CBL & Associates Properties, Inc. (CBL) 2016 Q2 法說會逐字稿

Good morning and welcome to the CBL & Associates Properties, Inc. second-quarter earnings conference call.

(Operator Instructions)

I would now like to turn the conference over to Scott Brittain of Corporate Communications. Please go ahead.

Thank you and good morning. We appreciate your participation in the CBL & Associates Properties, Inc. conference call to discuss second-quarter results. Presenting on today's call are Stephen Lebovitz, President and CEO; Farzana Mitchell, Executive Vice President and CFO, and Katie Reinsmidt, Senior Vice President of Investor Relations and Corporate Investments.

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. We direct you to the Company's various filings with the SEC for a detailed discussion of these risks.

A reconciliation of non-GAAP financial measures to the comparable GAAP financial measures will be included in today's earnings release and supplemental that is furnished on Form 8-K and available in the investing section of the website at cblproperties.com.

I will now turn the call over to Mr. Lebovitz for his remarks. Please go ahead, Sir.

Thank you Scott, and good morning everyone. I'll start with a brief comment on the SEC investigation before we move on to our performance for the quarter. The process is ongoing and we hope to make an announcement in the near term. We remain confident in a positive resolution and assure you we are making the utmost effort to put this behind us as quickly as possible.

Given the sensitivity of the situation, we will not be making additional comments at this time. We appreciate your understanding and ask that you limit your questions today to our results and operations. With that said, I'll move on to what we are really here to discuss, our results for the quarter and outlook for the future.

I have good news for you this morning. Our second-quarter results were excellent across the board. We built on the strong momentum established in the first quarter, with portfolio same-center NOI growth of 3.4%, including a 3.2% increase in the malls. This is the highest increase in same-center NOI we've had in recent years.

Adjusted FFO was also well above expectations, growing 9.3%, to $0.59 per share. Our success this quarter is due to the hard work and focus of the CBL team, the stability and upside potential of our market-dominant properties, and the impact of progress we've made in our portfolio transformation strategy.

Operational improvements were led by a steady climb in occupancy, with a 150 basis-point increase in our same-center mall portfolio to 91.7%. Overall portfolio occupancy increased 160 basis points to 92.6%. We leased approximately 1.5 million square feet in our portfolio this quarter, including 473,000 square feet in our mall portfolio, a 27% increase over Q2 2015.

Average lease spreads for the quarter increased 7.8%. New leasing spreads continue to be strong, posting an increase of 26%. Renewal spreads improved over the first quarter and were essentially flat.

Our rolling 12-month same-center sales increased 1% to $377 per square foot, although we saw weaker results in the second quarter. The primary driver of the deceleration is a few malls located in energy-sensitive markets and border markets. We have seen a recovery in sales in July, and expect a flat to slightly positive sales environment for the remainder of the year.

Moving to dispositions, we have now sold five regional malls year to date, including the sale of two tier 3 malls last week. Fashion Square in Saginaw, Michigan and The Lakes in Muskegon, Michigan were sold together for $66.5 million. The buyer assumed a $38.2 million loan secured by Fashion Square as part of the transaction. With these sales, we have now completed transactions on 11 malls over the past 18 months, which will increase to 14 as we complete the lender transactions on Chesterfield, Midland Mall, and Wausau Center.

Additionally, we have several properties being marketed and in various stages with interested buyers. We are pushing hard to be in a position to make additional announcements as we progress through the year.

We also sold two community centers during the quarter, Renaissance Center in Durham, North Carolina was sold for $129 million, or $64.5 million at our share. We also sold a grocery-anchored strip sitter, The Crossings at Marshalls Creek for $22.3 million. Altogether, we have completed $160 million in community center dispositions at our share since announcing the program in the third quarter last year.

These transactions have been executed at very attractive pricing. As we have taken -- as we take advantage of the strong demand for high-quality centers. We are working on additional community center and non-core asset dispositions, which we will announce as they are completed.

The progress we have made on our portfolio transformation strategy is significant, and it's worthwhile to review the milestones we've achieved. In April 2014, when we announced this strategy, 22% of our mall NOI was generated from tier 3 and non-core assets. With recent dispositions and pending foreclosures, we will reduce this to below 10%, which has been our stated goal.

Additionally, our Tier 1 NOI contribution has grown from 31.4%, to more than 43%. We've made meaningful progress towards achieving our sales goal of $400 per square foot, increasing from $356 to $379 per square foot.

The headway we've made has also had a beneficial impact on our balance sheet. Since announcing this strategy, our debt has been reduced from $5.5 billion to $5.1 billion, and our debt to EBITDA has improved from 7.2 times, to 6.6 times. These are substantial accomplishments that have resulted in CBL becoming a stronger company and we are not done.

We are investing much of our free cash flow into upgrading our existing higher-gross centers, improving our properties and deleveraging. Over the past three years, we have completed or have underway 24 large redevelopment projects, and have opened more than 94 box and junior anchor stores, and more than 60 restaurants.

While we still have work to do, we have made dramatic progress, especially given the various challenges in the markets. We are pleased to share this progress and demonstrate clearly this quarter how our strategy is having a positive impact on our results.

I will now turn the call over to Katie to discuss our current redevelopment pipeline in more detail.

Thank you Stephen. A key priority for CBL is investing in our existing properties, primarily with our substantial free cash flow. These expansions and redevelopment projects are significantly broadening the uses at our shopping centers as they evolve to meet the changing consumer preference.

We are offering more entertainment, more lifestyle and fitness retailers, more dining and in general a broader selection of offerings. In many cases we are replacing former under productive anchors to accomplish this. We have a number of projects underway that I will take a few minutes to review.

At Friendly Center in Greensboro, we are adding West Elm and Pieology, as well as Cheesecake Factory in a freestanding location. The new stores and restaurants will open later this year. We've also started construction on our expansion project at Mayfaire Town Center, in Wilmington, North Carolina, bringing H&M, Palmetto Moon and West Elm to market.

Construction recently started on the redevelopment of the former JCPenney at York Galleria in York, Pennsylvania, which will include a new Gold's Gym, H&M and additional stores and restaurants. H&M is scheduled to open ahead of the 2016 holiday season, and Gold's Gym will open in spring 2017. We are under construction on Dick's and ULTA in the former JCPenney at College Square in Morristown, Tennessee, where we proactively negotiated a lease termination last year.

At Northpark Mall in Joplin, Missouri, we are replacing a former Shopko box with an 80,000 square-foot Dunham Sporting Goods. Those projects will open this year. We recently opened a new Ross and ULTA the in the former JCPenney location at Randolph Mall in Asheboro, North Carolina and we have one ground-up development in process.

Construction is continuing on the outlet shops at Laredo our newest 65/35 joint venture with Horizon. The 350,000 square-foot center will be the only outlet for 180 miles, serving as a regional destination as well as providing a value shopping option for the 4.5 million people living in Monterrey, Mexico and the nearly 1 million people living in Laredo, and Nuevo Laredo. The center features an excellent lineup, including Michael Kors, Brooks Brothers, Nike, Under Armour and Puma.

We are 75% pre-leased, and look forward to a strong opening in spring 2017. We're pleased with the positive results from our redevelopment and expansion programs and will continue to prioritize it throughout our portfolio.

I will now turn the call over to Farzana to discuss our financial results.

Thank you Katie. Second-quarter financial results were outstanding, with adjusted FFO increasing 9.3% to $0.59 per share. The major driver of our growth this quarter was higher top-line revenue from occupancy increases as well as rent growth. Percentage rents increased $0.3 million as sales grew. Interest expense declined by more than $5.6 million due to our lower overall debt balances and a 29 basis-point improvement in our average borrowing rate.

Operating expenses, and maintenance and repairs were also lower compared with the prior-year period. We recorded a $1.1 million in professional fees related to the investigation and related litigation in the quarter. We have excluded the expense from adjusted FFO since this is a nonrecurring item. Adjusted FFO also excluded the increase in equity and earnings for the completed foreclosure of Gulf Coast Town Center.

Net of nonrecurring fees, G&A for the quarter was $15.4 million or 6% of total revenue for the quarter, compared with 6.4% in the prior-year quarter. Our cost recovery ratio for the second quarter was 106.7% compared to one of 103.5% in the prior-year period due to lower expenses. Same-center NOI in the quarter increased 3.4% for the total portfolio and 3.2% in the mall portfolio.

Total revenue growth of $5.6 million was fueled by higher rents from occupancy increases. We had a net decrease in expenses of $0.5 million, with improved operating expense offset by higher real estate taxes.

Based on second-quarter results and our current outlook for the remainder of the year, as well as dilution from recent asset sales, we are increasing our FFO guidance to a range of $2.36 to $2.40 per share. This new guidance range assumes an increase in the same-center NOI growth range of 1.5% to 2.5%. Our guidance also assumes an increased occupancy assumption of a 75- to 125 basis-point improvement to stabilize mall occupancy throughout the year, and does not include any unannounced disposition or capital markets activity.

2016 is a transformational year for our balance sheet. With the equity raised and debt assumed by buyers in dispositions, and reductions from lender transactions, our total debt balance is more than $385 million lower than the prior-year period. Additionally, our rolling 12-month debt-to-EBITDA multiple improved to 6.6 times at June 30, from 7 times at the end of the prior-year period.

Our average borrowing rate continues to improve as we refinance maturing loans at lower rates. In June we closed on three non-recourse secured loans totaling $227.7 million with a very attractive weighted average from fixed rate at 3.9%, with a weighted average term of nine years, these loans extended our maturing schedule and contributed to lower long-term borrowing costs.

I'll take a minute to walk through the activity we have on properties on our non-core list. We have engaged with a servicer to move towards foreclosure for the loans secured by Chesterfield Mall and Midland Mall. We are targeting completion by year end.

Additionally we have decided to return Wausau Center to the lender. The property is secured by non-recourse $17.6 million loan. We have been working with the city on our redevelopment plan for the property, but determined not to move forward when returns didn't meet our threshold. As a result, we recorded an impairment charge of $10.7 million during the quarter.

With the conclusion of these foreclosures and the recent asset sales, our debt balance would be further reduced by $250 million, bringing the total reduction compared with the year end 2015 debt balance to over $555 million. During the quarter, we utilized disposition proceeds to fund the payoff of four loans on two malls and two associate centers, totaling approximately $100 million. At June 30, we had over $711 million available on our line, with the dispositions completed last week increasing the availability further.

Our remaining 2016 maturities total only $134 million. We have a $71 million loan secured by Green Briar Mall.

We are in discussions with the lender and are seeking to extend the maturity and utilize free cash flow to invest in new leasing at the mall. It is a solid tier 2 center and we hope to conclude a favorable restructure with the lender.

The remaining two maturities include a $65 million loan secured by Dakota Square and a $7 million loan secured by Governor Square, and unconsolidated property. The debt yields on these loans are well north of 20%, and we plan to retire this loan and add Dakota Square, a tier 1 mall to our unencumbered pool, utilizing our line.

As we look forward in 2017, we are in a great position with our balance sheet. We have tremendous flexibility to address our maturities, utilizing the most favorable source available. We have reached a number of near-term goals with regards to our unencumbered pool and have the optionality to refinance maturing debt or add high-quality properties to our unencumbered pool.

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

Thank you Farzana. 2016 performance year to date has been exceptional. We're focused on continuing the strong results in the second half. We've made great strides towards achieving our strategic objectives this year.

Our balance sheet is stronger and more flexible, and as our stellar results this quarter demonstrate, our portfolio is higher quality and higher growth. We are positioning the Company to not only perform well today, but to perform well over the long term.

Thank you again for joining us this morning, we will now take questions.

Thank you.

(Operator Instructions)

Our first question will come from Todd Thomas with KeyBanc Capital Markets.

Hi thanks, good morning. First question on the renewals, you know, you mentioned there was an improvement from last quarter that still a challenging environment. Were there any portfolio deals done in the quarter, and do you see the pressure on the renewal side easing at all or should we expect that to be ongoing?

Good morning Todd. So yes, like I said, the renewals spreads did get better this quarter over the first quarter, and we are also continue to increase our rental amounts and our average rents. And that's a positive that gets reflected. Like we've said for the past two quarters, we anticipated that renewal spreads would be tougher this year compared to last year.

There are some portfolio deals, primarily with some of the juniors whose struggles have been well-documented and well-publicized, that have created some challenges. But we've had a lot of positives and we're seeing a lot of strength out of other categories to offset it. The other thing we've said is that our priority is occupancy and NOI, and we're not as focused on lease spreads. And so those are really the primary drivers that we are looking at.

As far as looking ahead to the rest of the year, I'd say we expect some improvement similar to what we had this quarter over first quarter. But it will still be a comparable environment. There's still some retailers that are trying to improve their sales, but they haven't yet. And as those renewals come up, that impacts our negotiations. We don't have as high a degree of renewals over the rest of the year as we do in the first half. And our new leasing spreads have been really strong and we look for that continuing. So you know, overall we feel really positive about where we stand.

Okay. That's helpful. And then in terms of the sales environment, you noted sales were a little bit weaker in the quarter but recovered in July. Can you just provide a little context around that in terms of the trends that you saw through July. And I think in the past you've talked about quarterly comp sales growth. Are you able to share what that was in the quarter?

Well, not exactly. Although, you can do the math and get a sense that second quarter had decelerated from where we had been over the past year. Just given where we ended up on a rolling 12 months compared to where we were at the end of the first quarter. And like I said, there were really a few malls that were, our border malls, or in some of the energy-sensitive areas, North Dakota, Texas, where the results from the economies there drag down our overall portfolio. And for the most part across most of the portfolio, we're seeing pretty good stability on sales. I wouldn't say it's robust growth, but it's consistent growth.

So you know, taking those outliers out, the results are pretty good. But obviously we include everything, and one of the things is that, we're almost through the full year of impact of lower oil prices and the stronger dollar. So as the year continues, we should see some stability there. One other point to make is last year we had really strong sales growth across the board. So the comps are tougher that were coming up against. That's a factor as well.

Okay. And then just shifting over to the balance sheet, one question Farzana, you have the Series D preferred to outstanding. There's a 7.4% yield. Those are redeemable. Is that something that you could chip away at with the new issue? It looks like the Series E preferreds are trading at [6.6%]. Just curious if there is any sense of where you'd be with the new issue today?

Well, in order for us to redeem them and reissue, we really need a meaningful spread differential. So at the moment, we don't see that. It is improving, definitely. The preferreds are coming back in strong. There's a lot of demand. We will continue to look at it in the future and we are monitoring it. But we haven't made any decisions today.

Okay. Thank you.

Thanks Todd.

The next question comes from Christy McElroy with Citi.

Hi. Good morning everyone. Stephen, you mentioned in the remarks that you're pushing hard to be in a position to make additional announcement on asset sales. You also said in the release that you expect an acceleration into the back half of the year. That seems like a little more of a positive outlook for sales than it has been recently. Can you give us a sense for anything that's changed in recent months, whether it's buyer demand or deal financing or your willingness to be more flexible on price?

Well, a couple of things I'd say is, first of all as we've maintained from day one, price has not been the obstacle to any transactions. It's been having buyers on the other side that can execute. And we've been at this over two years, and it takes time, and we're finally seeing the results that we've been talking about.

We sold five malls this year. We've got different properties at different stages of negotiation with buyers. It's still very difficult to get a loan assumed. The Fashion Square loan, that whole transaction took about six months longer than we thought it would, but we got it done. And I think that's what counts.

You look at what we've accomplished, and it's damn good. 11 of the 25 malls in that original portfolio are now taken care of. And it will be 14 when you include the three we are working with the lenders on. So we've made huge progress, and like we said from the beginning, we are going to execute on this program and get it behind us as quickly as we can.

What were the cap rates on the deals that you just announced?

We don't give cap rates on the transactions. They are market transactions. And you know, that's really what we're working with on all these transactions. We've done better than certain of our peers in our execution. We've been able to find the right buyer. On Bonita Lakes, we found a really strong local buyer, and it was a good execution and we are pleased with the cap rate there. The two that we just announced again, we haven't stated the cap rates but, given those properties, given where the trends are, we feel really good about where we executed the deal.

Can you give or range where it falls sort of, you know, upper single digits, double digits, low double digits, high double digits, and just a sense for what the buyers are doing with those assets?

How about double digits? What was the second question? I'm sorry.

Just are these buyers, are these assets being purchased for a reposition, are they planning on operating these as ongoing entities?

I mean the buyers on Lakes and Fashion, they are opportunistic buyers. They've bought other malls over the past few years from peers in the business. And I think for the most part, they're just planning to continue to run these properties. There's not major repositioning involved. It's just more, holding NOI at levels where it is, blocking and tackling, expense management, and I'm pretty sure that's their strategy.

But I'm really speaking for them, and from our point of view, these were tier 3 properties that were part of the pool that was slower growth. It's not, as we've said, these are stable but they didn't have the growth profile that we wanted as a company, so it made sense for us to sell them.

All right. Thank you.

Thanks Christy

Our next question comes from Caitlin Burrows with Goldman Sachs

Hi, good morning. I was just wondering if you guys could comment on your occupancy, which was obviously up nicely this quarter. On the types of tenants that are filling that space, to what extent they are traditional retail and/or whether it's movie theater, restaurants or some other types of uses if that does happen.

Good morning. It really is a combination of users and that's one of the benefits. Like we said when we had the bankruptcies last year, it was short-term pain but over the long term we are better off. We've got more of a diversity of uses, a diversity of users. H&M is someone that we've continued to do business with, and they are having great results in our markets and we are adding with them. Elle brands, with Victoria's Secret and Pink, and White Barn Candle and Bath and Body Works has been repositioning stores, and taking some of the vacant spaces and expanding, and they're doing very well.

American Eagle and Aerie have had a really strong comeback. They were struggling a couple of years and their results are good. And Aerie has been expanding. But it's been other, it's been cosmetics and that category, whether it's Sephora or ULTA.

The shoe category, athletic shoes and footwear has been strong. Jewelry has been strong. Hot Topic, Torrid, they been doing very well. So we've been expanding, and then there's also regionals like Altered State that were doing more business with, and they've got a great concept.

And then even some strong local users that have either online presence or local boutiques, and they're looking to expand into the malls. We're opening a Cool Springs in Nashville just in a couple of weeks. The store Rock Creek Outfitters that is a store out of Chattanooga that's expanding across Tennessee and more in the Southeast. And sporting goods, that's a category, and outdoor-oriented and fitness. So it's really a combination that were seeing.

Okay. And then maybe for Farzana on the capital markets side. What do you see as the potential for doing a debt offering?

Hi Caitlin. As I mentioned in my prepared remarks, we are opportunistic. Our debt balance sheet is in an excellent position now, and by year end it will even get better. So we have the option to access the best source of capital that we see. We have loans coming up next year as well. We have the opportunity and they are all strong assets. And whether we pay them off or whether we get secured financing, it will just depend on what capital access we have.

We hope that with all the credit metrics improving and our balance sheet improving and the strong performance we've had thus far, and continuing with that performance, that we will be able to access the public bond market as well. But sometime in 2017, if something comes up and we have an opportunity this year, we will look at it.

Okay and then last, on the share buyback side, do see any potential for that?

Yes Caitlin, we're really happy with the progress we are making on our balance sheet, in terms of the deleveraging and improving the credit metrics. And even though our stock is undervalued and at a discount to NAV, the balance sheet is the priority in terms of improvement. And so the stock buyback, while it's still out there, unless we have some kind of major transaction on the dispositions front, that's not something we are likely to execute on near term.

Okay. Thank you.

Thanks.

The next question will come from Craig Schmidt of Bank of America.

Good morning. I'm wondering, we've had a relatively benign year from Sears and JCPenney store closings. I just wonder if you think that continues maybe for the next nine months?

Good morning Craig. I think it will. JCPenney has had continued strong results, growth in sales, growth in profits, and they've made the statement that they are not looking to close stores. The are looking to grow their revenues and grow their profits, and their stores are profitable. They did some closings, but that's behind them. And then Sears is focused on Kmarts, and that's where the majority of their closings are. And the conversations I've had with their Head of Real Estate and their real estate people is that they're not looking to close Sears stores.

Okay great. And just, the increased pace of being able to sell the assets, has there been any change that you would point to, or is it just persistence and that you have finally gotten through.

You know it's really persistence and time. And unfortunately these transactions take longer than we wish they did. But we've been working at it for some time and now we're starting to see the results, we haven't changed any criteria, we haven't changed any people. We've been focused on it for a while and now we're seeing good progress.

Okay thank you.

Thanks Craig.

The next question will come from Jeff Donnelly of Wells Fargo.

Good morning guys. On Aeropostale, can you update us on your exposure to their announced store closures, and maybe any advances you've made with those spaces?

Yes, at the end of the quarter, we had 68 Aeropostales. There are few that, it will be a little less because of some of the dispositions that we've made. And then, that will bring it down to 65. And of those, eight will be closing this year. We anticipate, like we said last quarter that, the hit to NOI will be roughly $2 million for the year.

So, I mean one of the reasons that when we did our guidance for the rest of the year, we're going to start feeling the impact of some of those closings, and the rent reductions in Aeropostale because of the restructurings from the bankruptcy there. So that's an impact that we are going to start to feel. And then PacSun and Sports Authority and the bankruptcies that happened earlier this year are going to start flowing through to our revenues as we get into the third and fourth quarter.

Which brings me to my next question, as compared to the results that you posted in Q2 for leasing spreads and same-store NOI, how should people be thinking about how those numbers look as we roll into Q3 and into Q4? Are you able to be that fine with your guidance?

Well, we did the overall, let you know what the full-year guidance is, and we do have Q3 last year was flat but, or Q4, had a robust 2% growth. So that's a tough comp. But as Stephen pointed out, these bankruptcies and the store closure impact will be felt more in the second half of the year. So it will moderate from the strong quarter we've had this year, in this quarter and last quarter, which is fantastic. And we hope to continue with that momentum, but it will moderate some, primarily because of these impact of the bankruptcies and the store closures.

Okay. A question on your remark about energy markets. You're talking about the deceleration we're seeing in, I think it was North Dakota and some markets in Texas. Have you seen that actually manifest itself in either leasing appetite or even weakness in sort of leasing terms, or is it really just kind of a sales issue at this point?

It's really sales. Actually the leasing has been strong and we're doing a redevelopment, expansion at Dakota Square in Minot, we're adding some good tenants there and we've got strong demand. We've got some other retailers that want to get in them, those markets and those malls, that we're trying to figure out a way to accommodate them.

So the leasing demand is strong. We had a great run up over the past three years. And now on the downside it's come back down, but the levels are still strong, and occupancy cost is healthy, it's not out of line at all. It's just primarily sales.

And just the last question, and I apologize for not heeding your request. But I guess I want to ask: Is the reason behind your expectation for a positive resolution on the SEC outcome that maybe an internal review has not revealed any material disparity in reporting, so that's why you feel sort of confident here?

You know Jeff, like I said you know, we're just not going to make any more comment at this time. And we are pushing and doing everything we can to bring this to resolution. And we are confident that it's going to be positive and we want that to happen as quickly as we can. I wish today we had it wrapped up in a bow and we could tell you exactly that it's behind us. But it's not. And we're going to hopefully get there as quickly as we can, and believe me as soon as we have it behind us, we will tell you.

Thanks guys.

Okay thanks Jeff.

And our next question comes from Rich Hill of Morgan Stanley.

Hey good morning guys. Farzana, just to start, can you tell us what the sales per square foot on the properties that you financed in June?

Yes, I can. Fremaux Town Center and Ambassador, we don't really report the sales for those, they are large community centers. And Hamilton Place mall is a tier 1 property, over $400 a square foot I believe by year end. It was $402 at year end, that's right.

Okay, thank you. So going hand-in-hand with that, you guys have obviously made some pretty great success over the past couple of months in selling some of your tier 3s. How important do you think it is to the market right now to have assumable financing?

So sort of specifically thinking about Fashion Square and still having six years left on that loan. Was that something that was particularly of interest to your buyer? How should we think about that going forward? Are you going to be more apt to sell tier 3s with loans on them? How should we think about that?

I mean it really cuts both ways because rates are low today, and the debt markets have come back. The Bonita Lakes was free and clear, but buyers were able to get financing from a regional bank and you know, Fashion had the loan in place. I can assure you it was a lot of work to get that assumed, and prolonged the transaction. But given the terms of the loan, it was attractive to that buyer. And the rate was below 5%, so that was favorable to them.

So I guess the best way we think of it, it cuts both ways. And some of the properties in our disposition pool have financing, and some don't. We're going to try to work through with the buyers in both circumstances to make the transactions happen.

Yes, so just one more question from me. So are you hearing from the market that malls doing less than $300 a square foot are getting financing?

Yes I mean it's happened. It might not be C&BS, but the properties that we've sold, the buyers have been able to get financing. I don't know what the terms are and what kind of financial guarantees or whatever, financial resources they have to provide, but I don't think it's institutionally driven financing. But you can -- there's still a lot of spread when you look at where the cap rates are and where underlying interest rates are, even if you get some conservative-level financing, it pops returns on equities for these buyers, and they are private buyers, so I think from their point of view it's pretty attractive if they can do that.

Yes, 40% leverage return probably gets a lot of people interested. All right thank you guys. I appreciate it.

And the next question is from Tayo Okusanya of Jefferies.

My question has actually been answered. Congrats on a great quarter.

Thank you. We appreciate it.

And next we have Haendel St. Juste of Mizuho.

Yes, good morning. Two questions for me. First, same-store NOI was better than expected on the quarter, benefiting from some decline in operating expenses. Can you talk about what is driving that decline and if it is sustainable?

Could you repeat your question? We couldn't hear it completely.

I apologize. Same-store NOI, notice that there is a reduction in operating expenses year over year. Can you talk about what's driving that, and is it sustainable?

Yes I mean you know, you probably saw the headlines. Most of it came from organic growth and the top line. Base rent drove it, percentage rent to some extent. We had strong top-line growth. The expense savings were comparatively a lot less compared to the revenue growth. So only $0.5 million of expense savings and $5.6 million of revenue growth.

So, if you just compare the two, top-line growth drove it, as result of occupancy growth, as well as rental percentage growth that we have. And all the new leasings that have kicked in. You know tremendous -- H&M (inaudible) (multiple speakers)

I certainly and acknowledge and understand that. I was just curious if there was anything perhaps we should be thinking on the expense line item, though.

No, I think expense line items do vary. We may have some exposure to higher expenses in the upcoming quarters. You know, store removal is an item that could impact us, real estate taxes could impact us. Just those are the variables that we can control. But to the extent that we have been able to manage the operating expenses, they are pretty much stable now.

Okay. Question on a potential bond offering. Where do you think you could price a ten-year bond offering today? And how does that play into your thoughts of potentially redeeming, maybe some of your 2017's early and incurring a prepay?

You know, like I said earlier, we will be opportunistic in accessing the bond markets. So today I don't really know that's if the spreads are where we want it to be, so we will continue to look at the bond market and be very selective because we do have the flexibility to access when we want it. And we do have some secured loans coming up. But they are great assets.

And we also have flexibility on our lines of credit because we do have over $700 million available. In addition, if we continue to make asset sales, that will provide us with additional liquidity. So again, with all the different sources of capital we have, we feel pretty good about making our right choices and driving our cost of capital down.

Okay, thank you.

The next question comes from Carol Kemple of Hilliard Lyons.

Good morning, congrats on a nice quarter.

Thank you.

Not on an absolute amount but on a percentage amount, the management development leasing fees increased a lot of year over year since the first quarter. Is the $4 million a good run rate or is there something special about this quarter?

There was a little something special this quarter. We had done some financing along with our joint venture partner on Ambassador Town Center and Fremaux Town Center, and there's a financing fee that the management company was able to earn. So we have about $0.5 million or so plus financing fees. And then we do have management fees that have gone up because we are managing some third-party business. So as that continues, we'll hopefully have a good continuation of the management fee income. But to the extent of these financing fees, that's sort of a one-time item.

So, going forward like $3.5 million per quarter sounds like a good run rate?

I don't really know, maybe around $3 million I guess per quarter. But it fluctuates. So --

Okay. That helps. Thank you.

The next question comes from Floris Dijkum with Boenning.

Thanks. Stephen, I think across all things, that things look pretty good. I had a question for you on your sales. If I look at your sales for tier 1 malls they were essentially flat, but the increase came in your tier 2 and your tier 3 malls. Can you maybe comment on that? And do you expect a pickup as well going forward?

Yes Floris. Good observation. The tier 1 sales, the malls that I talked about, the energy sensitive and the border markets are in the tier 1. So that's where we had the biggest impact on the negative side,. It was offset by some good growth in other areas of the country, which is why we were flat. And then the tier 2, really just speaks to the stability, the only-game-in-town-nature of most of those properties. And tier 3, there's some volatility. Some of the tier 3 is taking out some of the stores that were less productive. So that helps them and also just a lower base so it's easier to move the needle there.

Great. And my other question is regarding your expense recovery ratio, it picked up during the quarter and Farzana, I think you were suggesting that means that we should be expecting this kind of percentage ratio going forward as well? Is that correct?

Well you know if the expenses pick up in the second half due to normal [roll] or something else, I would think that it would moderate. But I think on a full-year basis around 100% recovery is a good run rate for us.

Okay. Great. Thanks guys.

Thanks Floris.

And the next question is from Rich Moore of RBC.

Hello guys. Good morning. I just wanted to make sure I understood, nothing yet from PacSun, Arrow or Sports Authority in 2Q, right? So everything that you talked about before is still to come. Is that right?

That's correct. I mean there's a little bit in Q2, but it really kicks in Q3 and Q4.

Okay. That's what I thought. And then Farzana, on the financing side, I'm trying to understand why you do both mortgages and bonds. I sort of thought you were just going to go to bonds all the time when you had the chance, especially on your better assets. Is there some strategic reason, I guess, to mix the two?

Well Rich, we've said all along we would balance it between secured and unsecured and be opportunistic. But we were focused on unsecured in the beginning because we needed to get the secured ratio down. And we have dramatically bring that secured ratio down to around 30%. And as we continue to pay off more loans, that will continue to come down.

So we have the flexibility to take opportunity in the marketplace based on the cost of capital on the debt side of course. And also look at when we can issue the bonds, and be opportunistic about it. And we now have the flexibility. We been working very hard to get the unencumbered NOI up around 50% or more, and we continue to make progress on that. And so, of course it's also making sure that the market is at the right juncture for us to access.

Okay. All right I got you. And then if I could on the Sears side of the equation, I can't remember, do you have any that -- I guess or Kmarts, if you have any that Seritage owns, and if you do are you guys doing anything with them to look at those?

Yes we have seven Seritage in our portfolio, Sears that are owned by Seritage in our portfolio. And we're talking to them on a regular basis. They've got actually some interest in a couple of the stores, in terms of taking the half of the Sears that they have the ability to take back. And we're working with them and whether they do it or we do it together, it's a positive for the center to bring in those new uses and to have the Sears space be more productive. We've got a great relationship with Ben and his team and I think are very supportive of their strategy.

And Stephen have they given notice yet to Sears, because I think it takes six months before you can even do anything after they give notice?

I don't know Rich.

Okay. All right that's fair. And then last thing guys, the parcel sale, maybe it was multiple parcels sales, where were those this quarter? Is that Laredo? Are you doing something down there on a parcel?

It's just a combination. It wasn't just at one property, there were just a few different ones that contributed to it. And, that's a really healthy market, a lot of 1031s and net lease buyers that are looking for yield. And the pricing is very attractive so were able to tap into that.

Okay. Great. Thanks guys.

Thank you Rich.

I'm sorry. The next question will come from Michael Mueller of JPMorgan.

Going back to the store closings you were talking about little bit earlier, Aero, PacSun, Sports Authority and everything. What's the total NOI that's expected to go away from that whole grouping that's not already reflected in the second-quarter run rate? And then conversely when do you think you are through all that and you have tenants back in paying you at the other side of it?

So it's about $2.5 million, a little more than $2.5 million is what the net impact is that we are projecting.

And that's an annualized number correct?

That's for the second half of the year.

Okay. So basically $1.25 million a quarter, roughly?

Yes, roughly.

And then what do you think to release it and have tenants back in, do you think? About a year, a little over?

Well the Aeros for the most part, Aero and PacSun, they are keeping most of their stores. Sports Authority, we'll backfill that, Sports Authority is about $1 million on an annual basis, and we'll backfill those pretty quickly because we have deals in place. And then the Aeros and the PacSuns, those will take six months to a year to backfill them. There are eight Aeros closing and four PacSuns, so a lot of that impact is just reductions that we negotiate as part of the restructuring through the bankruptcies.

Got it. Okay. But on the closings, the closing component probably within a year so?

Right.

Okay. And then I guess tied to that as well, the renewal spread pressure, now you that you are through a lot of this and looking to the back half of the year, do you see improvement in the renewal spreads?

I mean we're obviously trying to get it. There's still some retailers out there that their sales are not where they want to be, and we have renewals with them. They bring us down and on the other hand, we've got some that are doing well. So our sense is that we'll continue to see some improvement, but it's not going to be dramatic.

Got it. Okay. That was it. Thank you.

Thanks a lot.

And our next question comes from Collin Mings with Raymond James

Hey good morning. Just a quick question, Stephen. Just curious how you think about the recent pick up, and disposing of some of these tier 3 malls, has that changed your thinking at all about additional community center sales, or what you might sell on that front?

Well we started the effort to sell community centers in non-core last fall. And the pricing has been strong and we got some others that are in the pipeline that we're working on, and I don't see any reason to stop on that. The execution has been good, the demand is good. It helps improve our credit metrics and our liquidity, so it's a net positive. You know, if we look at them and we don't see really the growth in NOI, it's a good time to sell. And that's really what were taking advantage of.

Okay. Thanks for the color Stephen.

All right.

And our next question comes from DJ Bush of Green Street Advisors.

Thank you just a follow-up on Collin's question just now. Stephen you're making good progress on the tier 3 dispositions. I think the community centers have -- there's been appetite for those for a while. I think you've touched on it in the past, but is there any more appetite to move up into the tier 2s and potentially, not do an outright sale, but do some larger joint venture to raise more proceeds to delever?

I mean, I'd say we're focused on getting through the strategic transformation, the 25 malls, as quickly as we can, to get that behind us and that's the priority. That's where we made the progress and I think that the results are driven by that focus. I wouldn't rule out looking at other areas in the spectrum for joint ventures, or other capital, and if we could find an attractive transaction, and it helps us in terms of narrowing the NAV discount and the gap there and improving credit metrics, then that's certainly something we'll always explore. Because we're really motivated to narrow that discount as much is possible and get our stock trading where it should be.

Okay. And then on the new leases signed, obviously the spread was quite strong and forgive me if I missed it, but is there any certain categories that are driving those leases higher?

You mean, which ones are helping us DJ? I'm sorry --

Yes, exactly. In those new leases, I mean, is some of that restaurants or other uses outside of maybe traditional apparel that is probably a little bit weaker at this point?

I mean still, even though we're doing more restaurants, a lot of those aren't in the lease spreads because they are not comps basis. Also some of the non-traditional uses, those are larger boxes like a Kings or a Dave & Buster's. So it's really driven by the retail.

And in some of the categories, like I was talking about Elle brands and Foot Locker and jewelry, athletic shoes, just some of the cosmetics, the eyewear, some of the traditional categories. I mean the biggest struggles really have been some of the juniors. And we're working through that, we're reducing our exposure to a lot of those retailers, re-leasing that space. But otherwise, there's really good results on the re-leasing spreads and sales and good stability in those other categories.

Okay. So if you were to -- you disclose it as gross rent, on a base rent or even a net effective basis with the spread, what would the spread look like? Would it still be quite healthy in the double digits? So TIs are more or less stable?

Yes, our TIs are pretty much what they've been the past few quarters on a comparable basis. Maybe a little bit higher but nothing material. And yes, gross is consistent with net. There's nothing really distorting it.

Okay great. Thanks so much Stephen.

Thanks DJ.

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

Thank you again for your time this morning. And as you can tell, we are thrilled with our results and looking forward to continuing to have strong results over the next few quarters. Have a great weekend.

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