CBL & Associates Properties, Inc. (CBL) 2015 Q1 法說會逐字稿

Good day. And welcome to the CBL & Associates Properties first-quarter 2015 earnings conference call.

(Operator Instructions)

Please note, this event is being recorded on Wednesday, April 29, 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 the first 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 10K.

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 the SEC regulation G. A reconciliation of each non-GAAP financial measure to the comparable GAAP financial measure will be included on today's earnings release that is furnished on form 8-K along with a transcript of today's comments and addtional, supplemental schedule. This call will also be available for replay on the internet through a link on our website at CBL properties.com.

Thank you, Katie, and good morning everyone. Our portfolio demonstrated its strength during the first quarter by producing double-digit leasing spreads and an impressive 7% growth in retail sales. We also generated FFO per-share results in line with the prior-year period and a 60 basis point increase in same center NOI.

Retail demand is steady and we will be opening a number of exciting new stores in our malls throughout the year. Notably, during the first quarter, we opened our portfolio's first ivivva Lululemon children's store, and before the end of the year we will open 10 H&M stores, two Dick's Sporting Goods, four Ulta stores, as well as the first Kings entertainment venue.

While bankruptcy related store closures are impacting our results in 2015, our aggressive leasing strategies and the ongoing retail demand will result in a higher quality merchandising mix at our centers. In total, the impact from the bankruptcy of Deb Shops, Wet Seal, RadioShack, Cache and Body Central, will result in approximately 175 store closures representing over $16 million in annual gross rents.

We have made good progress in releasing spaces that have been returned due to bankruptcy activity. To date, we have 36 leases executed or out for signature and an additional 57 leases in active negotiations. Our leasing team members have full schedules at recon next month in Las Vegas, were there will be pushing to make additional progress.

Occupancy was the metric most notably impacted by store closures. In total during the quarter, 153 stores closed comprising approximately 620,000 square feet. Additionally, there were several Deb Shop and Wet Seal stores that closed in late December. We took several spaces offline at the start of the year, as stores are being built out for the box openings I mentioned.

As a result, we ended the quarter with a 310 basis point decline in occupancy for same center stabilized malls to 89.5% compared with 92.6% at the end of the prior-year quarter. Occupancy gains at the associated in community centers partially offset declines in the malls, resulting in overall portfolio occupancy of 90.9% at quarter end, a decline of 160 basis points.

The leasing environment remains healthy as we completed more than 581,000 Square feet of leasing in the malls during the quarter, approximately 80% of which were renewal leases. The average increase in gross rents for new and renewal leases with 10.6%. Spreads on renewal leases were 3.4% and new lease spreads remain high at 35.1%. These strong first quarter results bode well for 2015's leasing trajectory as this quarter is generally the lowest of the year with a heavier weight into renewals and portfolio deals.

Retail sales for the quarter were excellent. Continuing the strong improvement that our portfolio generated over the holiday season. Sales during the first quarter grew 7% bringing our rolling 12 month sales to $365 per square foot.

The positive calendar shift and early Easter holiday, coupled with the benefit from low gas prices, has contributed to the increase in consumer spending in our markets. We have also seen some impact on the strengthening dollar on our border malls. However, our malls with exposure to energy markets generated increases in line with our portfolio.

Apparel sales results were mixed during the quarter with certain names in juniors, ladies, and children's posting strong increases while other struggled. We also saw strong increases across home, cosmetics, and footwear. We expect sales to remain positive for the remainder of the year, providing a solid backdrop for additional leasing success.

As an update to our disposition program, last April we laid out a three-year plan to dispose of 25 malls and non-core assets. We have disposed of four malls from this group, have one additional mall and community center under binding contracts, one additional lender property in process, and are actively negotiating several others. We anticipate closing on the sale of the community center that's under contract shortly. The growth sales is $22.8 million including the assumption of the related loan.

This week we closed on the sale of Madison Square in Huntsville, Alabama for $5 million. We entered into this contract following last quarter's conference call and were pleased to complete the sale. The associated center next to the mall is being marketed separately and preliminary interest is strong.

Due diligence has expired and deposit money is firm for the sale of Triangle Town Center and its associated center in Raleigh, North Carolina, into a new 15%/85% joint venture with an institutional investor. Due to the bankruptcy activity in the quarter and capital items, the purchase price was adjusted to $174 million, maintaining a cap rate in the mid-7% range.

We anticipate closing on this transaction in the third quarter following the loan payoff. We also completed a sale of an apartment complex next to our center in Daytona Beach, The Pavilion at Port Orange, which we built in partnership with a multifamily developer. We own the land under the complex, received ground rent, and participated in the net sales price. We received $10.7 million in proceeds and recorded a half-million dollar gain on sale of real estate that was included in our results for the quarter.

Finally, we did have a setback last week for the three-mall package that we announced under contract in the last call. The servicers did not approve loan assignments through the purchaser due to minimum network requirements not being met and we have terminated the contract. While we are disappointed with this news, these properties were packaged off market and we anticipate that a full marketing process will result in a broader, more qualified buyer pool.

In addition to these updates, we have properties that are in more advanced stages of marketing and anticipate being able to make additional announcements in the near future on individual property transactions. We are optimistic about these discussions and will share details at the appropriate time. I will now turn the call back over to Katie to provide an overview of our redevelopment and development pipeline.

Think you, Stephen. Investing in value-added redevelopments and select new developments continues to be an important focus for us with over 1.3 million square feet in process across the portfolio. Construction is now underway on several anchor redevelopment projects. The former JC Penney store at Janesville mall in Janesville, Wisconsin is being redeveloped for Ulta and Dick's Sporting Goods; will both open this fall. Hobby Lobby is under construction in the former JC Penney space at Hickory point in Forsyth, Illinois and will open in the fall as well.

Our Sears redevelopment at Cool Springs Galleria is scheduled to open this May, featuring American Girl, H&M, Kings, Ulta, and two quality restaurants, Connors Steak house and Kona Grill. Cheesecake Factory opened up in the mall late last year and Belk Home opened their new store in March, and is renovating their existing department store into one of their flagship facilities.

We are also under construction for new restaurant district at Brookfield Square in Brookfield, Wisconsin in 21,000 square feet of the Sears store that we were able to lease back. The project will include Blackfinn Ameripub, Mooyah Burgers, Jason's Deli and one additional restaurant. The project is scheduled to open later this year.

At Sunrise Mall in Brownsville, Texas we are under construction with a new 50,000 square-foot Dick's Sporting Goods. The new store is an expansion an existing pad attached to the mall and is scheduled to open ahead of the holiday season. We are also adding a 50,000 square-foot Gordman's at Meridian Mall in Lansing, Michigan which will open in the third quarter.

We recently broke ground on phase two projects at two of our outlet centers. At the Outlet Shops of the Bluegrass, we are under construction on a 53,000 square foot expansion with H&M, The Limited Outlet and several other brands. This project has enjoyed a successful first nine months with sales exceeding expectations.

In Atlanta, construction is underway on a 33,000 square-foot phase two expansion of our outlet center that will bring Gap, Banana Republic, and other great retailers to the project. Those expansions are expected to open before year-end.

Moving on to new developments, phase two of Fremaux Town Center in Slidell, Louisiana is under construction and will open in October of this year. The 280,000 square-foot project will be anchored by Dillard's and will include additional fashion oriented shops such as Ann Taylor Loft, Chico's, Aveda, and Francesca's. This project is being developed in a joint venture with Stirling Properties.

Construction is continuing our new joint venture project with Stirling Ambassador Town Center in Lafayette, Louisiana. The 438,000 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 Farzana to provide an update on financing as well as a review of our financial performance.

Thank you, Katie. Adjusted FFO for the quarter was $0.52 per share, flat from the prior-year period. FFO as adjusted in the current quarter excluded at $16.6 million gain on investments recorded for the sale of marketable securities as well as a $4.7 million litigation settlement net of related expenses. Our consolidated performance for the first quarter 2015, reflects results from opening two new centers and properties sold our return to the lender in 2014.

Topline growth from new properties and rent increases during the first quarter were muted by lost income from store closures. A strong first-quarter sales growth resulted in an increase in percentage rents of $0.5 million. Interest expense declined as a result of interest rate savings achieved as we retired secured loans and replaced them with unsecured bonds.

Property operating expenses and maintenance and repairs compared favorably with the prior year. These expense improvements were offset by an increase in real estate taxes and G&A expense. G&A as a percentage of total revenues was 6.6% for the quarter compared with 5.7% in the prior year. G&A increased in the quarter primarily due to a one time Company-wide bonus paid CBL employees for significantly exceeding NOI budgets in 2014.

We expect G&A expense to moderate throughout the remainder of the year. Our cost recovery ratio for the first quarter was 95% compared with 93.2% in the prior-year period, primarily due to lower snow removal expense in the current quarter. Same-center NOI growth in the quarter increased 60 basis points for the total portfolio and was flat in the mall portfolio.

Our growth and same-center NOI would have been over 2.5% as we lost $3.6 million from recent bankruptcy activity. For the same center portfolio we experienced topline growth, revenue growth of $2.9 million which included a $0.9 million increase in base rent, a $0.4 million increase in percentage rents and a $1.5 million increase in tenant reimbursements. Property operating expenses increased $0.8 million primarily as a result of a $0.4 million increase in bad debt expense and $1.1 million increase due to insurance adjustment recorded in the prior-year period.

Real estate tax expense increased $2.3 million, a portion resulted from a tax refund received in the prior year. Maintenance and repair expense declined by $1.2 million primarily as a result of a point $0.5 million decline in snow removal and other expenses.

As Stephen reviewed earlier, we are making progress in releasing the spacious turnover through bankruptcies, as well as generating temporary income through short-term tenants. Most of the permanent leasing will take occupancy in late 2015 and into 2016.

We will have more clarity on the level of replacement income for 2015 as leases are signed and tenant opening dates solidified. Based on current progress, we remain comfortable with our guidance range. We are maintaining FFO guidance for 2015 in a range of $2.24 to $2.31 per share which assumes same center NOI growth in the range of 0% to 2%.

As compared with the prior year, occupancy will be down throughout the remainder of the year. With the gap lessening as we close in on the fourth quarter. Consistent with our practice, guidance does not include any future unannounced asset sales or acquisition.

As you know, one of our strategic priorities is to improve our balance sheet and lower our overall cost of capital. This year we had approximately $460 million of secured loans maturing for consolidated, wholly-owned properties. We expect to take advantage of open to par date, and repay these loans in the second and third quarter of this year.

The weighted average rate on these loans is 5.2%. We anticipate interest savings as we initially utilize all lines of credit to retire balances and then reduce the line through an unsecured bond offering. Additionally, all share of joint-venture loans maturing in 2015 total $230 million.

We plan to refinance these loans at open to par date with secured non-recourse mortgages. Based on the current interest rate expectations, we believe lower rates will be achievable, thereby reducing our overall cost of debt. We have reduced our total debt balance by nearly $30 million from year-end and $145 million from the prior-year period. A line availability of $1.1 billion gives us tremendous flexibility to execute our plan to convert secured debt to unsecured borrowings.

Our financial covenants remain strong with a fixed charge coverage ratio of 2.2 times, flat with the prior year period, and an interest coverage ratio of 2.8 times compared with 2.7 times. Secured debt to gross book value remained constant at 37% at quarter end. However, as we payoff secured debt during 2015, the ratio should improve to less than 30%.

I will now turn the call over to Stephen for concluding remarks.

Thank you, Farzana. Thank you again for joining us this morning.

Our entire organization is focused on executing the strategic initiatives we have set forth for our portfolio and our Company. We are confident that the opportunity to upgrade our tenant mix by replacing the vacancies created by bankruptcies will prove to be a net positive to long-term growth. We are now happy to answer any questions you may have.

We will now begin the question-and-answer session.

(Operator Instructions)

And our first question comes from Craig Schmidt, Bank of America, please go ahead.

Thank you. The significant lift in first quarter sales, it seems like some of it was the benefit of early Easter and other events, but what is your sense the sales could grow in the second third and fourth quarter?

Yes, good morning, Craig.

We are looking at consistent gains in sales, not as high as the first quarter because the first quarter definitely had the calendar shift in January which helped us and also the early Easter like you say, but we saw the benefit of lower gas prices and that's helping us.

So we're looking to the 3% to 4% range going forward for the rest of the year and we feel that with the stability in the economy that that should be a number that retailers should be able to meet.

Great.

And then just thoughts on possible JV with Sears holding, viewing your involvement in the past, sort of GCP and SPG are you contemplating that or for any reasons are you not?

We're talking to Sears. We continue to talk to Sears. We actually had seven stores in our portfolio that are going into the REIT, so we had a lot fewer stores then GCP and Simon.

And I know, just from conversation with Sears that their focus was doing some larger deals. Like 10 stores like they did with those two companies and we would have significantly fewer that we would be interested in doing a JV with them.

So we're talking with them and I think we'll see how the timing goes, but their stores that are both going into the REIT and also stores that aren't going into the REIT that we've identified that have excellent redevelopment prospects and we continue to think that we'll be able to partner with them, and have a good redevelopment program with those stores going forward.

Okay. Thank you.

Thank you, Craig.

And the next question comes from Christy McElroy, Citi. Please go ahead.

Hi, good morning everyone.

Just trying to get a handle on the mass around NOI growth. It sounds like a $3.6 million NOI impact in Q1 from the bankruptcy, I think, Farzana you mentioned that. And given that the full impact of the bankruptcies is $16 million annually, it sounds like there could be a little bit of a modest additional residual impact on lost rents in Q2, so it seems for NOI growth was sort of flattish in Q1.

Would you expect that Q2 same-store NOI growth could potentially get into negative territory? Can you maybe walk through that math a little bit?

Hi, Christy. Good question.

Yes, we did have approximately $3.6 million impact in the first quarter, that's net off of -- net of bad debt expense that we had related to those revenues. However, second, third, and fourth quarter we think, the net impact to NOI would moderate as we bring in specialty leasing and temporary leasing as well as some permanent leasing will happen. The stores will open.

However, we should see a negative same center NOI next quarter so I don't necessarily think that over the entire period of time we should end up somewhere between the 0% and 2% that we have indicated.

Okay. So it should sort of start to improve from here as opposed to dip further and then improve?

Yes.

Okay.

And this is turning to the three assets that fell through. Stephen, maybe you could provide a little bit more color on what went wrong.

To what extent were the three assets maybe impacted the bankruptcy closings in the quarter, and did that play a role? Are the servicers becoming more wary about loan transfers on malls in this environment of heavier retail bankruptcies?

And then given that much of the buyer pool for these lower productivity malls are local, does that set back have you concerned about the future efforts to sell malls?

Yes, hi, Christy.

Let me try to answer those different questions although I'm not sure I got them all, but as far as this specific transaction, this was a regional buyer. We had informally marketed, they had come to us off market.

All three properties had CMBS loans in place and we went to the servicer and they came back and said that the buyer wouldn't meet their criteria for minimum at work. We didn't know up front what that criteria was. It was different servicers for different properties and like I said, we were disappointed.

We obviously tried to do what we could, but the servicers are not easy to deal with. I don't think they are any more difficult than they have been in the past. They are representing the CMBS owners as part of this and dealing with what they think their job is.

So, with this specific transaction, I don't think I would read too much into it. It doesn't set any trends or mean anything beyond what happened. It just didn't go forward and we still feel like each of these properties are viable sales candidates, that there will be buyers for them, that we have flexibility with the loans as they come due -- two of them.

One of the matures this year, one of them matures next year, so there's flexibility to either pay them off or try if we can -- we'll be more conservative with the next buyer, obviously, to make sure that they would satisfy network tasks, now that we have a better idea of what that would be if they want to try to assume the loans. So we're continuing to push forward on these three. As we are with all of the ones in the portfolio for disposition.

And just remind me, these 3 assets were not part of the original sort of 10 that you set out with a year ago? That you started at -- that you were at, different degrees, actively marketing?

That's right, these were part of the group of 21 and we had this buyer come to us really without marketing the properties, and we were hoping the transaction would go through and unfortunately, it didn't.

Thank you.

Thank you.

Your next question comes from Jeremy Metz of UBS. Please go ahead.

Hi guys good morning.

Just following up a little bit on Christy's question. With the recent sale, the three mall package falling out of contract, can you just give us some color today as you sit here one year later just how the transformation process has gone versus your expectations last year when you announced it? Do you still feel confident in being able to achieve all the remaining sales in the next 12 to 24 months?

Well, we knew upfront that it wasn't going to be easy. We said it was going to take two to three years and it's been exactly what we thought it would be.

We've got two of the malls we sold. One of them we eventually sold it to the fourth buyer after going under contract three times. Madison Square was the third buyer after going under contract twice.

So we never thought it was going to be easy. We never said was going to be easy, but we are fully committed to getting it done and we're confident that we will get it done in that three-year time frame, two to three-year time frame that we said we would.

And we've got discussions going on other malls, like I said during my remarks, but we're not going to announce anything until we feel like it's real and at that point will communicate more details as to the next group of transactions.

So it's not necessarily then been harder than maybe your expectations were it's as difficult as you thought it could be when you started out?

I mean, look, you always hope that things will go easier and smoother, but you know, we also didn't expect it would be easy. And we're not the only ones that have gone through this or are going through this and it's just the market is out there and there are buyers that are interested in these properties, but it's a lot of work to get through the process.

Okay. And then just one for Farzana.

You mentioned paying out some of the secured loans coming due with an unsecured. Can you just talk about where an unsecured deal would price today? And then just as we think about absolute levels of proceeds versus paying offers to bond offering, you expect that to generally be neutral?

Hi, Jeremy.

Yes, we should -- our bonds are trading less than 4.5% today, but the 10 year treasury is moving up and down depending on however that treasury ends up. We hope that we would be around 4.5%, 4.6% in that range. That's our expectation and anywhere from $350 million to $400 million would be your expectation for new bond proceeds.

And that should pretty much clear the secured debt that we expect to pay off. And we will be better in terms of interest rate, weighted average interest rate in a month that we are paying off at 5.2% if we say 50 basis points 60 basis points that will be positive.

And on the unconsolidated, do you see any issues of being in the refi those with similar proceeds to what is coming up?

No worries because we have Oak Park that's coming up and that is a phenomenal asset for us, so we should be able to save quite a bit interest savings on that; it's at 5.85% and we should do much better on that one.

Okay. Thank you for the color.

Thank you, Jeremy.

And the next question comes from Carol Kemple from Hilliard Lyons. Please go ahead.

Good morning.

What was cap rate on the Madison Square, Mall sale?

Yes, good morning, Carol.

It wasn't sold on a cap rate basis, just given the declines in NOI that it has seen and the vacant anchors. Is was really sold as a redevelopment by the buyer that purchased it.

And then I know last you talked about wanting to announce a couple new outlet projects this year. Are you close to having any new construction? Besides expansions in the outlet space?

We are getting closer. We are not there yet in terms of the pre-leasing and as a reminder, we look to have in the 50% to 60% pre-leasing range before we announce a project and formalize the partnership with Horizon. So we're getting there.

We've got the convention in Las Vegas coming up in a couple of weeks and that's a great opportunity to work with retailers in trying to push the deals that we need to, across the finish line. So we feel like were going to have some announcements to make.

And then like I said, we have the outlet expansions that we've been able to go forward with, with two of the projects that are under construction and leasing demand continues strong in the outlet sector.

Okay. Thank you.

And the next question comes from Mike Mueller from JPMorgan. Please go ahead.

Yes, I apologize if I missed this earlier in the call, but where do you see occupancy ending 2015 relative to where it ended 2014?

Oh, Mike this is Katie.

It will be down year over year. We didn't give a projection because we're still waiting, as Farzana mentioned in her comment, which I think you might have missed, we're waiting for some of the leases to solidify to see whether they're going to be taking occupancy this year or if it will hit in the first quarter. So that will really have a little bit more clarity after the second-quarter results coming.

Okay. Does your gut tell you at this point that you'll make up half of the vacancy or half of the gap, the year-over-year gap that we're seeing in Q1? Do you think you will make at least make that much up by year end?

Yes, I think we're estimating at this point maybe 100 to150 basis points down, but again, it is very early for us to tell.

Okay, that was it. Thank you.

Thanks.

And the next question comes from Jeff Donnelly from Wells Fargo. Please go ahead.

Good morning, guys.

Actually, if I could circle back to the question on Madison Square. I know it's not a representative asset and like you said it wasn't sold on a cap rate basis. But do you have a sense of what the new owners specific plans were or are I should say? And is a fair to say that we sold at something close to land value?

I'm just trying to pull something from this that maybe it's applicable to other assets out there.

Yes, good morning, Jeff.

Madison Square, we owned the mall portion, but there were also, four other owners of properties there, so the buyer has closed on the mall from us. Now they're talking to the other department stores or former department store owners to aggregate their parcels and their plan is to work on a redevelopment.

We don't know what their plans are. The mall is located right across from the research park in Huntsville, which has a lot of defense companies that are based there. They do research around the space program.

They partnered with the city and we've worked with the city over the years too, but given that location, I would expect that there would be some extension in terms of office there. And it's not going forward, a retail location and from a malls point of view there might be some service retail, but that was really the primary reason that we sold it versus pursuing a redevelopment.

That's helpful.

And to switch gears just with ICSC coming up on us, I'm just curious, are you guys going into that with any source specific plans or goals or objectives where you are saying to your leasing people or your transaction people that we need to achieve sort of X going into this event? Or is that so much not of a focus?

Well, we have approximately 175 spaces that are vacant now that weren't at the beginning of the year. And, like I said, we've made some progress but that's really priority one is backfilling those spaces and working with retailers to backfill as many of those as possible.

We don't have a goal necessarily of 100% and we haven't said it's at least 50% of those, but that's the focus, is backfilling those spaces with good quality retailers. And it's interesting, of the spaces that we've done leases with, it's been spread across a broad variety of retailers and uses, so like I said in my comments, we'll end up ahead of the game through this. It's definitely painful from a short-term perspective, but down the road we feel like we'll have positive leasing spreads and also a better quality mix going forward.

Great. Thank you.

Thank you.

The next question comes from Todd Thomas from Key Bank, please go ahead.

Hi, thanks. Good morning.

Just first, following up quickly on trajectory of NOI. I just want to clarify something just to sort of help manage expectations going forward.

Farzana, you're comfortable with the 0% to 2% range for the year, but next quarter could get a little worse with same-center growth heading in the negative territory you're not anticipating that? I just wasn't clear on what you're thinking for the second quarter.

Todd, hi, we look at full year. It's not a quarter-by-quarter business, so you know, it just depends on how our releasing efforts come in to play. We have backfilling with temporary leasing and we expect -- we don't know what the opening dates would be for the executed leases for permanent leasing.

So depending on how the cash flow comes in from all of this, that might be a quarter -- on second quarter, that might be an impact, but I think our goal is for the full year. We are looking at the full-year from 0% to 2%, so that's what we are hoping to get, to the higher end as opposed to being at the lower end.

Okay. Got it. Just looking for a sense of what the trajectory might sort of look like.

And then in terms of Sears, just sort of curious what you think the REITs spin-off really means for your business overall? How do you think it impacts both the stores going into the REIT -- that are going to be contributed and the stores not going in? I mean what are your thoughts overall?

I think it's a real positive because I think indicates that Sears is willing to redevelop most of their locations. The ones that are going into the REIT are going in for, I think, financial reasons, they can maximize the proceeds that they are raising through the REIT and they're leasing them back. But I think it just signals a willingness the part of Eddie Lampert and the Sears organization to tap into the real estate value.

And from our point of view, we're happy to do it as a venture with them. We are happy to do it on our own. We bought two stores. We've leased back portions of stores, we're flexible, but the most important thing is to have more traffic and more sales coming from that portion of the mall and [sit] positive in that direction.

Okay.

And then my last question on page 25, the commencement schedule that you provide, and the 2016 commencement bucket, what's driving big gross rents there, the mid-$70 numbers? Is that attributable partially to the Cool Springs redevelopment or is there a mall or two to that's impacting that? Just curious.

Those a pretty big numbers, much higher than the portfolio average. I was wondering if you talk about that?

Todd, we will get a list of the stores that are in there. I think it's only eight leases and I think it's a couple of restaurants and higher dollar square foot. I mean it's only 13,000 square feet, too, so that's playing into as well as small space.

Okay. All right, thank you.

The next question comes from Omotayo Okusanya Jefferies. Please go ahead.

Yes, good morning.

My question is focused on around retail. First of all, trying to get a sense for retailers interested in taking some of the vacated space.

Just a general sense of the profile of those kind of retailers, are they generally new retailers looking to get into the market? Are they people you have existing relations with looking to expand into the markets? Just trying to get a general sense of that.

And then second of all, if there are any new tenants that could potentially be on the quote-unquote watch list.

Good morning Taiyo.

Just as far as your first question, it's a really a wide range of tenants and it's not just retailers that we're working with as far as replacements. For example, we've got hopefully another Cheesecake Factory that will take part of one of the bankrupt spaces that we were able to get back.

Several of them are going into H&M deals that we're working on. Some of them, actually we took at of this year's budget because they were part of the 2015 H&M deals.

And then there's some companies that we haven't done a lot with in the portfolio, but we are doing more like Windsor fashion, Vans, a couple of juniors that are expanding and doing well like Tilly's and Zumiez. There's some women's fashion stores like Apricot Lane. Fitness is a use that we're adding depending on the location and we have a couple of Planet Fitness locations.

So it's really a combination of different retailers and different uses, and for the most part, they are companies that we do have in the portfolio, but we're growing our presence with them.

Thank you. And then also on the watch list side anything new?

You know, the benefits of the bankruptcies is it cleared a lot of our watch list. We're still working with a couple of juniors, Aeropostale and A&F are the ones who sales have been suffering the most.

We don't think they are necessarily bankruptcy risk, but they have indicated that they are continuing to close stores. Aero closed PS by Aero,19 stores in our portfolio in January, and we knew that was coming, but that was something that lowered our exposure to them across the board.

And then we've also been watching some of the children's stores that didn't have a great year in 2014. Gymboree and Children's Place, but Gymboree at least has bounced back.

And also in the juniors, American Eagle, which had sales decreases the past couple of years has had a nice rebound and is seeing some good results, so that will just give you some color on that.

Got it. Thank you.

Thank you.

And the next question comes from DJ Busch of Green Street Advisors. Please go ahead.

Thank you.

Stephen, I think Macy's recently announced that it's entertaining the idea of introducing an outlet concept or an off-price concept and that it won't necessarily be in new locations but in current locations. Also I think Ralph Lauren has toyed with the idea of opening some of its outlets in traditional centers.

Are you having these types of negotiations or conversations? And is it something that would make sense at maybe some of your only- game-in-town assets that may not have radius restriction type issues to deal with?

Well, we've seen it a little bit. Hey, DJ.

We've seen a little bit with a few of the specialty stores. We opened a J Crew factory in Chattanooga in Hamilton Place and it's done really well, and they tried that at a couple different properties. Express has opened their outlet concept in some traditional malls just to see how that did and tested and according to them it's doing well.

My understanding for the boxes is for the most part those are going in open-air centers and not in the malls, but that's something as we look at Sears redevelopments and areas like that, that definitely is an opportunity.

We've talked to Macy's, we've talked to Nordstrom Rack and we're talking to the other users and they're not just looking at outlets definitely. Even Saks Off 5th started at outlets, but most of their expansion now is not outlets because they see a real opportunity there.

And how careful are the retailers being, or how careful as a landlord do have to be as far as kind of mixing those two channels together under one roof?

I mean, you have to be careful especially with the department stores that you are not cannibalizing their brands from a price point of view, but it's still so early and so small. I think it's more of an experimentation phase right now.

Okay. Thank you.

The next question comes from Colin Ming from Raymond James. Please go ahead.

Thanks and good morning.

Just two quick follow-ups here. As it relates to backfilling some of the new vacancies. Have you noticed a discernible difference across your different productivity tiers as it relates to either the success attracting new tenants or on rent spreads?

Yes, good morning.

We do see stronger lease grads at the tier one centers compared to tier two and tier three, so that's going to be the trend with the replacements as well. But we've seen activity across the board. It really just depends on the types of uses.

I mean the Cheesecake is in a tier one mall but some of the other uses are interested in the tier three malls and the rents are lower and as long as they are getting the right cost deal, then it's attractive for the retailer.

Okay.

Is there a particular -- as you think about the trade-off between maybe just backfilling the space to get the occupancy versus trying to hold out for a higher quality tenant or a potentially a positive leasing spread? How are you thinking about that trade-off?

You know, that's definitely a trade-off. We do have a really active specialty leasing program that puts in temporaries and that's a part of this that I haven't talked about, but that's really the best way to bridge the gap this year because like Farzana was saying, most of the retailers, the permanent replacements aren't going to come online until fourth quarter or even first quarter next year. But we are looking at quality and upgrading as part of this.

And it's not just about filling the space with any living, breathing retailer. So that is a part of this. We want to get also positive lease grads and get the right economics. If we have to invest TI want to make sure it's a strong company going forward, so that's an important part of this.

And were at a good point in the cycle in terms of retail demand. There are still really no new construction on the mall front and so, we're seeing good demand and we think, Iike I said, net-net we'll be ahead of the game at the end of this.

Okay.

And just clarification. As it relates to Sears are you looking at potentially doing a direct investment in the REIT like some of your peers, or just looking at potential JV deals with some assets?

Just potential JV deals on assets.

Okay. Alright, thanks good luck in the quarter.

Thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to Stephen Lebovitz for any closing remarks. Please go ahead.

Thank you again for your participation this morning. We look forward to seeing many of you out in Las Vegas at recon and then at NAREIT in June.

Thank you and have a good day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.