CBL & Associates Properties, Inc. (CBL) 2017 Q2 法說會逐字稿

Good morning, and welcome to the CBL Properties second quarter earnings conference call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Mr. Scott Brittain with corporate communications. Please go ahead.

Thank you, and good morning, and 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 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 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 measure was included in yesterday's earnings release and supplemental that will be furnished on Form 8-K and that is available in the investing section of the website at cblproperties.com. We will be limiting this call to 1 hour. (Operator Instructions)

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

Thank you, Scott, and good morning, everyone. As our results for this quarter indicate, 2017 is a year of challenges for CBL and for the retail real estate industry. That being said, there continues to be a huge disconnect between the magnitude of these challenges and the grossly exaggerated reports declaring the end of bricks-and-mortar retail. Claims that 55% of malls will be shuttered in the near future and nearly 9,000 stores will close this year are the product of poor research and sensationalism.

We are not denying that the retail industry is changing, but CBL, along with our peers, owns the highest-quality retail properties in the best markets and locations.

The new term loans we announced earlier this week not only validate the quality of our properties but also our overall market-dominant strategy. We greatly appreciate the support of our banks and their ability to see past the misleading headlines to grasp the significant value and opportunity at CBL.

The pace of retailer bankruptcies and store closings has increased this year due to a number of factors, including high amounts of debt by many companies. Online shopping is taking an increasing share of sales, but retailers are aggressively adding online capabilities to complement and further enhance the in-store experience. The vast majority of retail sales are still done in stores, and pure play online retailers have yet to figure out how to be profitable. Even mighty Amazon has validated the value of a physical store presence with their Whole Foods acquisition.

New technologies are helping retailers understand and reach their customers more effectively, and retailers are investing significant time and capital to satisfy the demands of today's consumers.

All of these changes will fuel the continued evolution of retail properties in the U.S. As I mentioned last quarter, CBL is focused on reinvention of our company in many respects and of our properties as we navigate this dynamic environment. We have made tremendous progress the last few years on upgrading our balance sheet and our portfolio. Our market-dominant locations position CBL to benefit from these trends as we transform our properties into suburban town centers that provide our customers with a differentiated experience. These experiences include value retail, entertainment, dining, fitness, beauty, health and wellness, services and other uses, with each market requiring its own strategy and tailored mix.

So far this year, we have made significant strides in our redevelopment plans, with leases out for signature or LOI's executed at nearly all of our major projects. Our merchandising mix continues to broaden as we leased to entertainment concepts such as Breakout Escape Rooms, iFLY and Dave and Buster's; and beauty, health and wellness tenants like ULTA Beauty, Lush Cosmetics, Planet Fitness and Ash's Salon.

Customers are asking for a socially conscious emphasis, and we are responding by adding stores like Altar'd State and BoxLunch. Food and beverage is expanding in our portfolio with robust demand. We currently have 65 restaurant deals underway, including 15 executed, 12 out for signature and 38 in active LOI discussions. These deals represent ground lease transactions, pad sales and traditional leases and include great concepts such as Bar Louie, Lucky 13 Pub, Bonefish Grill, Old Chicago and Panera Bread. We also know that capital is precious. And we look to add these uses and others across our portfolio, we are maintaining a sharp focus on tenant credit. Many times, we are limiting our investment by ground leasing or selling the pads to these users.

Innovation is a priority for us. We are utilizing new technologies to better connect with the customer and to help our tenants drive higher in-store traffic. We are testing traffic cameras at several centers that will not only provide us with traffic information but will also provide us and our retailers with better demographic data.

Our digital marketing is reaching broader audiences than ever before with our fresh, new mobile-friendly property websites and a fully integrated social media platform.

With multiple channels competing for shoppers' attention, it is vital for our centers to offer a fresh experience for customers on each visit. Pop-up stores are not a new thing, and we have a very successful seasonal business built around these short term leases, but we've taken a new approach to this established idea. We've rolled out a pop-up shop in a number of our centers, which feature a new use each week, providing an opportunity for local an online boutiques to showcase their merchandise. The word gets out quickly through social media, attracting unique and seasonal vendors such as prom dresses in spring, local artisans, natural beauty products and custom jewelry.

Our dominant locations offer greater traffic and critical mass, which appeal to these local merchants and allow our centers to reflect trends and popular products in their local markets. Additionally, regional boutiques like Cabela's, Southern Charm and Lizard Thicket help us to diversify from national chains and bring their large and loyal customer following with them. New uses such as craft breweries, wine bars, boxing gyms and other distinctive concepts are being adding to our centers, and we are actively working to add hotels, office and residential components as part of anchor redevelopments, where appropriate.

We have also made significant progress upgrading our portfolio through our active asset management discipline. During the second quarter, we wrapped up our stated disposition program, with transactions executed on 19 malls at a value of more than $750 million, including this quarter's sale of 2 Tier 2 -- Tier 3 assets as well as the conveyance of Chesterfield Mall. We also recently entered into an agreement to sell our remaining 25% interest in River Ridge Mall through our JV partner. That transaction is expected close in the third quarter. Going forward, we will actively review our portfolio for disposition opportunities as a source of capital to reinvest and as a means to optimize our portfolio.

Year-to-date, these asset sales have generated nearly $100 million in net equity, which contributed to the decline in total debt of more than $330 million compared with second quarter 2016. As I mentioned earlier, we extended our debt maturity schedule, closing the extension and modification of 2 term loans that were set to mature in 2018. We have also completed a preliminary agreement to modify the loan secured by Acadiana Mall. With adjusted FFO per share of $0.50 and same-center NOI declining 1.3%, our results for the quarter were in line with expectations. While we are not at all satisfied, we are working to maximize results in the current environment and also focusing on positioning our portfolio for the future.

I will now turn the call over to Katie to discuss our operating results and investment activity.

Thank you, Stephen. Our occupancy has been impacted by the retail trends Stephen referenced earlier. During the second quarter, it declined 100 basis points for the portfolio, with the same-center mall pool declining 140 basis points to 90.6%. Bankruptcy activity impacted mall occupancy by 240 basis points or 453,000 square feet. We are making good progress in backfilling these locations, with roughly 45% of the space re-leased or in active negotiation.

Despite media reports, demand at our properties remains strong. During the quarter, we executed over 1 million square feet of leases in total. On a comparable same-space basis, we signed roughly 465,000 square feet of new and renewal mall shop leases. New leases were signed at an average increase of 8.1%, while renewal leases were signed at an average of 3.5% lower than the expiring rent. Renewal spreads were negatively impacted by several renegotiated Payless deals executed in the quarter.

Given the challenging retail environment, we are prioritizing occupancy and income and anticipate pressure on leasing spreads throughout the remainder of 2017. Our new leasing activity is certainly demonstrating our focus on non-apparel uses, and traditional apparel retailers represented only about 30% of new leases executed year-to-date.

Sales for the second quarter were flat, an improvement over the declines we experienced earlier this year, with most border markets posting increases following the rally in the peso.

On a rolling 12-month basis, stabilized mall sales for portfolio were $373 per square foot compared with $382 on a same-center basis.

Year-to-date, we have opened almost 600,000 square feet of development and redevelopment projects, including our new outlet center in Laredo. The center is performed well since its opening in April, and we just opened a number of new additions over the 4th of July holiday to a great reception.

Our remaining current construction pipeline is comprised of 170,000 square feet of redevelopment projects, which reflects our refined focus on our existing portfolio. In our pipeline today, we have only one remaining new development of a grocery-anchored center, that we expect to start construction on within the next few months. Our [inquiry] developments are receiving a lot of attention, with strong interest from high-performing retailers, entertainment operators, sporting goods stores, restaurants and other uses interested in joining the projects. Our existing retailers are also very excited to benefit from the planned improvements.

We anticipate making announcements shortly for construction in 2018 as plans are finalized and leases are executed. We recently opened a number of new additions to our malls, including a new ULTA Beauty store at Turtle Creek Mall. York Galleria welcomed Gold's Gym, which joined a recently opened H&M. In April, Dick's Sporting Goods opened in the former Sports Authority location at Pearland Town Center. Beauty Academy opened at Stroud Mall, and we also opened a new 20,000 square foot T.J.Maxx in May at Dakota Square Mall.

Sears recently announced that they were closing their location at this center, which we had expected. And we have an LOI currently under negotiation to replace Sears after they close. This fall, we will open a new T.J.Maxx store at Hickory Point Mall, and we are currently renovating East Towne Mall, where we open Planet Fitness earlier this year. We will also add Lucky's 13 Pub, which is currently under construction. And next spring, we'll open Flix Brewhouse and H&M.

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

Thank you, Katie. During the second quarter, adjusted FFO per share was $0.50, including $0.03 per share of abandoned project expense as we wrote off predevelopment costs for certain projects we are no longer pursuing. Portfolio same-center NOI declined 1.3%, and same-center NOI for the Mall portfolio declined 2.1%. FFO per share, as adjusted, for the quarter was $0.09 lower than second quarter 2016. Major variances impacting FFO included $0.01 per share due to lower same-center NOI, offset by contributions from new properties; $0.03 per share of abandoned project expense; $0.04 per share of dilution from asset sales completed in 2016 and year-to-date; $0.01 of lower outparcel sales; and $0.01 of higher interest expense.

Same-center NOI declined $2.3 million, with revenues declining $4.3 million, primarily due to lower occupancy and percentage [rent]. We partially offset the revenue decline with $2 million in lower property operating expenses.

Since last quarter's call, several anticipated bankruptcy filings have occurred, and we are now finalizing negotiations with retailers for rent concessions that are going through reorganization. Based on those discussions and our current expectations for the remainder of the year, we believe the $20 million to $24 million reserve for bankruptcy embedded in our guidance to be sufficient for the year. We are maintaining our adjusted FFO guidance in the 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 FFO guidance does not include any unannounced transactions.

We are projecting to end the year with stabilized mall occupancy of 93% to 93.5%. We ended the quarter with total debt of $4.8 billion, a decline of $336 million from the prior year quarter and $260 million lower sequentially. Similarly, the lines of credit declined to $181 million as of June 2017 compared with $252 million at prior quarter. These reductions were a result of equity raised from properties sold in the quarter as well as the conveyance of Chesterfield Mall to the lender. We ended the quarter with net debt to EBITDA of 6.5x.

This week, we announced the extension and modification of 2 unsecured term loans that were set to mature in 2018. We closed $45 million term loan, replacing the $50 million loan set to mature in February of next year. Including extension options, the term was extended to 2022 at a rate of 165 basis points over LIBOR. We also extended and modified the $400 million term loan maturing in July 2018. The new Term Loan initially increased by $90 million through July 2018. Then it will be paid down to $300 million, a net $100 million reduction. This term loan also has a final maturity in 2022, assuming all extensions -- extension options are exercised.

Our goal, as we approached this financing, was to extend our maturity schedule, maintain our low cost of borrowing and further optimize our debt capital structure by reducing short-term floating-rate debt. With these financings, we are extending our maturities schedule and incorporating $100 million reduction in our term loan exposure planned for next year.

We recently reached a preliminary agreement with a special servicer to modify the $125 million loan secured by Acadiana Mall in Lafayette, Louisiana, which matured earlier this year. The principal will be bifurcated into a $65 million A note and a $60 million B note. Interest will be payable on a current basis on the A note. Interest will accrue payable at maturity on the B note. The loan maturity is expected to be extended to September 2020, with a 1-year extension option for final maturity date of September 2021. The interest rate will remain at 5.67% with no amortization payments.

Lafayette's economy is largely dependent on energy, and it has been -- and it has seen a rise in the unemployment rate due to the stalling energy market. This has significantly hurt mall sales and is beginning to impact NOI. However, we believe there is an opportunity for the center to recover lost sales and NOI. The modification provides us with the time for the economy to recover. Cash flow after debt service will be invested to reposition the property and support leasing efforts.

Based on our negotiation of future -- on our projection of future cash flows, we concluded that our investment was not recoverable and recognized a $43 million loss on impairment this quarter.

We have exercised the extension option for the $350 million term loan to extend the maturity to October 2018 and have one remaining option that will extend the final maturity to October 2019. We retired the $200 million loan secured by the Phase 3 of Gulf Coast Town Center during the quarter, and have just one remaining maturity in 2017, a $62 million loan secured by the outlet center in El Paso. This property is owned in a 75-25 joint venture. We anticipate refinancing the loan by the December maturity date.

Our focus on liquidity and improving our balance sheet is evident in the accomplishments we have achieved year-to-date. As it stands today, our credit metrics are some of the strongest in the peer group and reflective of a strong balance sheet. 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 plan for growing EBITDA through redevelopments and reducing debt balances will help us to progress towards our goals.

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

Thank you, Farzana. Despite the challenges in our business and the negativity in the press, we are far from discouraged. In fact, we are energized by the opportunities that are available in our portfolio today. Our careful focus on balance sheet improvements and liquidity put us in a position to take advantage of these opportunities to create growth and value for our shareholders. We appreciate your continued support, and we'll take your questions at this time.

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

Just hoping to get a little bit more color on the write-off of the development projects. What projects were they and where? And do you still have land tied up?

Christy, so we haven't disclosed which specific projects, but it's a combination of projects. It includes outlet centers, conventional projects, several new developments. And we didn't have a lot going, but we had accumulated costs over the past few years that we have been working on these. And just given the environment, we wanted to focus 100% on our redevelopments. I did say there's one -- or Katie said there's one exception where there's a supermarket-anchored project that's a joint venture that is virtually fully leased. And that should begin later this year. But beyond that, we're focused on the redevelopments in our existing portfolio, which is what we think we should do. And just given that focus, we felt like this was the right time to go ahead with the write-offs.

Okay. And then Farzana, just in thinking about the extension modification of the term loan, sounds like you're using the $85 million of net proceeds to pay down the line of credit. But as you think about sort of -- sorry if I missed this, as you think about sort of capital needs into next year and paying down the $190 million in the year from now, what's the plan for funding that and other funding needs sort of as you think about your free cash flow generation, your redevelopment pipeline and then other capital raising that you might need to do?

Christy, good question. A couple of different answers on that. A, we do have significant free cash flow with $225 million each year, as you are aware of that, and we are using that to fund our redevelopment pipeline. In addition, with our lines of credit balance down to, as of the end of the quarter, is $180 million, but the $90 million of excess proceeds that we raised that further reduces the lines of credit. So our lines of credit balance is very low. We will be using that lines of credit to pay off the $190 million. I also want to remind you our lines of credit balance has come down because of the properties we sold, and we raised $100 million in net equity so far. So all in all, our liquidity is very strong, and it should be able to fund not only our -- the payoff next year as well as the redevelopments that will come from free cash flow.

Our next question comes from Nick Yulico of UBS.

This is Greg McGinniss on for Nick. I just had a couple of quick questions about occupancy and leasing. It's very topical right now. Folks are thinking about tenant improvement dollars and how it relates to getting leases signed and sort of kind of promoting occupancy at this point. I'm just wondering if there's been any upward trend in tenant improvement dollars on new leases.

Well, you can look and you can see that year-to-date, our tenant allowances have actually been down. So we're roughly $32 million, $33 million in 2016, down to $22 million. And a lot of that is we did a wave of H&Ms over the past few years, and so we're doing fewer of those because we put them in most of the centers that make sense. There still are some we're working, but the pace has slowed down. And we're doing a higher percentage of renewals to new leasing. Renewals typically don't involve any type of tenant allowance. So we're very mindful of that. Like I said, when we're doing the restaurant deals, we're looking to ground lease or sell pads as a way to limit our investment there or manage our investment there and make sure that we're not taking undue risk.

Right. And then in terms of back half occupancy, how much economic occupancy lift-up are you expecting for 3Q and 4?

We -- I think Farzana mentioned in our call that we expected to end the year at 93% to 93.5%. So that's kind of where we see the trajectory. There are some Gymboree's that will hit in the third quarter, but we also some leasing activity that should offset some of that. So we're expecting a back half lift. We don't give quarterly guidance, but year-end should be in that range that we projected.

Our next question comes from Rich Hill of Morgan Stanley.

Just a quick question. And Stephen, maybe this is for you. You had mentioned in your beginning prepared comments that maybe some of the research regarding store closures was not great research. So I'm curious, Cushman & Wakefield, I think, is talking about maybe 13,000 store closures next year. What are you seeing that's maybe different? And could you give us any color on that?

Well, there's a lot of reports out there, and retailers are talking about store closings, potential store closings. And a lot of that is being used as a pretense to try to reduce their occupancy cost. And this is not new. I mean, we deal with retailers negotiating all day long and year after year. And the environment is definitely tough. They're feeling that they've got more negotiating power today because of that. And so they put out numbers. But typically, they don't close the numbers that they put out. And what we're seeing across our portfolio is that the retailers that announced store closings ended up closing less than they initially announced. So I feel like, like I said, that's really overblown and overstated and sensationalized. I don't know where Cushman & Wakefield comes out with 13,000. We don't see the 9,000. And I'm not saying that there haven't been more store closings this year. We admit it. But people like to throw out these headline numbers, and the press picks up on it, and it pads their book. But that's just not the facts that we're seeing.

Got it. That's actually really helpful, Stephen. Just one follow-up question. When you mentioned the announced stores versus what actually closes, what sort of ratio do you guys usually expect from what you see?

I can't tell you exactly, Rich. I mean, all I can say is that it never ends up being what they announce. And you can look -- I mean, earlier in the year, I think, Macy’s probably did about 75% of what they said. Payless, we had 56 stores in our portfolio. They're closing 4. Rue21 had 48, they're closing 9. So these companies, assuming that they're able to get through bankruptcy, which fortunately, this most recent wave has done that, they're preserving most of their stores. Gordmans, we had 5. Initially, they were going to close 4. They ended up closing 1. So I mean, it's -- they don't want to close stores if they're making money. And stores play a vital role to their full business. Even the online sales go down when stores close. So people don't like to say it, but the stores are really important and a critical part of these retailers' strategies. And that's where the primary sales are still being done.

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

Just first question, just sticking with the closures a little bit. I think last quarter, you suggested occupancy would fall further. But in the quarter, same-store occupancy was slightly higher sequentially. And I know you maintain the year-end occupancy of 93%, 93.5%, but just in the quarter, was the better occupancy timing related or due to delays? Or are store closures not materializing as you anticipated?

Yes, I think, Todd, I think it's both. There weren't as many stores closed that initially were announced, and there's been some timing delays. But yes, I mean, occupancy was up sequentially. Like Katie said, we've got some Gymborees that will close in the quarter. But we're making a lot of headway. Like I said in my remarks, we're going beyond the traditional nationals in terms of our leasing. We're doing a lot more locals, a lot more regionals, more pop-ups, different kind of uses. And that's how we're going to make up for the closings that we've had this year. It's a little different than in '15. In '15, we had the bankruptcies, and most of it was replaced with nationals and more traditional retailers. This time, we're being more creative. We're looking at different types of uses, more -- like we've talked about, more food, more services, more personal-related, wellness. Those types of categories are really doing well in this environment. So that's where most of our leasing is focused.

Okay. And do you have a sense for sort of the Paylesses, the Gordmans and some others that you mentioned there, how far along they are in their restructuring and how comfortable you feel you are with where they stand at this point with regard to their store fleets?

I think they're pretty far along. Rue 21, Payless, Gordmans are all pretty far along with their process. And in terms of the stores, like Gordmans closed temporarily in a few locations, but they've reopened, and they -- these retailers had really strong sales because of the bankruptcies, but now they're moving ahead. And you look at a company like Aeropostale. Aeropostale, as everyone knows, went through bankruptcy last year, closed a lot of stores. They redid their merchandise. But now they're doing really well. We're seeing good sales gains across our portfolio. So these retailers have a strategy. And if they're closing the stores or -- that have the high occupancy costs that are out of line, then they can come back and be profitable. Now if they're focused on their merchandise, then they can be successful long-term.

Okay. Great. And just lastly, I was just wondering if you could go back to the Sears and Macy's anchor boxes that you had captured earlier in the year and just maybe run through or provide an update on some of the progress so far.

Yes, sure. Well, just to remind everyone, we purchased, on a sale leaseback, 5 stores from Sears, 2 Auto Centers, and we also purchased 4 Macy's. And we haven't announced -- I'm sorry, 3 Macy's. We haven't announced any specific redevelopments. We're making progress, but we don't want to really announce anything until we're ready to start. And we anticipate starting a couple of those, the Auto Centers are smaller with Sears. So those will happen quicker, and we anticipate starting a couple of those in '18. And we do have a 6-month notice with Sear's. So we don't give that notice until we satisfy pre-leasing and have the returns and the pro forma at the level that we need them to be. So that's -- there's not anything definite I can announce. I will tell you that we're getting really good activity in terms of letters of intent moving to leases, negotiating leases. There's a lot of entertainment as part of the mix, a lot of food and restaurants that we're getting interest from. We're working on mixed-use with several of the locations. And so it's primarily outdoor exterior type space they we're having success with. But it's a real compliment, and these will give a tremendous shot in the arm to these properties.

Our next question comes from Tayo Okusanya of Jefferies.

Just along the lines of debt refinancing, I guess, you guys continue to do very well in that department. Just curious what you're targeting next in regards to debt reduction, debt refinancing. And could you also talk a little bit about how come the market still feels so open and why lenders still feel very comfortable with debt refinancing or giving you guys debt just when equity markets seem to be much more (inaudible) about the retail environment.

Well, that's because CBL is a strong company. And so in terms of the term loan, we had a strong -- 18 different banks participated in our term loan, and they are across the board in all our facilities. We had several that stepped up. The few banks that leaving -- that are leaving that we are paying off, they're generally Asian banks and Canadian banks, so it doesn't fit their model. It doesn't fit their future plans. So we are -- the U.S. bank continue to be strong supporters of CBL, and they understand our business a lot better. So there is that support. And in terms of what we're going to do in future, we have, as we mentioned, a loan that's coming up later this year, a secured loan, which is a joint venture property loan. We will be refinancing that, and there is definitely good, strong market. It's an outlet center. And next year, we have a couple of loans coming up, one specifically is CoolSprings Galleria. That's going to have a lot of attention, attraction from different lenders. It is a very strong property for us. I'll also remind you that we have a very high interest rate on both El Paso and CoolSprings Galleria at almost 7%. We have a couple of other loans coming up next year. They are very -- they're both strong properties, high debt yield, also have high interest rates. So some, we will refinance and get excess proceeds, and we'll use that to pay off our other secured debt that's coming up and unencumber them.

I'll just add, Tayo, that when we did our bank term loan, when we're first starting talking to the banks, we had them come to CoolSprings in Nashville. And we held the bank group meeting in the Kings Bowling, which is part of the Sears redevelopment. And they could see firsthand how we had taken a Sears, had added the entertainment, the restaurants, ULTA, American Girl, H&M, Belk and really how transformative that was for the center, how it boosted sales in the following year by double digit. And that really gave them tangible comfort with our strategy. And picking up on that, even with the climate being as negative as it is, the banks showed a lot of confidence. And I like I said, we really appreciate their support.

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

This is Justin Devery on for Craig. I was hoping we could spend some time this morning talking about dispositions, namely, the 2 that sold in 2Q, if we could start there and any details around those transactions, whether it be cap rates or number of bidders that you had on the properties.

Justin, this is Katie. So we don't disclose the cap rates on our mall sales, because we are still active in the market, and so it hasn't benefited us from a competitive standpoint. They were great transactions for us, though. They're both good, solid properties that had nice stable cash flows. So the buyers of those will do well, and it was a good transaction for us as well, raising $50-plus million of equity proceeds that we were able to reduce debt with. So there were a few buyers out there. As we've talked about before, the buyer pool is not incredibly deep in this environment, but there are interested players out there that understand the markets and understand the types of assets. We've been most successful in targeting local and regional buyers and some funds that -- on other properties that are similar to this.

Okay. And maybe as a follow-up to that, for the properties that you don't envision to be the urban town centers of tomorrow, I'm curious, when you're evaluating what malls to sell, I know that performance and location matters to you, but does size ever come into play as well? If I look at Tier 3, Stroud Mall is pretty small. It's like 400,000. And then you can go as high as Kentucky Oaks or Monroeville, which are over 1 million GOA. I'm just curious, are the incoming calls, do they discriminate against size?

Yes, I mean, I think there is a buyer that targets transactions that are under a certain value, so it's not really to size of the property, but it's the amount of the transaction, because the debt and equity piece becomes a bigger part of it when you're talking about larger transaction sizes. So there is some variability there and some buyers that can only write a check under $15 million or some buyers that are interested in doing something larger.

Our next question comes from Caitlin Burrows of Goldman Sachs.

I was just wondering if you could talk a little bit -- in the beginning, in the prepared remarks, Stephen, you mentioned that in the future, you might have more hotel, office, residential uses and then more recently, in the Q&A mentioned, mixed-use. So was wondering if this is actually happening yet, if it's just a topic of conversation at this point. And would it be something that would go into your existing space in maybe the case of an office? Or would that be built kind of outside of the mall?

So Caitlin, it is something that's happening now in the planning for the redevelopments. We haven't announced any projects. Typically, we've done a lot around the ring road, where we've sold to hotel operators. There have been office buildings built, that type of thing. And now we're looking to incorporate it more into the redevelopment. So looking at office or medical office on top of retail, bringing the hotels closer in or residential. It's not something that we're planning to do from an investment point of view to make it a big part of our NOI. We would use -- we would bring in partners or we would ground lease or sell pads as a way to finance it, but it does -- it's an important part of the mix of today's projects, and we're seeing the demand from consumers. And that's what's driving it.

Okay, great. And then also just on the leasing. I notice that if you look at the total leasing volumes, you guys showed that last year, you had a lot of development square footage, but even -- that you were leasing up, but even excluding that, looking year-to-date on the new leases and the renewals, it does look like you're down year-over-year. And it's not just you, like (inaudible) even mentioned it on their call yesterday. But I was just wondering, as you go forward and try to sell the vacancies that have occurred, kind of what should take from seeing that leasing volume is down, is it just that it takes time and that it will -- it just hasn't picked up yet, or what should be read from that?

Yes, I mean, I'd say it's a combination of things. The development was mostly driven by Laredo. And so that was the factor there. As far as the total leasing, we did have a higher amount of renewals and especially some larger spaces, some boxes and some anchors. And that goes into total leasing. And then on the small shops, a lot of the vacancies have just occurred or haven't even -- so that does take time to replace them. We'll bring in temps on an interim basis, but we do see, like we said, getting back to the 93%, 93.5% level by year end. So we do feel like we're going to -- confident that we're going to call that back. And we're seeing good demand from these others types of uses that I mentioned. So I -- we feel very comfortable with the leasing environment.

Our next question comes from Michael Mueller of JPMorgan.

Quick question, on the year-end occupancy, 93%, 93.5%, is that total portfolio, the mall portfolio or some segment in the mall portfolio?

That's total portfolio. So it's about 150, 200 basis points below where we ended last year.

Okay. And then, I guess, Farzana, you mentioned $20 million to $24 million reserve, kind of capturing what you're thinking about with discussions. But as you go through and you talked with the tenants about the concessions, 2 quick questions here. One, when a concession actually takes place, do we see it in the lease spreads, or is that outside of the spreads? And then how should we think of the marginal change in NOI from Q2 in terms of what's already in that run rate based on what you know versus how much marginal deterioration we can see at, I guess, at the margin?

Yes, so the lease spreads, the rent concessions are in the lease spreads, as Katie mentioned earlier, Payless had rent concessions, and that kind of showed up in lease spreads. So that's already baked in. And as we go through the quarters -- next 2 quarters, we don't, obviously, give quarterly guidance, but in our reserve number, most -- about half of it has already come through, and the other half is going to come through the second half of the year. So bottom line, the -- this quarter was probably the hardest hit. So as we go forward, it should kind of get better, and we end the year in the guidance we've given. The range is still solid in terms of FFO as well as the same-center NOI.

Our next question comes from Floris van Dijkum of Boenning.

Stephen, I'd love to get your comments on the trends for temp occupancy. And how has that performed? And how do you see the outlook of that going forward?

So for temp occupancy is stable in terms of the trend. I mean, it's been, give or take, $100 million business for us over time, and that varies. And it depends a lot on the availability of in-line space, because we bring both common area and in-line space together in our specialty leasing group. I talked about in my remarks, the pop-up shops that we're doing, where we rotate every week or every other week different local retailers or online retailers. And that's been very successful for us in terms of both bringing in new users and also bring in customers. And it's an important part of the business as a way to incubate new retailers and new uses. And so we put a lot of focus on it. We have a great team, and it's not something new, but it's something that we're continuing to innovate and look to be really creative with.

Great. And maybe also, I guess, the temp, I guess, that includes the specialty. Talk maybe some of the initiatives on electronic billboards, or you're seeing some of your competitors do that. Are you bringing more of those into your malls, and how do you -- what do you see happening with that part of the business?

Yes, so we've been doing a lot of sponsorships, business development deals. We've been doing that. It's not a new thing. But again, it's continuing to grow. And one of the benefits of our malls is in the markets we're in, we're getting a lot of traffic. We have critical mass. And so local hospitals, local car dealers, local professionals advertise in the property. They sponsor play areas. They sponsor mall walking programs. They sponsor customer service centers. They advertise on banners. We've done digital billboards, digital directories. So that's a good source of income. So there's lots of different ways that we can capitalize on the traffic that we're generating and generate income. We're adding fiber optics in terms of technology, and we're offering Internet and digital services to retailers in bringing in Wi-Fi, and that's a way to enhance the customer experience. And in certain cases, that gets sponsored by cable companies or Internet providers as a way to defer the cost of that. So we have a full sales team that's out there working all of those different types of initiatives, and it's very successful.

Great. And maybe if you could remind me, the gap between your signed and signed not opened and your actual physical occupancy, is there any sort of meaningful change there?

Floris, you're violating the 2 question limit, but we actually don't provide that information. But Katie can talk to you off-line about it.

Our next question comes from Carol Kemple of Hilliard Lyons.

What was your all's occupancy cost in the quarter?

We don't do it by quarter, Carol. We do it at the end of each year. And -- but we're consistently in the 12 range, and that's -- we don't see anything changing with that. Our sales were down a little, but they're coming back, as we said. The second quarter was better than the first and was positive. So we see it -- that continue to improve as the year goes on. And occupancy cost should be relatively steady.

Our next question comes from Daniel Busch of Green Street Advisors.

This is Spenser Allaway on for DJ. Stephen, you mentioned that you guys have been adding some more local and regional boutiques as well as pop-up stores to your properties. Can you talk about how the rent levels and the occupancy cost ratios for these tenants compare with the portfolio average?

Spenser, it's a case-by-case basis. And what we see is with the pop-ups, there's a higher percentage rent component. And so depending on how well they do, we do well as well. So they're -- and they're in for a short period of time, so the rent can actually add up and be very favorable as these retailers or these users start to generate more income. So we're looking at -- I can't tell you specifically, but over time, we expect to get back to the levels that we were at before. And also with the spaces being built out, we have minimal cost to bring in the new types of users.

And then just in terms of the properties you guys have kind of deemed as repositioning malls, can you provide any update as to what you envision for these malls kind of moving forward?

So at Cary, North Carolina, IKEA announced in May. And so that's phenomenal. We're working through the approval. They're not going to open until 2020, so it's -- there's a long approval process and rezoning. But they will -- they'll purchase basically, the former Sears and Macy's. And that'll be a huge catalyst for the redevelopment of that property. And we're working on plans for the redevelopment of the remainder of the property. So that's really exciting. And then at Hickory Point, we had this -- the T.J.Maxx deal that was part of our development pipeline that is under way. And we're basically working on other boxes to come in there. I mean, it's kind of an enclosed mall, but it also has a lot of boxes with Ross and ULTA and Hobby Lobby and now T.J.Maxx. And so we see that continue to be the strategy there. And as we get closer to the refinancing, we'll determine what makes the most sense in terms of selling or putting new debt in place or what we'll do going forward with that.

Our next question comes from Linda Tsai of Barclays.

At this point, given what you know, the $24 million to $25 million in tenant bankruptcies for 2017, would this be a reasonable amount to expect for '18 as well?

Hopefully not. We don't -- I mean, that's really based on this year, and we don't see that. These do seem to go in waves, and we're still early to say in 2018. But we don't expect it to be at that level.

Okay. And then in terms of [Athena], have you engaged in any discussions with them yet? And any sense of the percentage of leases in your portfolio that could be impacted?

Sure. We're engaging currently. We're in discussions with them. It's primarily focused on renewals for next year. And for the most part, there are some stores that won't renew. But for the most part, they will, and we're just working out the terms on that.

And we have a follow-up question from Christy McElroy from Citi.

It's Michael Bilerman here with Christy. Stephen, I just had a question, I guess, a competitive question relative to how your portfolio is performing relative to the public peers. And you've talked a lot about your asset base being market dominant with less competition, mall-based competition in the markets that you operate in relative to those who own assets on the coasts or in some of the major cities around the country, where would be multiple malls. And I'm just curious as you're -- which arguably, I think you've tried to make the argument that those market-dominant malls should be able to perform better. And so your results would lead us to the opposite conclusion, because your comp same store has been much weaker from an operating perspective. So how much of it is it's the markets that you're in? I guess, what's the driver of that -- how would you describe what's driving that underperformance where, in some ways, I think your -- the strategy that you've talked about being -- having these market-dominant malls not necessarily in the top markets in the country, but where's more limited competition. What's eating away at that in your operational results relative to your peers?

Michael, I think that there's really -- the major factor that's impacting our performance this year has been the occupancy and percentage rent. And so that's what has hurt our same-center NOI so far this year. And in terms of our strategy, we've sold a lot of properties over the past 3 years and upgraded our portfolio. There's some properties that have been hit harder because of the border traffic and the oil and gas and some local factors. And those have been a drag on our results also. But we feel really good about our long-term strategy, about the redevelopment program. A lot of our malls, over roughly 2/3, are single level, so they have the ability to be redeveloped and take advantage of the parking lots that are part of that and to add the boxes and the other uses that are in demand. And we're focused on getting the best results we can and giving CBL the best long-term platform to operate and grow. And that's really where our focus is and not on what our competitors -- or not our competitors, what our peers are doing.

Right. But it's not just this year from a same-store growth perspective. It's been, I would say, over -- going -- since coming out of the recession, your same-store has been weaker. And I'm just trying to better understand what may be behind some of that, where, arguably, you have less mall competition in your local markets, given that you typically are the only game in town for a certain larger radius. And so there's got to be some other factors going on that's depressing your same-store and your asset base relative to the broader peer set.

Yes, I mean, we've said for forever that our malls are more stable. We don't have booms, we don't have busts. This year is tough because of the store closings. But last year, our same-center NOI was in the 2% to 3% range. Our goal is to be in the 2% to 4% range. Historically, we've been 0% to 2%. Other companies are going to perform differently depending on their tenant mix, depending on their market. But we're -- we are who we are, and we feel like we've got a really good long-term strategy. We've made tremendous progress on our balance sheet. Getting the term loans done this year -- earlier this quarter shows how the banks still have confidence and liquidity that we have to execute on our plan. So I think we're in a good position.

Just on the refinancing, I guess, what was the decision to pull back after a year in terms of that term loan amount? And how does that set you up for the other loans that you have with the same banks? And arguably, yes, they gave you a little bit more, they gave you an extension, but they're pulling back the commitment next summer lower to what you have today. So I'm just trying to better understand those dynamics that are going on.

No, we had -- our existing term loan didn't expire until next year. So the banks that were in that term loan that are not extending, their money is -- continues in the term loan through next year. And then the new loan really kicks in next year. But we intentionally brought that back. And we said we want to cut down our exposure to short-term floating-rate debt and want to cut down our level of debt. So we did not -- that didn't happen because it was forced on us. It happened because that's what our plan is from a balance sheet point of view. And it does accomplish that, because we reduced, by roughly $100 million next year, our total exposure to short-term floating-rate debt, and we'll use disposition proceeds and our free cash flow to fund that. So I mean, that's our goal. We're down to 6.5x debt-to-EBITDA. We want to bring that down to 6. And our balance sheet is really important to us, and liquidity is really important to us. And that's a big rationale behind our focus on the redevelopments as well. So I think it all fits together. And hopefully, you can see that.

You're using the line of credit. You're using floating-rate debt to pay down that extra $100 million.

That's just the interim, Michael. We've used the refinancings, the dispositions and the free cash flows. I mean, that's the source -- I mean, the line of credit is an interim step if we need it. But our real goal is we'll continue to look at the unsecured debt markets to raise more long-term debt, depending on how those go. And so our goal is to have longer term fixed rate, use our line of credit as an interim step and also to bring down our overall level of debt.

That is all the time we have today for our question-and-answer session. I would like to turn the conference back over to Mr. Stephen Lebovitz for any closing remarks.

I do have just a quick quote I want to read, and this is from Cheesecake Factory's CFO in their release yesterday, and it's just on the topic on mall traffic, and I didn't get to work it in earlier but no one asked about it. And his comment was that their core guests are going to the mall as much or more than they used to. And there's been a lot of reports about traffic being down, but for the -- for most food users and other users, we see traffic stable. And I think that's important to recognize, and it's good to see that other companies are making that comment, because I think that's important for the market to see as well. With that, we'll conclude. And thank you for your time.

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