CBL & Associates Properties, Inc. (CBL) 2016 Q3 法說會逐字稿

Good morning and welcome to the CBL and Associates Properties third-quarter earnings conference call.

(Operator Instructions)

Please note this event is being recorded.

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

Thank you and good morning. We appreciate your participation in the CBL & Associates Properties Inc. conference call to discuss third-quarter results. Presenting on today's call are Stephen Lebovitz, President & 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 risk 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. We are pleased to continue our strong performance this year with excellent results for the third quarter.

Portfolio same-center NOI growth of 2.6% and adjusted FFO growth of 1.8% to $0.57 per share put us squarely on track to achieve the high-end of our guidance ranges. Demand for space in our malls remains healthy with occupancy moving up 110 basis points in 93.5% for the portfolio and 90 basis points in 92.5% in same-center malls. In total we leased approximately 800,000 square feet during the quarter.

As we anticipated, stabilized mall leasing spreads have improved as the year has progressed averaging 10.2% in the quarter. This improvement was led by an increase in renewal spread to an average of 7.3% while new leasing continues to be strong at 19.7%. We have finalized our negotiation with the new owners of Aeropostale, as previously planned we closed several stores during the third quarter and also sold properties with arrow exposure ending the third quarter with 58 stores. All 58 stores will stay open until the end of the year and in January, 9 additional stores will close and rents at certain locations will be reduced. The total gross rent impact of 2017 from these additional closures and modifications is roughly $3 million.

Sales growth has moderated as we have moved later in the year. For the rolling 12 months sales in our portfolio were down 50 basis points to $377 per square foot. Tier 2 and 3 generated slight increases while Tier 1 declined modestly, primarily driven by two properties located in energy markets.

Holiday sales forecast for ICS and NRF are in the 3% to 3.5% range so we're optimistic that sales will end the year in a more positive direction. Our disposition program has made major progress this year both for Tier 3 malls and non-core properties. We recently closed in the assignment of our 50% ownership interest in High Point Commons for $16.9 million. We also sold out office building in Greensboro, North Carolina for $2.4 million and have additional non-core asset transactions in process that we hope to announce over the next few months. As we announced in yesterday's release, we have a binding contract on a portfolio of three Tier 3 assets for $32.25 million. We anticipate closing that transaction in the fourth quarter.

We have closed or have in process 17 mall transactions as part of our portfolio transformation program identified in April 2014, representing a value of over $700 million. We have additional promising activity underway and hope to bring this program to a close next year.

Last quarter's call, we reviewed some of the target metrics we had set forth in our investor call in 2014 and discussed how we have already reached or exceeded a number of those targets. While I won't go through the full list, it's worthwhile to note that our Tier 3 NOI is now just 7% of total mall NOI compared with 22% when we started on this path, and it will continue to decline.

It's important for you all to take a fresh look at CBL. We are not the same company that we were just two years ago. The progress we have made on our portfolio transformation strategy is substantial and this program has yielded tangible results in our performance. I am excited to see us approaching the end of this program. We have successfully transformed our portfolio as well as our balance sheet creating a much stronger and more stable company. Our ongoing investment in redevelopment, expansions, and select new development projects has been a meaningful contributor to the strengthening as well.

Over the past few years we have refined our expertise in department store redevelopment and have been successful in using these opportunities to bring new retailers, restaurant, and entertainment uses to our malls. As you are aware, Macy's recently announced the store closure plan that will go into effect after the holidays. We have been in discussions with Macy's regarding terms and timing, and while the list is still being finalized, we expect to gain control of five to seven locations in early 2017. We are already working on plans to retenant these spaces to be ready to move forward quickly early next year. Getting these stores back will allow us to upgrade the offerings at the malls, driving higher traffic in sales at attractive high single to low double-digit returns on investment.

Our job as a major mall landlord is to make sure our shopping centers evolve to meet changing consumer preferences. Our portfolio of market dominant properties occupies the best commercial real estate locations in their markets, and being able to recapture an underperforming box is an ideal way to bring new excitement to our shoppers and long-term success to our properties. I will now turn the call over to Katie to discuss our current redevelopment and new development pipeline in more detail.

Thank you, Stephen.

Since 2013 we have completed or under construction on over 20 redevelopment projects, representing an investment of roughly $250 million at our share and generating an average return at 8.5%. We are also pursuing certain expansions at our malls as well as select new developments. As a result of these projects, we have been successfully offsetting the dilution from our disposition programs maintaining EBITDA and growing FFO.

This quarter, we commenced construction on a couple of new redevelopments including the addition of TJ Maxx at Hickory Point Mall in Forsyth, Illinois, which will open in the fall of 2017. At East Towne Mall in Madison, Wisconsin, we are developing shop space to accommodate a new Planet Fitness which will open by year end. Several anchor redevelopments are on track for openings ahead of the holidays, including a new H&M in York Galleria in York, Pennsylvania, and part of the former JCPenney. Dick's Sporting Goods and Ulta will open replacing JCPenney at College Square in Morristown, Tennessee as well as a Denim Sports and a former Shopko at North Park Mall in Joplin, Missouri.

We are proactively working with department stores to recapture underperforming locations and line up replacements. We have one ground-up development in process. The outlet shops at Laredo are 65/35 JB with Horizon. The 350,000 square foot center features a terrific retail lineup, including Michael Kors, Brooks Brothers, Nike, Under Armour, and Puma. We are nearing 80% pre-leased and look forward to a strong opening in spring 2017. We are exploring other opportunities to continue our partnership with Horizon given how successful it has been and will evaluate each new opportunity individually as it's presented.

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

Thank you, Katie.

We are pleased with our financial results for this quarter. Adjusted FFO growth of 1.8% to $0.57 per share was fueled primarily by top-line improvements including growth in rent and occupancy in the same tenant pool, as well as contributions from new developments and interest savings. This growth was offset by dilution from asset sales completed year to date. DNA for the quarter was $12 million, net of $1.2 million in nonrecurring legal and professional fees, representing 4.8% of total revenue for the quarter, consistent with the prior-year period.

During the quarter, we had recorded an impairment of $53.6 million related primarily to the pending sale of the three malls under binding contract. We also recorded a $7 million gain on the sale of our joint venture interest in High Point Commons during the quarter. Neither item was included in FFO.

Our cost recovery ratio for the third quarter was 98.1% compared with 100.8% in the prior-year period. For the nine months, the cost recovery ratio was flat from the prior-year period. Same-center NOI in the quarter continued our streak of strong results this year with an increase of 2.6% for the total portfolio and 2.3% in the mall portfolio. Growth in the same tenant pool was driven by occupancy increases in rental growth with revenues improving by $3.4 million and savings in operating expenses of $1 million.

Based on third quarter results, the impact of announced transactions and our current outlook for the remainder of the year, we are maintaining our FFO guidance in the range of $2.36 to $2.30 (sic - see press release "$2.40") per diluted share, and anticipate reaching the high-end of this range. We also anticipate achieving the high-end of our guidance range for same-center NOI growth of 1.5% to 2.5%. We are projecting a 75 to 125 basis points improvement in stabilized mall occupancy from prior year end. Guidance includes anticipated dilution from the sale of the three malls that are under contract, but does not include any unannounced transactions.

We have made significant progress improving our balance sheet and our total debt balance continues to decline. We have lowered total per added debt by more than $460 million since the prior-year period and $380 million since year end. We anticipate further improvement of $190 million as the three malls in receivership are returned to the lender. As of September 30, our rolling 12 month net debt to EBITDA multiple was 6.6 times compared with 7.1 times at the end of the prior-year period.

The unencumbered property pool continues to grow and improve. Year-to-date we have retired $172 million of secured debt. We utilized disposition proceeds to fund the payoff of the $55.2 million loan secured by Dakota Square, a Tier 1 mall, as well as two loans totalling $17 million at our share that were secured by two unconsolidated properties. At the end of the quarter we retired the $38.3 million loan secured by our open-air property Southaven Town Center. All four loans had very high debt yields and it made sense to retire them. We have reduced our secured debt by over $420 million year to date in 2016 through net proceeds and debt assumption from dispositions, as well as amortization and extinguishment of debt to lenders.

Chesterfield Mall, Midland Mall, and Wausau Center with an aggregate balance of $190 million were placed into receivership during the quarter. We expect these foreclosures to be completed before year-end or in early 2017. We are in discussions with the service (inaudible) to extend the maturity of the $17.8 million loans secured by Green Briar Mall and hope to finalize on negotiations shortly.

Our next loan maturity is in March of 2017 for $46.5 million loan secured by Cary Towne Center. We are currently documenting our agreement with the lender to restructure the loan, lowering the 8.5% interest rate to 4% interest-only and extending the maturity date by up to four years. This property is well located in the market and we are pursuing a game changing redevelopment anchor by very recognizable and in demand retailer. We will announce more details as we make progress on the redevelopment plan.

The remaining $273 million of 2017 loans secured by wholly-owned properties will be evaluated closer to maturity, and we will determine whether to retire the loans or refinance. We plan to refinance that $81 million of maturing joint venture loans. CBL's share of total maturing loans of approximately $440 million carry weighted average interest rate of 6.1%, so we have a terrific opportunity to reduce the borrowing costs and generate additional interest savings adding to our FFO. The progress we have made over the past 24 months in reducing our debt balance, improving our operating performance, and growing through redevelopment gives us tremendous flexibility with our balance sheet as we look to fund our business. Our priorities going forward are to continue the progress we have made to enhance our [product] metrics, grow EBITDA, and reduce debt.

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

Thank you, Farzana.

As I mentioned in my comments earlier, our portfolio a stronger and our balance sheet is more stable and flexible today than at any point in our company's history. Our properties are positioned well in their markets to evolve to meet changing retailer trends and customer preferences as we add more dining, entertainment, and experiential uses. We will continue to execute on the clear path we have outlined. We have exciting opportunities for growth on the horizon and look forward to ending the year by generating further success. Thank you again for joining us this morning.

And now we will be happy to take questions.

(Operator Instructions)

DJ Busch, Green Street Advisors

Thank you. Stephen, regarding the three malls under contract, is there any financing contingencies in order for those to close?

Good morning, DJ. There is not. No financing contingencies, and like we said we've got a binding contract with a substantial deposit. Just a little more color on the dispositions in the three mall package. I can assure you it's not a 20+ cap rate. We don't give cap rates and the transaction hasn't closed. So I can't give any more detail at this time but I can certainly say that that's not close to where we are making this transaction.

It's a market transaction that we have -- we did source through brokers and went to various parties and I think as everyone knows when you get into calculating a cap rate there's a lot of factors that go into it in place NOI, projected NOI, capital expenditures that might be deferred or might be coming down the road. There are a lot of different considerations go into it, but we are pleased with the progress we have made with dispositions this year and we are really getting towards the latter stages of our overall disposition program.

That make sense and that's helpful color. Going back to some of your comments, I think you made a little over a year ago, you specifically address the need to redevelop brand off mall in order to sell the asset and appeal to buyers. Just looking back on that decision, are you satisfied with the outcome of Randolph? Did you see a change in the buyer perception or change in the demand for that property, given that you took on some of the redevelopment risk for that to get it across the finish line?

Yes, absolutely.

The decision to go ahead and redevelop Randolph and add Ross and ULTA in the former JCPenney is what enabled us to sell it. Similarly with Regency, we replaced the former Sears, the JCPenney building was bought by another party and redeveloped. So that really allows the buyers to have enough comfort to go ahead with the transaction. And it did involve an investment, but it was recaptured as part of the purchase price.

Okay. And then just one last one on the 5-7 potential Macy's closures. I know you are not ready to give locations, certainly, but are any of those closures potentially at malls that are still for sale, and if so would you undertake a some redevelopment effort that you did at Randolph to do the same strategy?

Yes, I mean I can't get into any of the details on it, and like I said it's not -- we don't even though the final list yet. We met with Macy's, so we wanted to get the market a ballpark sense of where we think this will end up. They own a lot of their stores, so that's a consideration and that still has to get worked out as far as having control of the space.

If, depending on how these go, the redevelopment of the boxes is really an opportunity for us to increase the value of these assets by bringing in other users and we've got a game plan for the assets that we think we are going to get back as far as who we would put in, and as is the case with every developments we have done over the past three to five years, some of them involve more capital than others. It depends on the property and it depends on where we want to go with it. And that's the way we will approach these as well.

Okay. Thanks. I'll jump back in.

Thank you.

Christy McElroy, Citigroup

Hi. Good morning.

Stephen, regarding the additional closures and modification term error that you mentioned, just to make sure I heard right, it sounds like this $3 million impact reflects both closures and lease modifications. And if that takes effect in January, will those modifications flow-through the Q4 releasings spread number or is there anything in Q3 and if anything Q3 spread numbers that reflected that.

Good morning, Christy. It did not -- it was not in the Q3 numbers, because we were still finalizing the negotiations so they hadn't been signed by the end of the quarter. And it also will not flow into the financial results for Q4, because it doesn't take -- it doesn't start until the beginning of the year.

They are keeping the stores opened through the rest of this year, so the $3 million will impact 2017. We are taking that into account in our budgets and when the issue guidance for next year, then that will obviously be factored in.

Just to be clear so on the releasing spreads numbers, presumably the impact will flow through the Q4 executed numbers on page 27, when we see the next quarter, but then they will also flow through the 2017 commencement numbers on page 28, is that fair?

Hello, it's Katie.

We are still in the process of documentation, so just depends on when those get executed to the timing of how that all flows through.

Thank you. And then given all the nuances in the releasing spread numbers, these trends are for the under 10,000 square foot stores and that only represents about 350,000 square feet this quarter of your roughly of 800,000 square feet of total leasing volume. Can you give me sort of a general sense directionally, what kind of markup trends you are seeing on the other half of the space lease for larger stores?

Sure. There is several boxes that go into the 800 that wasn't included in the under 10,000. It's really hard to say in terms of a trend because we are taking space that had been vacant. We are taking some difficult spaces, and we are also taking some former anchors.

We evaluate those in the redevelopment pipeline for Return on Investment point of view. We have gotten high single-digit returns on those low double-digit returns, sorry I keep stumbling on that. That's been a positive financial result for us.

Thank you.

Thanks Christy.

Todd Thomas, KeyBanc Capital Markets

Hi. Thanks. Good morning.

Just a follow up on Arrow. So the $3 million annualized impact from the closures and rent modifications that you expect to begin early next year, you had $2 million budgeted for Arrow in 2016, I think a $10 million budget in total for rent loss for closures and modifications for the full year. I am just wondering if you layer in the $3 million now that you expect in 2017 and maybe what you would expect typically at the beginning of the year, how does that stack up to the year historical budget for what you would look at for foreclosures and maybe rent modifications.

Sure.

Just to be clear, the $2 million is the impact for 2016 from the closures that happened earlier this year, and also for any rent adjustments that happened prior to the bankruptcy and so that is in our numbers for this year. The $3 million will go into our budgets for 2017. The $10 million really is just -- I mean that was a totally different number that we talked about earlier in the year when we were trying to get a handle on what the combination of Arrow and PacSun and Sports Authority and some of those other bankruptcies could mean to us over the course of the year. And now we've got better visibility on that.

Arrow ended up not being as bad for 2016, just because they are keeping the stores open for the year. PacSun, the impact was what we had said last year. I mean last quarter. I'm sorry. Which was about $1.5 million, Sports Authority is about $1 million on an annualized basis. When you put it all together, we ended up being a little bit better this year and then in our budgets for next year will take all this into account.

Okay. That's helpful.

Regarding the Macy's, the five to seven stores, any sense on where they might fall in the portfolio in terms of tiering? And do you anticipate that any of those closures could trigger any tenancy issues in the portfolio?

Yes, like I said, it's just too early to give any more details, Todd. We just wanted to give the market a sense of a number of stores. We have been really successful with the redevelopment and the replacement of department stores and we feel that will be the case again. After next quarter, once the list is finalized we will be able to give more details.

Okay, and just last question for Farzana, sorry if I missed this. Any visibility around the timing to convey your interest in the three lender malls Chesterfield, Midland, and Wausau?

Hi, Todd. We are continuing to work with our lender. The foreclosure process just had a timing of its own. So we are hoping to get them back by the end of the year or early part of January. Naturally the timing we have now from a letter of counsel.

We are working with them, our goal is to return it as quickly as possible. They are not in our control anymore anyway; they are with the receivership. It's a matter of just extinguishing the debt, which is imminent.

Okay. Thank you.

Thanks Todd.

Caitlin Burrows, Goldman Sachs

Hi. Good morning. I just had a question.

One of the things that's been talked about on your own call and your peers calls has been releasing spreads, and this quarter your renewal rates seem to be much stronger than in the past couple quarters. So, I was just wondering if this is something you thought would continue or just happen to be something that the leases that were expiring and the old rate happened to be particularly low or not?

Sure. We will probably have some pressure in the fourth quarter as the Arrow deals come through. Because likely those will come through during that quarter given the timing of signing the new deals.

Just in general, the first two quarters, the first quarter was the weakest and we did signal that we felt it would get stronger over the course of the year. And we have seen some good momentum in terms of renewal leasing spreads this quarter. We were pleased with the overall results, being back into the high single digits and that's our goal.

And we feel like we've got good demand. We're making good progress on bringing up our occupancy levels to recapture the bankruptcies from 2015. That gives us more leverage in the negotiation with retailers. So in general we are positive about leasing spreads. Although like I said fourth quarter could have some pressure because of Arrow.

Okay. And then also just on Laredo, I was wondering if you could comment on, I know Katie gave some examples of retailers that were going to open there, but just the amount of demand you have had for those spaces versus maybe some of the outlets you did a year or two ago and how it might have increased, decreased, or stayed the same.

Sure, Laredo is going great. The outlet sector has stayed strong. Demand by retailers is good at our existing portfolio. We have replaced Saks Off 5th with stores like North face, and some other good retailers. So we have seen good momentum and the leasing is strong.

Laredo, we had a delay in the schedule, which slowed down leasing a little bit but now it's on track to open next spring. We've got good leasing demand. We are really positive about where that's going to end up.

Okay. Great. Thanks.

Thank you Caitlin.

Richard Hill, Morgan Stanley.

I just wanted to just maybe get a little more color from you about Kentucky Oaks Mall versus Green Briar Mall. Your decision process to pay off Kentucky Oaks Mall six months early. I think it might still be encumbered on your balance sheet.

And on the other hand Green Briar Mall, I think you had disclosed in your 10K that you were looking to extend the maturity. But maybe that's still ongoing with the special servicer. Any color that you could provide in terms of how you thought about paying off Kentucky Oaks Mall early, but still in the negotiation process with Green Briar Mall would be helpful.

Sure, Rich. It was really a very easy decision for Kentucky Oaks and Governor square. The debt yield was like probably north of 50% to 60%. It was really low leverage. If you note $17 million was our share of the two loans that we paid off. Combined they had a 6.25% interest rate on our weighted average basis.

It was a no-brainer so we pay that off, and our partner also wanted to pay that off and not secure additional financing. That was a mutual decision and an easy one.

Green Briar Mall on the other side has some really good tenanting opportunity and the loan matured and we are in discussion with the lender. And hopefully we will announce our restructure very soon. It will be a good restructure, both from our point of view as well as the lender's point of view, gives us the time to bring in the new tenants, use the property cash flow to fund the tenant allowances, and get it to the level we would like for the center to be.

We have some exciting tenants coming in. That was a decision we made and will be very successful. We will announce that very soon.

Got it, just one quick thing and Green Briar. It looks like a pretty stable mall. I thought maybe around a 10% of 11% debt yield, which looked like it should have been refinanceable. Any reason why you maybe wouldn't have focused on -- why you would have chosen to do a mod instead of just looking to refinance?

Yes. Again the reason for it is his to give us the time to stabilize it again and get it to a point where a point where we think the debt yield should even be even higher and get even a better refinancing on it or pay that off. It gives us the opportunity we should have with a three or four year extension option. New extension with the lender.

That will give us the time to -- like I said increase the cash flow, increase the NOI, and then make a decision whether we want to pay it off or we would like to refinance it. And it is a very good mall. It is a very stable mall and a solid mall.

Great. Thank you guys. That's helpful. I'll go back in queue.

Tayo Okusanya, Jefferies.

Most of my questions have been answered, but I was curious as we start to ramp up into the holiday season, what you are seeing out there, and if you are concerned about potential for more store closures or bankruptcies post holiday season?

Good morning, Tayo. Like I said in the call, in my script the sales forecast ICS in or out are in the 3% to 3.5% range. That would be a positive from our point of view, and we are looking forward and have good -- and are optimistic as far as where the holidays are going to end up. There are good signs in the economy.

The GDP growth today is certainly a good read, so there is a lot of tailwind in the economy, getting the election behind us will certainly be a positive. So we are encouraged about where we will end the year.

As far as bankruptcies, with Arrow and PacSun behind and at least we know where those are going to end up. There's always retailers in our watch list, but we feel good about the outlook for next year. There's going to be some continued rationalization by certain retailers, but we are also seeing growth by others in categories such as beauty and cosmetics, athletic footwear, and the Elle brands are still strong.

We are seeing good demand and there's just a shift in the tenant mix of the properties and juniors and apparel you have the fast fashion like H& M that is taking more space and then retailers like Abercrombie are taking less. That's a natural transition that's occurring.

Got you. And then just a quick update on Sears, the situation there. Last quarter tough results. You see Lampert put more money into the Company. Are you feeling better or worse about the Sears situation, and how you are gearing up in case you do end up with a retailer who has to go through a decent amount of restructuring?

I don't really have anything new to say about Sears. They haven't given any indication whatsoever of giving back or closing Sears stores. They have been much more focused on Kmart in terms of where their losses are. We talk to them regularly. We will see what their results are when they announce them for the third quarter. But at this point, we are anticipating just a continuation of the status quo with them and we will learn when you learn when they come out with their next quarter.

Thank you.

Okay Tayo, thank you.

Michael Mueller, JPMorgan

Hi. Couple of asset questions. First, Stephen I think you couldn't give a cap rate on the transactions that are closing. But I was wondering, could you give us even ballpark range for the 2016 mall sales as a whole?

One second please. I can give you just low double-digit as the range. It's definitely a range and that's a little squishy, but that's at least something.

That's definitely helpful. And then also, you said hopefully you can wrap up the program in 2017. Can you give us hearing another range, just a rough range dollar amount of how much is left to actually wrap up the program. Is it several hundred million, a couple hundred million? $200 million? Some color would be helpful.

Yes, it's probably $200 million to $300 million, when you include both debt and equity. I will say there are a few properties that are on our original list where we've got redevelopments that are game changer transformative to the property type redevelopments and so we're going to pull those off the list.

One for example is Cary that I talked about on the call where we can't announce who the retailer is but it would be just a complete change in the property in terms of its trajectory and its opportunity going forward. We are not going to be selling all 25 before we bring the program to a close.

Got it. Okay that's helpful. Thank you.

Okay Michael, thank you.

Jeff Donnelly, Wells Fargo

Good morning, folks. Stephen, you've done a good job restoring the 200 or 300 basis points of occupancy that was lost over 2015. I think the portfolio today is running about 70 basis points or so below where it was prior to that.

You have been more aggressive selling those tier 3 malls. I was just wondering as we look out to 2017, do you think we should use your 2014 occupancy levels as maybe the goal for where you'd like to get occupancy back to next year? Or do you think it's even possible to surpass that level down the road just because the average quality of the assets is better?

Good morning, Jeff. That's probably fair.

We will announce when we do guidance what our occupancy assumption is for 2017, but I think what you are saying makes sense. As we go forward we do have a better quality portfolio.

We have taken up some of the tougher spaces with boxes and some larger users, so that will help our overall occupancy. And we should be able to get some traction and be above historical levels as long as we don't have the bankruptcies that come along and set us back. We are looking at ongoing gains in occupancy going forward.

Understood. I am just curious, as far as asking rents, or sort of market rents, not so much what you are actually -- not leasing spreads per se, but just the actual trend and what's getting asked in the marketplace, how has that trended over the last six to 12 months? Has there been much change? Has it gone lower has it gone higher? I'm just curious what you think retailer's perspective on where asking rents have gone?

Yes there's always a negotiation with retailers, as you know. They are trying to push down their occupancy costs. You see it in our releasing spreads and improvement that we have made there in our average rents have increased consistently, so we were able to get good gains in our rents across the portfolio.

It's supply demand driven and as we have less vacancy it allows us to bring in better retailers and higher performing retailers. The restaurants have been a bright spot, and the restaurants -- there has been some publicity recently about difficulties in the restaurant business, but if you are dealing with the right restaurants, there's been there's definitely good demand there.

We're seeing continued strong demand in fast casual and some other categories. I think we are encouraged about where we are heading, and like I said, we are not a retailer, we are a landlord and we have the flexibility to bring in different categories. You look at a retailer like ULTA, 14% comp store increases and we are doing more with them and others in that category. We can pick the hot categories and bring those into the properties and focus on them.

Maybe just one last question on the disposition though, just curious, and I apologize if you said this earlier, but can you give a little color on the depth of the demand for the assets you have been putting under contract? Were there multiple bidders within close proximity? And were you finding some of the prospective bidders looking for seller financing, or trying to keep you guys involved in the deal in some way?

Yes, I haven't answered that, but I'd say it's consistent in terms of the buyer pool and there has been some success in terms of getting financing on these assets, which helps the buyer pool. I wouldn't say it's super deep in terms of the number of buyers, but we also have multiple buyers that we are talking to on different assets. I see that being consistent.

It's private regional type buyers, it's not we are not selling institutional quality properties in the malls. The non-core in the strip centers is a different story. That's more institutional buyers and the cap rates on those have been really attractive. Mid-single digits.

So we've continued to make good progress there. That's been a great way for us to raise capital, pay down debt, reduce our debt balances over where they were and Farzana talked about how much progress we made on the balance sheet. We don't seem to get credit for that, but we really lowered our debt to EBITDA, our total amount of debt and hopefully the market will recognize that.

All right. Thank you.

Carol Kemple, Hilliard Lyons.

Good morning. Do you all know what your same-store sales growth would be if you took out the energy market properties?

Good morning, Carol. Not at the top of our head.

It would definitely help and we are down slightly for the quarter. In the tier 1 malls, those were where we had the couple that impacted us the most. That would have pushed us back into positive territory there.

And then regarding your decision not to open your malls on Thanksgiving day, what's been the feedback from your retail partners regarding that?

The retailers have been really positive. We actually talked, to them before we made that decision. We wouldn't make it without getting their input, and they were supportive of it. Like we said in our release, they feel like the business just gets spread out over two days over the weekend instead of being concentrated more on Black Friday. And it's a great opportunity to make Black Friday a more exciting and energetic shopping day, and bring back the excitement there. And the retailers have been very supportive and I think they wished everyone else would do it.

Okay. Great. Thank you.

Floris Dijkum, Boenning.

Thank you. Question on the disposition program. You said it would likely end by 2017. Does that imply that you are content with the portfolio at that stage and there will be no further dispositions?

Good morning, Floris. Not at all, and I appreciate you bringing that up. It's just that the 25 malls that we announced in 2014, we will bring that program to a close. But we are going to continue to look at the portfolio to sell properties on the basis that it makes sense.

On a normalized basis, and not have a big announcement of a number of properties that we're going to sell. I think it's really important for us as a discipline and also it just makes good sense to recycle certain properties as -- either a source to improve our overall quality, to give us proceeds to reinvest in new developments or other new projects, and it's something that we will definitely continue even after we bring the portfolio group of sales to a close.

Great. And for a follow-up question in terms of redevelopment spend. Just to make sure, $250 million debt was mentioned earlier that is what you spent to date on your properties, I believe. What do you expect to be spending on an annual basis going forward and redeveloping our strength in running your assets?

Yes, just to clarify, Floris. The $250 million was over the last three years. The redevelopments that we have done, some were department stores, some were expansions, some were adding boxes. It's about 1.5 million square feet average 8.5% returns. You look at the average. It's in the $12 million range per project. And we have been doing those $50 million to $75 million per year on the redevelopments. It was a little higher when we did the two Sears at Cool Springs and Fayette because we cut those up into smaller pieces and those were more capital intensive. We traded a lot of value through those and that's a good run rate going forward.

Okay. Great. Thank you.

Okay Floris, thank you.

Haendel St. Juste, Mizuho.

Good morning. Thanks for taking my question.

First I was hoping maybe you could give us some insight into the debt financing side. The debt available for a private group like the Hull Property Group, who's buying the three malls here. Can you talk about maybe the lending appetite perhaps of local regional banks. The cost of debt financing that's providing LTDs. And then how does that compare to perhaps the debt availability to CBSI.

Hi, Haendel, this is Farzana how are you?

As to your question in terms of financing on the disposition side, previously the transactions we closed the buyers had had the opportunity to get financing from their local banks and other sources in that respect. Typically banks, I don't know if they have gone and gotten CMBS financing, but they have been able to assume one of the CMBS financing that -- we sold a property, Fashion Square Mall, that had a CMBS loan, they were able to assume it.

In terms of new financing, CMBS is very selective of course. Again, it's not necessarily that they are making financings on higher productivity centers. It depends on what type of center it is, the sponsor is, what's the story, so it's a property by property financing. So we cannot be generalizing it.

So I would say it is available. We do see in our centers where we were not financing, CMBS taking an active role in providing us with quotes. But again we can be selective whether we go through institutional or CMBS or through banks.

You saw us doing that in the last several months where we had financings through two banks, different banks that gave us the loans on and then they soon thereafter converted to CMBS execution. It's different for each property, so it's hard to generalize.

Okay, certainly appreciate that, just really just trying to get a sense of what broadly that could look like. Maybe that's not the question you had a lot of clarity on, but what certainly appreciate the color now or perhaps off-line.

Maybe then a question on the development opportunities that you're looking at on the outlet side with Horizon. How many projects are you looking at there? Your gross appetite, your return threshold, and I guess I'm assuming funding would come via the asset field. Had you look at that opportunity, that capital allocation versus say debt reduction and stock buybacks?

Sure. Well, there's a lot of components to the question. Horizon has done a good job of sourcing projects. Every year to 18 months they seem to bring us a good opportunity. We've had great results in terms of the returns that we have seen in the past and we look at each one individually and evaluate it in terms of the return, the value in terms of the creation that comes about through that.

The strength of the market, the growth prospects. There's really no one factor. I think like we said, redevelopments in terms of capital allocation or capital spend is our priority, but on a selective basis we have had good results for new developments and it makes sense.

And we are also trying to continue and are continuing the progress on our balance sheet. So dispositions like you say are a source of the equity and also free cash flow. We've got over $250 million of free cash flow that we generate as a company and we reinvest that in the redevelopments and again paying down debt and that's a source for new developments, as well.

So maybe you could flesh out a little bit the minimum return requirements for those type of outlet developments that you have and maybe how that changed at all given the volatility in stock prices here and rate that may be, certainly, on the rise?

Yes, I mean we evaluate each one individually. We look at our IRR, we look at the growth potential, the opening pre-leasing in terms of how strong that is. I don't want to box ourselves in to a certain number. You can look at the past projects. We have had them as high as 12%. Those have been really attractive. We create a lot of value there. Those are nice. We don't expect them all to be at that level. We can still make a lot of money for our shareholders on the outlet program like we have shown, and there's a lot of demand from retailers for that sector, and it's been a real successful program for us.

Thank you.

Okay, thanks.

Ladies and gentlemen, 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 everyone, we appreciate your time this morning. We wish you a happy Halloween and look forward to seeing you in Phoenix at NAREIT in a couple of weeks. Have a good day.

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