. You're exactly right, we're going to offset that, that's not a total loss number, that's just the total number of gross rents.

Not all the stores are going to close and we'll have replacements in place and specialty leasing to pick up, so we've got sources to offset. That's why we used the $10 million number, but it's a tough start to the year given these bankruptcies, and like I said, it's more than we've seen in quite a number of years, so it does make our job harder this year to get to where we want to be.

Okay. Just one last question, last quarter you alluded to there being a potential new outlet project, something that might open in 2016. Actually, I believe that there was a possibility that two projects could potentially open in 2016 that you were looking at. Any comments on that? Anything that is new in the pipeline that you can discuss?

We still have the two projects. We are not ready to announce them yet. As you've seen in our other projects, we don't go forward with them unless the pre-leasing reaches certain levels. It's been 60% or more for all the projects before we've actually made the announcement so we're pushing the pre-leasing, but it's not there yet, and hopefully in the near future, we will have more to announce on those.

Okay, thank you.

Thanks, Todd.

Jane Wong, Bank of America Merrill Lynch.

Hi, thank you. I'm here on behalf of Craig Schmidt. I was just wondering if you could talk a little bit about the challenges or the lessons learned so far from the dispositions that you've planned and if you have any targets or goals of how much you want to sell this year? Also if the environment has changed for the buyers?

Sure, good morning, Jane. The environment really has not changed. It's been steady. Interest rates have stayed low and that helps us, because most of the buyers do use some leverage as part of their strategy. We're talking to the same universe, a combination of institutions, private equity groups, regional buyers. Some come in new, some go out, so there's always transition there, but I'd say it's a pretty consistent pool in terms of the depth that we're working with.

As far as targets, we have not announced any specific targets for the year. We announced last year the 21-mall program, plus the 4 malls with the lender transactions. We said we planned to do that in a two- to three-year time frame and we're pushing to do it as quickly as possible and that's still our plan. We're working on, as I said in my comments, really the vast majority of the malls we're having discussions. They are either being marketed by brokers or we're having discussions off-market, so as quickly as we can get this done, that's better for us, that's better for the markets, so that's our priority.

Lessons learned, I would say, it's good to have back-ups. The mall that we announced under contract, we really went through a process with the original buyer, but we had back-ups in place and now we've got another buyer that we don't have the contract signed yet, so we can't announce details, but we feel confident that it will move forward. So we're working on all fronts and we're working very hard at it. Like I said, we're confident that this is going to be a good year of progress for us.

Great, thank you. And, have you disclosed which community center is under contract to be sold for $23 million?

No, not yet, but we will when it closes.

Great. And the just one last question, for the 2015 guidance of same-store NOI flat to 2%, how much do you think the store closings and bankruptcies is impacting that?

We mentioned it's about $10 million reserve that we have taken, so at that low-end of the guidance, we're at 0%, and had we not had this reserve, we would be around 1.5% at the bottom end of our guidance, so right now that's our estimate.

Got it, thank you.

Thank you.

Nathan Isbee, Stifel.

Hi, good morning. Just going back on the guidance issue. The flat to 2% same-store guidance, as you mentioned, includes $10 million of reserve or loss NOI based on the increased closures. Like you mentioned, Cache filed this morning. How many more bankruptcies or large-scale closures does the guidance assume, and at what point do we assume even flat NOI might be a challenge?

The $10 million guidance, the stores that we know are closing, some of it has already been considered, and this $10 million additional bankruptcy guidance reserve that we have used, we have given ourselves some room for additional bankruptcies to come into play. However, we also have made the assumption that we will have specialty leasing, we will have other leasing activity that will push us to reduce that guidance, or at least maintain that $10 million reserve. At the bottom end, we should -- we're comfortable at this point.

The Deb, Wet Seal, and Body Central, they not only filed, but they closed their stores almost immediately with few exceptions. There are couple of Debs that stayed open and a few Wet Seal. So that is why those are the three primary ones that we felt like we needed to account for in terms of the reserve. Then there's some other room in the reserve for others that we were worried about.

Cache we knew was just a matter of time, although Cache, we don't think is going to close the majority of their stores. RadioShack, there's rumors every day about who is out there. The latest I read this morning is Amazon and Sprint looking to buy their stores, so who knows what will happen with them?

But other than that, we don't see a lot of exposure. Aeropostale has had a few tough years. Everyone's been talking about. They closed down PS by Aero in January, but we had budgeted for that, so we knew that was coming. From a credit point of view, you look at most of the other retailers and this really clears a lot out of our watch list, the companies that have filed this year.

Just to clarify, the Wet Seal and Deb Shops, was that included in the $10 million?

Yes.

That's right.

Okay. Then just taking a step back. You said in years past, it's been $5 million to $7 million, so you think a $3 million additional reserve is enough for this year to account for the potential bankruptcies?

Nate, $10 million provides us with the known bankruptcies that we discussed and some additional closings that we are aware of that is included in our budgets and some additional cushion that we think is necessary. Because remember, it's not just -- we know these stores are closing but we are also making assumptions that we are going to be backfilling some of them with specialty leasing.

We're not going to let them just sit vacant. So a lot of it has been baked in, in this $10 million, so we -- unless something major happens, that is outside our consideration right now, but for the known bankruptcies and what we know about RadioShack or Cache, we feel comfortable.

Okay, thank you. Then just one last question. This Triangle Town Center sale, would you say that was one of the original malls that you contemplated selling last year when you laid out your 20 mall asset sales plan?

It was one of the 4 that we said were in the lender bucket, so was 21 plus 4, 25 total, so it was one of the 4.

Okay. All right, thanks.

Thanks, Nate.

Jeremy Metz, UBS.

Hi. Good morning. Just going back to the three malls you said you had under contract, I understand not giving the names, but I was wondering if you could at least try to provide us with some goal posts here. Are we talking about $50 million or this is $150 million worth of assets, just so we can give shareholders a little more information on the potential impact here to earnings, without getting into the individual mall information?

And then, the second part of that would be if you can talk a little more about the process there. Was it a brokered package? How big was the potential buyer pool? And then you talked about a 9%-plus yield there? Just how did that pricing end up versus your expectations?

Just to give you a rough idea, it's under $100 million, in the $75 million to $100 million gross value, so that includes the debt. These were malls that we were working with a broker. It was part of the off-market group. We were talking to a limited number of buyers, but it was something that the broker that was representing us talked to a number of buyers and this buyer emerged as the most aggressive.

The pricing is consistent with really what we've been saying, that this portfolio that we're looking to sell should trade out as an average high single-digits. This is in the low 9% range. So, yes, we feel very good about where we're ending up on this and we're hoping we can get it through the lender assumption process as quickly as possible and move forward.

Comparing these assets just to the remaining 17 you have left, is this pricing fair to assume for that remaining bucket or are the assets that you still have out there, are those a little worse quality, and maybe pricing should move up from there?

This is representative. Some of the rest are going to be lower cap, some are going to be higher, but this average is right about where we see things going.

Okay. Then just one last one, just switching gears. In terms of the same-store guidance, going back to that, the 0% to 2%, can you just give a little bit of color on the growth between the three tiers here? If you were assuming the Tier 1s are going to be in that 3% to 4% range, does this mean you're thinking that the Tier 3 malls are going to be somewhere in the negative 5% range or just whatever color you can provide amongst how that breaks down?

Our tiers are, as we said in the past, more linear. Our Tier 1 generates around 4% growth, and as you move down the ladder, it's going to be progressively less. However, I don't think that the Tier 3 will have a negative 5% growth; we perhaps believe that, that's going to be around flat growth, and so as you see the 0% to 2% range. It's just going to vary, but our Tier 1 should perform well and Tier 2 should also follow suit, with a flat growth for Tier 3.

Okay.

Jeremy, one of the things, actually, in 2014 that drove our NOI growth higher than we had budgeted and higher than we guided earlier in the year was Tier 2 and 3. The leasing, the lease spreads actually were better than we had expected, so that was just a factor in last year that really helped us.

Okay, great. Appreciate the color. Sorry to go back, but one other one. I don't know if I missed this earlier, but did you give a yield on the $181 million Triangle sale or can you provide the yield on that one?

Yes, we said it was in the mid 7%s.

Okay. Great, thank you.

Thanks.

Lina Rudashevski, JPMorgan.

Hi, thank you. I was just wondering, do you think the level of bankruptcies will normalize back to the $5 million to $7 million you quoted going forward in 2016, or do you see a heightened bankruptcy level among retailers?

I wish I knew, but this year, this is definitely going to be a higher year than we've seen in the last few. In 2011 and 2012, we were down in the $2 million to $3 million range. So hopefully after this year, it will go back down. The $5 million to $7 million is average over -- except for 2008, which was a lot higher, is the average that have we seen over the long-term.

But there's some volatility in that number and I think getting -- clearing this group of retailers out will help us. Not necessarily short-term, but long-term we're out there working with replacement retailers. And just given the high occupancy rates in the portfolio, we're seeing good demand and so we feel like we'll be better off down the road replacing these retailers. It will just take time with downtime and backfilling.

All right. Thank you.

Thank you.

D.J. Busch, Green Street Advisors.

Thank you. Stephen, just talking a little bit about the core portfolio, have you seen an increased demand or even been approached for some of your malls outside of the disposition properties in the core portfolio? And what would be, given maybe the Westfield transaction of last night, what would be your willingness to sell some of those properties if pricing has, in fact, gone higher?

Yes, hi, D.J. We get approached, I'd say, not a lot, but every once in a while about other assets in the portfolio, but we have been clear that our priority now is really executing on the program that we announced last year. We feel like we need to make progress on that and then, that will get us to a place where we can evaluate what makes the most sense going forward.

You remember, we did the TIA joint venture with some of our top-tier malls back in 2011, and that made sense at the time, given what the demand was in the market. But our Tier 1 malls we see good opportunity to redevelop and grow them going forward and that's what we need in the Company. So our inclination isn't to sell those properties, but to sell the ones that we've announced.

Okay. Then going back to Christy's first question on use of proceeds on the dispositions, can you talk about your willingness to buy back shares, and based on unsecured ratings, is it even possible? Can you explain that process on if you can use proceeds to buy back some of your shares at its current level?

What we said really hadn't changed, that in the event, with the dispositions, we generated significant cash, we would look at our share price at the time and see if a buyback made sense. Given how our stock has moved up some, it doesn't make as much sense now as it did mid-part of last year, but it is still something that is on the table and we'll evaluate at the time, just depending on proceeds we raise and where the market stands. So it's definitely an option and something we would evaluate at the same time as the redevelopments and any the acquisitions that might be out there.

Okay, great. Thank you.

Thanks, D.J.

Jim Sullivan, Cowen.

Thank you, good morning. Stephen, on the sale of the Triangle property, can you just share with us, first of all, whether there was any preferential return provided to the new partner there, number one? And number two, whether the decision to retain an equity stake, as well as manage the asset -- whether that was how the asset was marketed or whether that was something that was just a mutual agreement between yourself and the new partner?

Sure, Jim, good morning. This -- first of all, it wasn't a marketed transaction. We were approached by the institutional group about the asset just from our announcement that we intended to try to work with a lender on it. They saw an opportunity to redevelop it and some upside so they came to us and wanted to get our sense for that.

There is no prefs in the deal. It's a straight-up structure based on the ownership split that I talked about 85%/15%. We are really excited to be able to stay in asset going forward. We see a good future and good opportunity. Also the partner we can't announce yet, but it's a great group to work with, so we're excited about being able to work with them and hoping that, that will lead to other deals going forward, as well.

Okay. Secondly, in terms of the store closure provision that you've made, the $10 million, I wonder if you can share with us, if we think about your portfolio, leaving aside the associated centers for a moment, into your core malls, your malls that you are planning to sell, and then your outlet centers. Is the -- should we assume that a disproportionate level of the store closures are in the assets that are for sale, or is it pretty evenly pro-rata spread across those three distinct segments of the portfolio?

It's really spread across the portfolio. It's spread across all mall owners. These companies, Wet Seal, and Deb, and Body Central have a presence across the industry in most malls and they weren't differentiated between tiers at all.

Okay. Then finally for me, in terms of the factory outlet center business, this has obviously been a very profitable development experience that you've had. I wonder if you can help us in a couple of respects to get our arms around the value creation opportunity here.

First of all, whatever you can share with us regarding where you think cap rates would be for the type of asset that you've been developing, number one? And number two, as you think about the potential performance, in terms of internal growth for your outlet center portfolio versus your core mall portfolio, do you expect the growth rates going forward to be comparable or is one going to outperform the other in terms of internal growth?

First, it's been a very lucrative area for us, and we're very pleased with our results. Our return on equity on our outlet center projects is over 30%, and on the most recent ones, it's infinite, because of the financing that we were able to do. It's very profitable. I don't know what cap rates are. We're not trying to sell these assets at all, but you could just look at where Tanger is trading and see that they continue to move down because their stock has done so well with their growth potential.

So there's huge value creation. We opened both Atlanta and Bluegrass at over 12% unlevered return and so you can do the math based on whatever you think the cap rates are. As far as growth going forward, the outlets are really all specialty stores. There aren't any large anchors. It's a function of sales growth.

They opened pretty highly leased. So it's not so much releasing, but we see good, consistent growth there and it should be pretty much at the same level as the Tier 1 of our other centers. So that's something we feel good about and we think they're good asset to keep in the portfolio. We've also been able to expand the outlet centers. We did two last year, we have two this year, so with the demand that we're seeing from retailers to come into the centers, we've looked at any land that we have as part of those and built that out as well, so that's opportunity going forward in the portfolio.

Then finally for me on the outlet centers, and I know at some points in the past, you've hesitated to put a percentage on it, but given that those kind of returns and that kind of relative growth. Do you have a target in terms of how much of the Company you would like to have be allocated to the outlet center sector and when you complete the sale of assets you'd like to sell?

We don't really have a target. It's about 5% now and we obviously want to grow it. It's a competitive area as far as finding new projects. We have a great partner, Horizon Group, and they are working on other opportunities. We're going to be smart about the new projects that we do to make sure that they have attractive returns and we don't jump the gun and start before there's the right level of pre-leasing, but if we can find projects that meet the criteria, and are consistent with the ones we've done so far, then we're happy to continue to add more and have them be a growing percentage of our overall asset base.

Okay, great. Thanks, guys.

Thanks.

Carol Kemple, Hilliard Lyons.

Good morning. What quarter this year do you all expect to have the rest of your litigation gain received in?

Can you repeat your question, Carol, just to be sure?

Yes. In your guidance, you all have an adjustment for a litigation settlement. What quarter do you expect to receive that settlement in?

It will be in the first quarter this year. We have already received that, so we'll book that.

Okay. Then, what have been your conversations with Sears, as far as them either selling their boxes back to you or them leasing their boxes to other retailers?

We talk to Sears all the time and they are focused on a lot of different initiatives. They continue to look at a REIT, which for some of their stores that they announced last year, and we know pretty much what everyone else knows, which is what they say publicly. We have worked with them to try to buy more stores and sublease more stores as a follow-up to the deals we've done last year.

We have not gotten anything to the point where it's moving forward, but we have ongoing conversations. We have a really good working relationship with them, and so hopefully, as they move forward, we will see more opportunities to do similar redevelopment to CoolSprings and Fayette that we were able to do last year.

Have they leased any of their space out in any of your malls to other retail tenants?

Yes, they've done that in a couple of cases. They did the Whole Foods at Friendly Center. We actually sublease from them about 30,000 square feet at one of our centers that we have under redevelopment, Brookfield Square in Milwaukee. So it's something that -- and I know they've had conversations with other retailers as well. So, it's something that they are continuing to evaluate and for them it's really financially driven, and how that transaction would compare to how much money they're making from the store on an operating basis.

Okay, thank you.

Rich Moore, RBC Capital Markets.

Good morning, guys. I just want to make sure I understand, Farzana, for the first quarter, should we put a $10 million provision for doubtful accounts in our operating expense number? Is that right?

No. That's for the full year. Full year, we are assuming that we will have about $10 million in losses from the tenants closing. That's for the full-year so it's not going to all happen in the first quarter, it should be ratable, because if you compare period-to-period, that's how the rents come in.

Okay, so each quarter, we should put $2.5 million of additional operating expense, is that right, as we estimate going forward? Is that the way to do that?

Well, that's a pressure on -- that's the reduction in revenue, so the way we see it, it's not really a reserve that we -- we have just built in our guidance what the revenue line item will be. The revenue line item will decrease because we're losing the rent that we had before, so that's really what we mean when we say a $10 million reserve. Not so much that it will be a bad debt expense, because the revenues are not going to be booked, so therefore there is not a bad debt expense.

Okay, so you won't -- your provision for doubtful accounts has been fairly low. Is that going to go up this year in addition to the $10 million that you're thinking?

The bad debt reserve fluctuate based on the receivables, the revenues we have booked, and then we have not collected. Therefore we will write it off. But if we never booked the revenues for these tenants that are already gone, then we're not going to book it, so it's just the pressure that we are going to expense on the revenue line item, that's the reserve we are talking about.

Yes, I got you. But then, in addition to that, will you have more on the bad debt line on the provision for doubtful accounts, because that has been somewhat low historically -- from a historical basis, so will you just raise that, a general view of the tenant environment? Should we do that, too, in addition to the $10 million?

No I don't think you should do that, because our bad debt expense for the full year has been around $2 million. Last year was similar, so I don't think you should do any more than what we have given you, the guidance.

Okay, great, thanks. Then on interest expense, the $3 million for the default interest expense, that was in interest expense, is that right?

That's correct. That was relating to Columbia Place mall. We had to book default interest, but once we return the property to the lender, it actually is a non-cash interest expense, so therefore we don't have a payback. So that we have netted that against our gain on extinguishment of debt, so that was in the full interest expense number.

Okay, so then interest expense for the quarter, the actual interest expense net of that, came down. What are you thinking about for interest expense as we go forward? Do you have a number in your guidance for annual interest expense that you are thinking for the year?

I don't have it broken down for the full year, what that interest expense number would be; however, it will be less than our full-year number, annual number we have for 2014, primarily because we are going to be paying off $400 million-some in secured debt that has 5.6% weighted average interest rate and we will refinance it through lines of credit.

There will be a short-term benefit from the lower interest rates from the lines of credit and then once we clear the bonds, that will have an impact of going back up. But we also have a joint venture loan, Oak Park Mall, that has a 5.85% interest rate. We know that, that will be refinanced and we should have at least 150 basis points savings on that loan, so generally, I'd say, the overall interest expense will come down.

Okay. Just out of curiosity, for the first quarter, were you getting any benefit in the fourth quarter from running balance on your line, that kind of thing, or should the first-quarter interest expense mirror what we saw the fourth quarter, or at least be somewhat in line, net of some of the changes you make, obviously, during the quarter?

That's correct. The first quarter should be similar as the fourth quarter. It will be higher, but as we -- because these loans that we will be paying off will not happen until third quarter, which is starting July.

Okay, good, got you, thank you. The last thing, guys, there's 25 malls in the Tier 3 bucket, and Stephen, you have got 21 for sale. Are there a handful in there, that are salvageable, that will ultimately make their way up in Tier 2? Is that the thought process?

Yes, there's several -- first of all, the 21 also includes a few Tier 2 malls, so it's not all the Tier 3. So some of the Tier 3, we see sales growth to move them into Tier 2 and redevelopment opportunities, which is why we haven't put them on the disposition list.

Okay, good. Thanks, guys.

Thanks, Rich.

Andrew Johns, [RREEF].

(Operator Instructions)

Mr. Lebovitz, we have no more questions at this time. I will now turn the call back to you.

I should have been in the queue, although they did already ask our two on -- answered, two on refi and NOI growth.

Hello? If you have any further questions, then you can contact us after the call. We would like to thank everyone for taking time this morning. We're excited again about our results for the year and looking forward to seeing all of you shortly. Thank you.

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.