CBL & Associates Properties, Inc. (CBL) 2017 Q1 法說會逐字稿

Good morning, and welcome to the CBL & Associates Properties Inc. First 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 with Corporate Communications. Please go ahead.

Thank you, and good morning. We appreciate your participation in the CBL & Associates Properties Inc. conference call to discuss first quarter results. Presenting on today's call are Stephen Lebovitz, President and CEO; Farzana Khaleel, Executive Vice President and CFO; and Katie Reinsmidt, Executive Vice President and CIO. 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 the non-GAAP financial measures to the comparable GAAP financial measure is included in yesterday's earnings release and supplemental that is furnished on Form 8-K and available in the invest section of the company's website at cblproperties.com.

We will be limiting this call to 1 hour. In order to provide time for everyone to ask questions, we ask that each speaker limit their questions to 2 and then return to the queue to ask additional questions. If you have questions that are not answered during today's call, please reach out to Katie, following the conclusion.

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

Thank you, Scott, and good morning, everyone. It's no secret that the narrative surrounding retail and malls has been unbelievably negative this year. And in fact, this is a challenging environment for our business. But, as our peers articulated clearly in their calls, the depth of the mall is far from upon us. Instead, as anyone who visits our properties can see shoppers are still shopping, parking lots are busy, and traffic is strong. Nevertheless, changing consumer habits or online shopping are affecting our business. Consumer spending slowed starting in late 2016, and that has impacted sales performance. At the same time, bankruptcies and store closures by NLP retailers accelerated, often due to their unsustainable debt loads. This combination of factors is negatively impacting our NOI this year. While we are at disappointment with our results for this quarter and that they do not provide ammunition to dispel the negative reports in the media, the good news is that we also see tremendous opportunity in these challenges. Retailers are adjusting their strategies, and we are doing the same. Healthy retailers are evolving, leveraging physical and digital assets to offer the convenience, value and experience the customer demands. But it is not enough for retailers to evolve. Owners have to change as well. Our leasing strategy is focused on bringing in dynamic new uses, food, entertainment, beauty, fitness and value. These uses not only drive additional traffic and sales, they also reduce our concentration in traditional, apparel and juniors. Our properties enjoy prime locations, excellent access, strong demographics and longstanding relationship with the communities in which they are located. Our strategy of owning the dominant retail real estate intermarket positions us to attract new uses and benefit from retail consolidation.

The word of the year at CBL in 2017 is reinvent. Given the trends occurring this is even more fitting now. In fact, we have to reinvent faster. We have proactively gained control of anchor locations and surrounding land for redevelopment, allowing us to quickly and thoughtfully transform our properties. Our vision is to create a growing portfolio of vibrant suburban town centers. There's no question that 2017 is going to be a tough year for a number of retailers, and we will experience a short-term impact as a result. But the challenges we are facing today will allow us to accelerate the transformation of our portfolio into stronger, more valuable properties for the long term. Another major strategic priority is to build on the significant improvements we've made to our balance sheet and further reduce leverage. Our commitment to achieving these objectives was clearly demonstrated with the sale of The Outlet Shoppes in Oklahoma City that we announced on Monday. The property was sold for $130 million, generating net equity proceeds of $38 million as our share after payoff of the debt and closing cost. We'll record a gain on sale from this transaction of approximately $44 million in second quarter results. This was a tremendous transaction for CBL and our shareholders. We originally developed this outlet in a joint venture with Horizon in 2011. And through this sale generated an IRR of approximately 40%. The proceeds allow us to further improve our balance sheet as well as providing increased liquidity for future redevelopment projects.

We also entered into a binding contract for the sale of 2 of the malls in our original target disposition list, for total gross proceeds of $53.5 million. Due diligence has expired, the buyer posted a significant nonrefundable deposit, and we anticipate closing later this month. With the completion of these 2 additional asset sales, we will conclude our portfolio transformation program having that most of our originally outlined goals.

The quality of our portfolio composition over the past 3 years has vastly improved, as we sold lower-productivity, higher-risk properties. Through these sales we've generated significant proceeds to improve our balance sheet and fund investments in higher-growth assets. Tier 3 NOI has declined to just 6% of mall NOI, as of March 31, and will decline even further following this transaction.

Going forward, we will sell assets as part of our capital recycling program or where we see opportunistic pricing, as we did with Oklahoma City.

Moving on to our first quarter operational results. Portfolio occupancy increased 50 basis points to 92.1%, primarily as a result of the disposition of lower occupancy malls and lease up of our associated centers. Occupancy in our same center stabilized mall pool declined 100 basis points, primarily due to that 110 basis points lost from store closures this quarter. We expect occupancy to decline further in the same center pool for the second quarter as a result of the additional retailer bankruptcies and store closures that have been announced since February. Our leasing team is focused on back filling these spaces as quickly as possible, and has executed several replacement leases already in the first quarter.

As you may recall, we had a similar bankruptcy experience in 2015, starting the year with a 320 basis point decline in occupancy. By year-end 2015, we had cut this in half. And by year-end 2016, we were 10 basis points ahead. The demand for space in our portfolio is strong as evidenced by the nearly 300,000 square feet of new leases executed during the quarter. This includes more than 130,000 square feet of new leasing for mall space under 10,000 square feet, signed at an average increase of 18% over the prior rent. While renewal spreads were down 3.4% this quarter, we typically see the low -- lowest renewal spreads in the first quarter, and this decline is consistent with renewal spreads generated for the same period last year. Our goal is certainly to improve spreads throughout the remainder of the year. Rolling 12 months sales for the portfolio were $372 per square foot. Sales for stabilized malls were down 2.6% on the same center basis and 1.6% compared with last year's unadjusted number. While some retailers missed the mark on fashion trends, we also witnessed normally strong brands post double-digit declines due to certain merchandising decisions they made. March demonstrated some improvement, and we anticipate a better April due to the later Easter this year.

I'll now turn the call over to Katie, to discuss our investment activity in more detail.

Thank you, Stephen. In April, we celebrated the grand opening of The Outlet Shoppes at Laredo. The project opened approximately 82% leased. Reports from retailers following the opening were positive with most new stores exceeding their sales plans. Traffic and sales have been solid since the opening with many shoppers coming across the border to ensure the broad assortment of new retailers. We also opened an expansion at our Mayfaire Town Center in Wilmington, North Carolina, with H&M and Palmetto Moon. Our redevelopment activity is robust, with 9 projects under way and 1 recently completed. Planet Fitness opened a college square in Morristown, Tennessee in space formerly used as storage. We will open a new 20,000 square foot T.J. Maxx at Dakota Square Mall this summer. And we'll also open a store at Hickory Point Mall in Forsyth, Illinois this fall. In April, we opened a new 48,000 square foot Dick's Sporting Goods in a former Sports Authority space at Triangle Town Center. At Turtle Creek Mall, we are redeveloping soft space for a new open beauty store, which will open this spring. Dillard's is currently building out their space at Layton Hills Mall in Layton, Utah, in the former Macy's location, the opening is planned for the fall. As we announced last quarter, we are working on plans for 3 Macy's locations that we purchased in January, as well as the 5 Sears stores that we gained control of through a sale leaseback transaction.

We expect to be able to announce more substantive plans for several locations later this year, as leases are finalized. Plans include entertainment, restaurants, value retailers, sporting goods, service and other nonretail uses, as we evolve our properties to suburban town centers.

As we mentioned last quarter, we estimate the total cost for these 8 projects will be in the $150 million to $200 million range over the next 3 to 4 years, which is in line with our normal redevelopment spend.

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

Thank you, Katie. For the fourth quarter we generated adjusted FFO per share of $0.52, in line with consensus. Same center NOI declined 1%, and same center NOI for the mall portfolio declined 1.6%. FFO per share as adjusted for the quarter was $0.04 lower than the first quarter 2016. Major variances impacting FFO included $0.05 per share of dilution from asset sales completed in 2016 as well as the office buildings sold in January; $0.01 of lower NOI for same center properties; $0.01 of higher interest expense partially offset by $0.03 higher gain on outparcel sales. Same-center NOI declined $1.8 million, while we generated an increase in minimum rent of $1.4 million from embedded rent growth, this was offset by $2 million of lower percentage rent and $2 million of lower tenant reimbursements and other income. Property operating expense in maintenance and repair improved by $2.2 million during the quarter, primarily as a result of lower snow removal and contract expense offset by a $0.4 million increase in bad debt expense. And real estate tax expense increased $1.4 million.

At the time we issued 2017 guidance in February, we incorporated the impact of bankruptcy activity announced today. Since that time, a number of additional retailers have declared bankruptcy and/or announced store closures. While the status of some of these retailers is still being determined, we are estimating an additional prorated impact to NOI for the remainder of 2017, in the range of $10 million to $14 million, or $0.04 to $0.05 per share. We are also estimating approximately $0.04 per share of net dilution from the recently completed sale of The Outlet Shoppes of Oklahoma City and the 2 malls under binding contract.

As a result, we are adjusting our guidance to a range of $2.18 to $2.24 per diluted share, and same center NOI in the range of negative 2% to 0%. As always, our updated FFO guidance does not include any unannounced transactions. We are projecting to end the year with stabilized mall occupancy of 93% to 93.5%. The decline in the year-over-year occupancy will likely increase in the second quarter, as we absorb additional store closures. But we expect to narrow the margin as lease up is completed later in the year. As Stephen outlined, we are aggressively working to replace the spaces vacated by store closings. We are also bringing in new uses as part of our strategy to transform our properties into vibrant suburban town centers.

We ended the quarter with total debt of $5 billion, relatively flat from year-end as the debt reduction from Midland was offset by the acquisitions of the Sears and Macy's boxes at the end of January. We will contribute more than $300 million to further debt reduction, as we apply dispositions -- disposition proceeds and as the foreclosure of Chesterfield and Wausau are completed. Our net debt to EBITDA of 6.6x at the end of the quarter remained relatively flat from year-end, and improved from 6.9x at the end of the prior year period.

In the first quarter, we unencumbered 4 properties with a total loan balance of approximately $159 million, and a weighted average interest rate of 5.67%. These loan retirements increase the percentage of a consolidated unencumbered NOI to 52% of our total consolidated NOI. We have $184.7 million of operating property loans remaining that mature in 2017. We are currently in negotiation with the special servicer to restructure the $125 million loan secured by Acadiana Mall in Lafayette, Louisiana and anticipate finalizing the restructure in the near term. As we've discussed previously, Acadiana is a strong property but it is located in an energy market and its sales have been significantly impacted. We believe it is appropriate to restructure the loan to provide additional term for the market to stabilize and utilize free cash flow after debt service to fund improvements at the property. We plan to refinance 2 joint venture loans secured by The Outlet Shoppes at El Paso, with an aggregate control balance at our pro rata share of $53 million, ahead of the maturity. We are also in early discussions with our banks to refinance 2 unsecured term loans totaling $450 million, which mature in February and July 2018. We will announce more detail once this is finalized.

The profits we have made over the past 24 months in reducing our debt balance, lengthening our maturity schedule and reducing our variable rate exposure, provides us with the flexibility to fund our business and take advantage of the tremendous opportunities ahead. Our goal is to lower net debt to EBITDA to 6x, reduce the secured debt to total asset ratio to below 25% and further increase our unencumbered NOI from high-quality properties. Our plans for growing EBITDA through redevelopment and reducing debt balances will help us progress towards our goal.

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

Thank you, Farzana. As I hope you realize, we are not at all satisfied with the numbers we posted this quarter. But, we are not discouraged either. We are actively responding to the immediate market challenges by bringing new retailers and new uses to our centers. At the same time, we are energized by the opportunity to redevelop underperforming anchor stores and transform our malls into dynamic and entertainment and multiuse of suburban town centers.

We appreciate your continued support, and we'll now take your questions.

(Operator Instructions) The first question comes from Christy McElroy of Citi.

I just wanted to follow-up on some of your comments. You talked a lot about sort of proactive anchor recapture and redevelopment, and also bringing in new uses to transform the properties. How should we be thinking about the pace of annual spend on sort of repositioning CapEx and development spend and the box re-tenanting, as well as the funding for that spend? You mentioned asset sales, but just trying to get a sense for sort of how much free cash flow covers it and how much more capital you would need to raise?

Christy, sure. It really is consistent with what we've been spending, which is roughly $125 million a year. And it's spread out over time, so we have the 5 Sears and the 4 Macy's, though 1 of the Macy's is under construction with Dillard's this year. But most of the spending is going to occur -- spread out over '18, '19, and even into '20. So what we said $253 million could spread out over that time frame. So that's what we're looking at, and we still generate a return $25 million a year in free cash flow, back funds, CapEx, deferred maintenance, lease costs and also the redevelopment program. We've supplemented that with the asset sales. Like I said, we're going to continue to do asset sales where it makes sense. But we feel comfortable that with the cash flow that we have that we can fund this program.

Okay, and then, Stephen, you mentioned the public market narrative being really negative. On their call earlier this week, GDP discussed the meaningful NEV discount and ways for them to close it, including exploring bigger strategic alternatives to sort of crystalize private market value and return capital to shareholders through buybacks or dividends. How are you thinking about ways to sort of close out NEV discounts, narrow that NEV discount? And would you consider a privatization if that option were presented to you?

Sure. Well like I said last quarter, we -- all options are on the table. We never rule anything out. We're a public company and that's part of being a public company. So privatization is certainly one of those options. But the best way we can narrow the discount is to fill the vacant space, get better lease spreads, move ahead with the redevelopment program and run our business and put up better results than we did this quarter. And like I said, we're disappointed with what we experienced this quarter. We did have a lot of headwind between the bankruptcies and store closings and the sales that unfortunately contributed to these results. We want to be realistic about where we stand and that's why we went ahead and reduced our guidance, because we see this being a tough year. But we're focused, and like I said, we are encouraged by the opportunity, we're not discouraged. We've been through this before. In 2015, we had basically the same amount of bankruptcies and we clawed back that occupancy over a 24 month period. And we're just doing the same thing now, which is filling space. The difference is that it's different types of uses. We're not going as much to juniors or apparel, we're bringing in new categories. We're bringing in more fitness and wellness and services and not traditional retail. But we're getting a lot of demand from those kind of categories. And value is an area as well that there's a lot of demand. And then with the redevelopments, we are even seeing a lot of demand from mixed use: residential, hotels, office, medical office, and so that's a category that we're going to be seeing more and more of across the portfolio.

The next question comes from Todd Thomas of KeyBanc Capital Markets.

I just -- first question on the guidance provision. Just to clarify that $10 million to $14 million of additional loss that you're embedding in guidance. Is that for announced store closings and bankruptcies that have already been announced, but where the outcome is not yet known? Or does that include additional store closure announcements that have not been made altogether that you're potentially contemplating in the future and that's embedded in guidance?

Todd, yes, it's really all of the above. Like you said, we do have -- we guided another $10 million to $14 million in these retailer bankruptcies, and that includes a little bit of a cushion, $3 million to $5 million that we are anticipating, but it will be later in the year. So we are giving us some room to absorb additional store closures or rent reductions.

Okay. And then just second, following up on Christie's question, I guess, as you execute, you start to fill some of the vacant department store boxes and find replacement tenant's for some of the in line retailers. To the extent that the negative narrative persists. How long do you wait until you act on to do something to close that GAAP? And what do you do? I mean, do you look to sell more assets aggressively, maybe some other outlets centers or higher quality assets and buyback stock? What options are at your disposal, sort of longer term that you're evaluating, if this disconnect or if this environment persists?

Yes, I mean, we're not waiting at all. I mean, I think the outlet center sales demonstrates that we're proactive. I mean that sale didn't happen overnight. It takes time to execute these sales and we talk about what we can do on a daily basis. So I don't want to give the impression that we're waiting around and just hoping that things are going to get better. Because that's certainly not the case. The question was, are you doing a strategic alternative process? And no, we're not doing that. We're not hiring bankers or anything like that. But there's a lot of levers we can pull within the portfolio. And we're evaluating that constantly. And that's our job. The Oklahoma City asset, it was a Tier 2 property. We had a great cap rate, we generated proceeds to help our balance sheet and we're looking opportunistically where it makes sense at other assets. And like I've said in the past, we look at joint ventures, we look at other dispositions. So there's a lot of different opportunities throughout the portfolio for us to do things.

The next question comes from Nick Yulico of UBS.

This is [Mark Ennis] on for Nick. I'm just curious more about this -- the anchor box redevelopment and the potential shutdown of Sears stores. With 16 leased and 47 total boxes, how are you guys thinking about developing these assets?

So we closed earlier this year on the acquisition of 5 stores from Sears they are leasebacks. So Sears is still operating, but we're working on the redevelopment, we anticipate the first of those starting in '18, we've had really good demand and it's given us the opportunity to broaden the uses, more restaurants and food, but fast casual and sit down; more entertainment; more value; and you've got TJX, with their different divisions; expanding Ross, Old Navy, so ULTA in the beauty category is doing really well. And then, like I've said, nonretail use have also been interested in these locations. So our goal is to chip away at Sears through these 5 and then others where they have leases that are expiring. So we see this number continue to come down, we had 72 at the peak and we brought that down dramatically and that's what's going to continue over the next few years. So that's really our strategy with regards to them.

Okay, great, thanks. And is there any risk of cotenancy clauses when these guys close?

So with the cotenancy there's a short-term situation, but we have backfills that would cure the -- any cotenancy. And also typically in the malls, the cotenancy doesn't trigger, it gets triggered by 1 department store or anchor. It's more than one. So we're very cognitive of that, we run that analysis, we make sure and we also talk to the retailers and let them know what we're doing, so that they are aware and they have been cooperative as well to try to work through that when it's the case. But it really hasn't been a contributor. It wasn't a contributor to what we experienced this quarter. And it's something that we're comfortable that we'll be able to mitigate and work through.

The next question comes from Craig Schmidt of Bank of America.

I was wondering where you thought the leasing renewal trends would be for the rest of the year versus the first quarter?

Craig, well, it's going to be better. But it's still not going to be great. We're are in that mode of preserving income and doing renewals and preserving occupancy versus driving tenants out and trying to replace them with new leases. We've got the vacancy that was created by the store closings. We've got some more coming up. So we'll -- we're anticipating that we'll be positive, probably comparable to last year, maybe a little lower. But it's still going to be a challenging environment.

Great. And then, the store closings, did you have more occurring in Tier 1 versus Tier 2 or Tier 3? I noticed the sales fell less in Tier 1 than Tier 2?

Yes, I mean, the sales in Tier 2, the decrease was really driven by some of the malls that are in that category, which are on the borders, North Dakota or the ones on the border with Mexico or the energy related. So it was more that versus store closings that impacted us. And then we had a couple where there was some new competition. So it was really more just the properties in those markets and we are seeing some stabilization in energy so we're optimistic that, that'll flatten out and start to come back, and also usually when we have competition, it's an impact for the first year but, again, that bounces back.

And so the store closures across tiers were pretty evenly divided?

Yes, that's correct.

The next question comes from Rich Hill of Morgan Stanley.

Maybe a follow-up question about the store closures across peers and taking a little bit of different direction. But the same-store NOI declines that you saw this quarter and maybe you're guiding towards for the full year, do you expect those to be relatively consistent across tiers? Or do you see more -- you see some variation between the Tier 1's and Tier 2's?

Yes, I mean, we -- our Tier 1 has had stronger NOI performance then Tier 2 and 3. It's historically been pretty linear and that's the case this quarter and that's the case going forward. So we see the best results out of Tier 1 and Tier 3. The reason that we've sold a lot of those assets is because we weren't getting the NOI growth as much out of those. And trying to invest more in Tier 1. So that's pretty much been the case, and we see it continuing.

Got it. And in terms of the releasing spreads, if my memory serves me, typically the releasing spreads have actually been pretty decent. So I think I was maybe a little bit surprised to see the weakness there. Was there any sort of one-off thing? Or how should we think about that?

Yes, I mean, we were within a 100 basis points of last year's first quarter on renewal spreads. So -- and first quarter is typically the weakest. I mean, we do -- we did have some of the retailers, children's and juniors, where the renewals were weaker, just because their business has been more competitive. And we're seeing as we add more H&M's and more fast fashion, it does impact some of the traditional juniors in the properties and that's contributed to some of the bankruptcies and store closing. But it also hurts us on the renewals. But we didn't see this being an outlier. Our new leasing was a little bit lower but, again, we had a really strong amount of new leasing. And so we're focused on getting good-quality renewals and lease spreads but again, part of it is dictated by where we are with occupancy.

Okay, got it. And just one final question from me. You guys have mentioned that some of the properties that have been coming up for maturity in the CMBS market are stronger. I think, at least looking at the metrics, I would generally agree that they look like they maybe could be have been refinanceable. Any reason that you haven't been tapping the CMBS market more frequently, than you have in the past? Is it just because the properties that are coming due you either want them to unencumber them or they just weren't stabilized. Maybe that's a question just for you, Farzana.

Yes, sure. I'll answer that question. As you know, we've been moving towards the unsecured strategy and we've been unencumbering a number of our secured loans. So that's the strategy we are on. And we mentioned for several quarters now, that the joint venture loans are up for refinancing. So this year we have 1 loan that we will be refinancing, that's El Paso Town Center, our outlet center and that's, that

(technical difficulty)

Excuse me, this is the conference operator. There's been an interruption in the call. Just one moment please.

(technical difficulty)

And I believe the question was coming from Rich Hill of Morgan Stanley.

Great, thanks, Farzana. Hopefully I didn't -- that wasn't a reflection of my question.

No, no, did you get all the answers.

I -- it cutoff mid-sentence, but if you could just maybe -- maybe just elaborate on it really quickly.

Okay, I'll just resummarize. The unsecured strategy that we are -- that we have been pursuing, so we will be continuing to pay off our secured 100% wholly owned secured debt, that they are high-quality properties, that have very high debt yields and we're paying those off. But when it comes to joint venture properties, we are refinancing the joint venture properties in the CMBS market or any other financing market that's available.

The next question comes from Michael Mueller of JPMorgan.

I apologize, if I missed this. But if you're looking at the pool of a space that you're looking to rule out, that you're just getting back from the closures and bankruptcies, can you talk about like what portion of it has been spoken for? What portion of it that you feel really good about? And just kind of walk us through kind of where you stand on it?

Well, you didn't miss it, because we haven't said that. And I mean, it's really something that is just too early to say. Most of these -- a lot of these stores haven't even closed, and so that's one of the challenges that makes it tough for this year, is the timing is uncertain, or coming in later in the year. In 2015, the closings were announced in January, we have the whole year. Now Rue 21's been rumored but they haven't filed yet. So we don't know the timing on that. And then some of the other big one that out there is Payless, which has filed, but they're still operating and so there's just uncertainty with that. We're working on the back fills. We really look at it from 2 perspectives, we look at it on a short term from specialty leasing and backfilling it through the holidays and that's a source of income that's really important to us, and they were also looking for the longer-term, more permanent replacements in both of those are really important as we look for how to increase our income this year.

Okay. And I guess, something tied to that too. When you originally talked about your comments at the beginning of the call, you talked about re-tenanting with food, entertainment, fitness, I think a few other categories. And when I think of those tenants, I think of department store box that goes away and you replace them with other big-box-oriented tenants that have lower rents that you would have in the shops. So I guess number one, first of all, where those tenants listed, you were thinking of boxes? Or were you thinking of those as replacements for shop? I'm assuming it's boxes. So following up on that, like -- can you talk about some of the tenants you're seeing in the small shops that are replacement opportunities?

Yes, No, I was talking about both. In fitness you have large boxes and you have smaller users like an Orangetheory or cycling, that type of thing, the spin classes. Restaurants, you have sit down, you have the fast casual, which is again 3,000, 4,000 square foot spaces. That's really active. With cosmetics, we've done a lot of ULTA deals in the malls and they've replaced vacant spaces. And then there's other categories that are doing well, whether it's anything that's related to mobile phones or wireless technology; personal accessory; sunglasses; jewelry is still doing well; personal services; shoes; there's retailers, like Hot Topic has new concepts that they're expending. We're doing more leasing with local and regional boutiques, that we have in the past. Pop-up stores is something that's been publicized. So there's a lot of -- there's a lot across the whole spectrum of sizes that we're seeing interest. And it's just, we're reducing the reliance on apparel and juniors because that's where we're seeing most of the problems in terms of the store closings, but we're seeing really strong interest from other -- these other uses. And this whole narrative is just out of control, ridiculous as far as malls going away. And like I've said in my comments, if you go to any of our malls, they're busy. And the parking lots are busy. There's shoppers. There's traffic. I mean, it's just crazy what's being printed out there. And it has no relation at all to reality.

The next question comes from Caitlin Burrows of Goldman Sachs.

I was just wondering first if you guys can comment, it looks like 2 extension projects you guys had in the past went away at Hammock Landing and Brookfield Square. So I was just wondering if you're not planning to go forward with that? Or kind of what the change was there?

Yes. Hammock landing opened, so that's an existing mall. And then Brookfield Square, we decided to delay it, because that was one of the Sears that we purchased with the leaseback. And so it was -- we just wanted to see how it would tie in with the Sears and so we just held off on that.

Got it. And then also, I think, Farzana, it was you that mentioned earlier that or maybe it was somebody else, sorry -- that within the Tier 2, some of the sales impact was by the energy markets but also by new competition. So I was just wondering, what kind of new competition that was, if it was, I'm guessing not enclosed malls, but if it was other open air centers or outlets, not sure kind of what that was?

There were couple of outlets in Little Rock and Daytona Beach, new outlets opened and so that hit the mall sales. And we've seen that in other markets. We had it in Asheville, North Carolina a few years ago, and we'll see some sales decreases kind of in the mid-single digits for a year but then it increases and it recovers back.

The next question comes from Carol Kemple of Hilliard Lyons.

I know this is a board decision, but considering you expect FFO to be down this year, do you think that could have any impact on the dividend?

Well, like you say, it's a board decision. And we've got a board meeting coming up. But we still have a very low payout ratio of less than 50% of our FFO. It's a dividend, even with these decreases. And so we see what's happening this year more short term and we also -- we're looking at paying out taxable income. Taxable income gets impacted by the dispositions and the gains on sales. So we got to look at all that together, in terms of that consideration.

Okay. And the as far as the portfolio transformation, I think as far as total number of malls, you all talked about 2014. It a few more than you've actually done. Are you all just fine with sitting with the other Tier 3 assets for now? Or are those something you'll probably sell over time?

So we -- with the one's we announced, we have 20 or the 25 that are basically accounted for. And then the others are really properties that since that time have redevelopment projects that will transform them and will make a big difference in the valuation and the cap rates. So that's why we've decided not to go forward with selling those. And we'll look at it down the road and see if it makes sense. And we're looking at all our properties from an asset strategy point of view and seeing where it makes sense to invest, through the department stores, where it makes sense to possibly sell. And that's something we do on an ongoing basis.

The next question comes from Floris van Dijkum of Boenning.

Steve, could you maybe -- you talk about reducing your reliance on apparel. Could you remind us what apparel, as a percentage of your overall tenant base and where would you like it to go in 2 or 3 years' time?

Yes, I don't know the exact number off the top of my head. But you look historically and the malls have been 70%, 80% apparel. And the food has grown as a percent -- its gone from 5% to greater than 10%. That's going to grow probably to -- in the 20% range. And then some of these other uses that I've talked about are going to grow as well. So I can't give you exact numbers. We don't have a specific target, but it's definitely going to shrink and it's -- due to store closures, that accounts for some of it, but also being more proactive and replacing some of these retailers that there's just too many of the same in the malls.

Okay. My other question had more to do, I guess, with guidance, and obviously there is a pretty large increase in the bad debt reserve, I guess that's mostly due to Rue 21 and Payless, I suspect. But the lower guidance actually doesn't seem to reflect any incremental sales and against -- my question to you is most of the investors when they look at your portfolio and see still, call it, over 20 C malls in your portfolio, those typically get sold at high double-digit -- or high single-digit cap rates. How much should we prepare for potential further dilution if you get bids for some of those assets? And I know it's tough to put in there, but how do you manage the expectations? Or how do you prevent from cutting your estimates progressively down the road as you sell more of these assets?

Floris, as you mentioned, we don't provide for anticipated dispositions. That's just kind of too much of a variable to include. We will include that, as we know that these dispositions will occur. We included 2 this quarter, because we had it under contract. So that's just really not how we make our -- provide our guidance. And to your question regarding just the bankruptcies, we have provided at the 2% bottom and negative 2% guidance, $10 million to $14 million. We are taking into account some additional potential closures or rent reductions. So that's really our best estimate today. And we are -- we hope we're not going to change this estimate and -- unless something catastrophic happens, which we don't expect. So therefore, this is really our best estimate today. That negative 2% to 0% is where we'll be on same center NOI.

I don't know what you're saying about 20 C malls, because we have 6 properties in Tier 3 after these dispositions and that includes in outlets, joint ventures and 1 center that is open-air. And like I've said, the others are redevelopment. That's why we decided not to sell them. So I don't think that's -- we're not just dumping properties and going to cause any further dilution.

The next question comes from Linda Tsai of Barclays.

In terms of the 2 malls that you have a deposit on, how long have you been in discussions with the buyers? And are you approaching the negotiation process any differently than, say, from a few years ago?

No. We've got -- like we've said, we had a signed contract, due diligence expired, closing is surely sometime this month. So that's the only reason we announced that had a closing because it's eminent. And we don't get into how long and all that. These things take time. They've taken time over the period. We talked about it. And -- but I can't tell you how many months or anything like that, it's a process.

Are you approaching the negotiation process any differently?

The negotiation process, honestly, everyone is different, every buyer is different, every property has different characteristics. I mean, these -- one of them had some redevelopment, where we replaced a JCPenney, and we brought in some boxes to do that and that positioned the property to get an attractive offer. And we were very pleased with the pricing that we're able to receive and it was significantly better than we would have if we wouldn't have done that. So, but there are all unique negotiations and I wouldn't say we're doing it different today than we have in the past.

And then just a question for Farzana. In terms of the additional $3 million to $5 million baked-in guidance for closures that you don't know about yet. how confident do you feel in terms of it being a sufficient cushion? What sort of a thought process that goes into it?

Linda, we try to make the best estimate. We look at all the different negotiations that's going on. We look at the announcements that have been made. We read about it. We talk to our leasing department. That's a lot of work that goes into coming up with that number. So at this moment, when we revised our guidance, we took into consideration, what we believe potentially may occur. So that $3 million to $5 million is including that assumption. So we feel confident that what we have today is after thoroughly going through our analysis coming up with that number.

The next question comes from Jeff Donnelly of Wells Fargo.

Maybe -- I guess the first question may be for you Farzana. It's just, with the pressures that we're seeing in the industry from store closures and other factors, do you expect you might need to increase the volume of asset sales in the future just beyond what maybe was your original expectation to achieve your net debt-to-EBITDA goal? I think it was around 6x. Or are you in more of a wait-and-see how the things unfold?

No. Actually, our net debt-to-EBITDA is going to improve. We are in the process of returning couple of more properties. Warsaw and Chesterfield that has very low debt yield. Then again, we are paying down debt from just the recent dispositions that gave us a good bit of resources to pay down debt. And we'll continue to improve the EBITDA through all of these redevelopments that we are very excited about. So a combination of the 2 will continue to improve. There's no reason to believe that, we will not achieve that goal. So we have our eyes on that metric, very focused on it.

And maybe one for you, Stephen. I'm just curious, thinking of kind of a, I guess for lack of a better term, the cadence of small shop leasing activity. Just with the churn that we're seeing in the industry of more retailers kind of rationalizing phase. I'm just curious if -- how we should be thinking over the next 12, 24 months, as we kind of churn to more tenants. Should we expect to see more downtime or do you think the demand from retailers out there is sufficient that maybe downtime between leases will remain pretty constant? I'm just curious how we should think about that.

No, I mean we see it being consistent, with what we've had in the past. And typically, we'll have 6 to 9 months of downtime, when we have a vacancy . And a lot of it depends on what time of the year the vacancy occurs and we'll backfill it with short-term specialty in the meantime. But most of the store openings happen in second and third quarter. So that's when we're going to start to see the pickup in occupancy. And given where we are in the year, it's hard to get that much done this year, which is the major reason why we've adjusted the guidance.

And so far, has the capital needs for that recycling been pretty consistent as well? The reason I'm asking, I'm just thinking between all the initiatives that you guys are trying to execute. Whether its de-leveraging, or -- and also maybe potentially facing sort of a higher churn rate with tenants, I'm just thinking about you go about funding the possibility of higher re-leasing costs or redevelopment costs in the future?

I mean, we've had in the ballpark of $50 million in tenant allowances for the last 4 or 5 years. And we feel like that's more than adequate. Just given the spaces, they're built out; they're in good shape. Where some cases, where we -- most of that is when we have spaces, we're combining for larger users like H&M and that we're moving people around, that's the primary source -- or I mean, use for that -- for those tenant allowances. But where we're backfilling spaces that are in place. We typically don't have significant tenant allowances.

And then just one last one. I know that dividend is a low as a payout of FFO. Can you just remind us where it is on the basis of taxable net income? I just wasn't sure where the payout was on that basis?

Our payout ratio is 100% of our taxable income and it's been around below 50%, so that's the payout ratio.

(inaudible) The last question due to time constraint is Haendel St. Juste of Mizuho.

Just sneaking it under the wire. One question from me. Stephen, I know you said, it was an opportunistic sale. But does the outlet sale of Oklahoma City signal perhaps a shift in your view on that business? You previously indicated that you liked the business and even talked about a desire to grow it. Or is it perhaps that you're seeing that as a better source of liquidity to help fund some of your REIT of activities?

Well, it's not at all an indication that we're less bullish on the business. The other outlet centers that we have in the portfolio are having good sales growth and have good upside. So from that point of view, we're not looking to sell others. When we looked at Oklahoma City, just given the point it was in the cycle, we felt like it was a good time to do a transaction. And also it generated a tremendous return for us and for our partner and for our shareholders. And it did accomplish what you said in terms of raising significant liquidity. The pricing was attractive, so it was accretive to where we trade and it does help us from a balance sheet point of view. So just kind of looking at everything together, we felt like it made sense.

So going forward, is it reasonable to assume that outlet sales could play a role in future sourcing for your REIT ups?

No. That wasn't what I meant to imply. I mean, I think we'll look across all the properties and the outlet centers at this time,. The other ones are having good growth, and we don't have any plans to do anything with them.

And we have a question from Andrew Molloy of Bank of America.

My call is regarding cotenancy clauses and circling around that concept. First, do you provide a percentage of total tenants that have cotenancy clauses in the lease agreements? And to date, have you seen tenants trigger this clause? And how does this compare historically? And I also have a follow-up as well.

Yes, we do not provide that percentage. I will tell you that it's -- there is some kind of cotenancy provision in the majority of the leases, but there's no consistency. It's different for different retailers. It's different in different locations. And it hasn't been material, it didn't impact our results this quarter. And going forward, we don't see it being an issue either.

Thank you. And this might be more of a question for Howard. But when an anchor goes dark, how does this change the definition of anchor stores in a lease agreements? And -- yes, how does that change the definition?

Yes, I mean, again, it's different in for different retailers. But there's rights to cure. There's more than one anchor that have to close the trigger cotenancy. There's the ability to be flexible in terms of replacement from both a square footage and the use point of view. So we're always working to make that as favorable from the landlords point of view if possible. And the retailers are negotiating with us on it and it's evolving.

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

Thank you, again, for your time today. If you do have any follow-up questions, please feel to reach out and we look forward to seeing many of you at the RECon conference in Vegas and then at NAREIT in June.

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