CBL & Associates Properties, Inc. (CBL) 2017 Q3 法說會逐字稿

Good morning, and welcome to the CBL Properties third quarter earnings conference call. (Operator Instructions) Please note that 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 Properties conference call to discuss third 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 are available in the Invest 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 earnings release yesterday indicated, this quarter was a difficult one for CBL from an operational point of view. For the quarter and for this year in general, the challenges many of our retailers are facing have taken a toll on our results, led to our guidance revision, and contributed to the dividend reduction. Despite our efforts to be conservative this year in setting guidance, the negative trends accelerated during the third quarter resulting in greater loss of income than we had projected for the quarter and as we look to the end of the year. The variance came from several sources. During the third quarter, bankruptcy filings from Toys R Us, Perfumania and Vitamin World added to the income loss from the more than 150 stores closed so far in 2017 from earlier bankruptcies. It has also been necessary to provide additional rent concessions to retain stores with retailers undergoing bankruptcy reorganization as well as other retailers who are looking to stabilize their finances.

While we have successfully preserved occupancy to mitigate income loss from store closures, it came at the cost of greater rent reductions as evidenced by the renewal spreads this quarter. We also experienced lower contributions from backfilling vacancies with temporary and permanent replacements. In addition, higher interest expense and property taxes weighed on our third quarter results.

Despite these setbacks, our confidence in our properties and our strategy has not waivered. Our portfolio is stronger as a result of the nearly 40 properties, including more than 20 malls, which we have sold or transacted on in the past 4 years. The steps we've taken over the last few years provide us with greater financial strength and flexibility. Our debt levels are much lower and our credit metrics much stronger. Our properties are dominant in their markets, well located, resilient, and well suited for redevelopment. We remain committed to executing our strategy of reformatting our properties with new uses that will make them more dynamic and provide a source of growth for the company.

Occupancy, while down from the prior year due to the 190 basis point impacting the malls, demonstrated a strong sequential improvement of 150 basis points. Sales stabilized during the second and third quarters after an unusually weak first quarter. And industry forecasts predict a strong holiday season. We have excellent demand from food and beverages users as well as fitness, entertainment, theater service value and other nontraditional tenants. Just in the third quarter we signed leases with new uses such as On Adventures, Fox Lunch, 0-2 Fitness, Lolli and Pop's Metro Diner, and Dave & Buster's. As we said in the earnings release, only 255 of our new leasing year-to-date has been executed with traditional apparel retailers, so this transition is happening now.

That being said, we expect continued pressure over the near term from many of our existing tenants as we reduce the apparel square footage in our portfolio. This shift facilitates the reinventing of our malls into suburban town centers with a greater focus on nonretail uses. Additionally, over the last several years, we have made it a strategic priority to strengthen our balance sheet. Since 2008, we have lengthened our maturity schedule, diversified our financing sources, adding approximately $1.4 billion of unsecured notes and significantly reducing total leverage by $1.9 billion. We have limited maturities over the next two years and ample availability on our lines. We have also utilized our free cash flow after our dividend to fund redevelopments and capital items generating incremental NOI without adding leverage.

I would now like to address the dividend. We realize that the dividend cut was a surprise to the investment community. That being said, there is no good time or way to deliver this news, and we felt it was important to be transparent and forthcoming in communicating this change based on the most current updates to our taxable income projections. The dividend is an important way that we return value to our shareholders, and we weighed the impact of this decision very carefully. This is not a step we take lightly and not one we plan to repeat. Consistency of our dividend is extremely important. As one of the largest shareholders of CBL, the reduction in the dividend impacts senior management drastically as well as our Board and employees. At the same time, free cash flow is our least expensive form of equity capital and is the best source to fund our redevelopments without increasing leverage. As we have consistently maintained, our dividend policy has been to target 100% of taxable income while maintaining a conservative payout ratio to maximize cash flow available for investing and debt reduction. Our payout ratio year-to-date is approximately 54% of adjusted FFO which means our dividend has also been very well covered.

While we have executed a major disposition program over the past several years, we have offset much of that dilution by adding new income through redevelopment and a limited amount of new development. As a result, in the past we have maintained relatively consistent EBITDA. Today we are in a position where our forward projections for taxable income allow us to preserve an estimated $50 million in additional cash on an annual basis by adjusting the dividend to an annualized rate of $0.80 per some from $1.06 per share. $50 million is a meaningful savings and we believe it is in the best interest of CBL and our shareholders to prioritize liquidity at this time.

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

Thank you, Stephen. Portfolio occupancy at quarter end was 93.1%, down 40 basis points compared with the prior year period and up 150 basis points from June 30. Declines in stabilized mall occupancy were offset by an increase in associated center occupancy which benefitted from 4 Gordmans stores reopening under new ownership this quarter, as well as from other leasing activity. Same-center mall occupancy delinked 120 basis points from the prior year and increased 120 basis points sequentially. Bankruptcy closures impacted mall occupancy by 190 basis points of 367,000 square feet for the third quarter as compared with the prior year period.

During the quarter we executed nearly 1 million square feet of leases in total. ON a comparable same-space basis, we signed roughly 530,000 square feet of new and renewal mall shop leases. Spreads on new leases were relatively flat. However, excluding one unusually negative lease, average new lease spreads would have been up approximately 4%. Renewal leases were signed at an average of 16% lower than the expiring rent. Renewal leasing activity during the quarter was negatively impacted by restructuring of higher occupancy cost leases with certain apparel retailers. These included a number of Route 21 and PayLess renewals during the quarter as well as the portfolio restructure with Things Remembered for 23 stores and renewals of several high occupancy cost GAP and Banana Republic Stores.

While third quarter was weighed down by larger portfolio deals, we do expect renewal spreads to remain under pressure. Sales for the third quarter were flat with positive sales growth in August and September. ON a rolling 12-month basis, stabilized sales for the portfolio were $373 per square foot compared with $382 on a same-center basis. ICSE and NRS are both predicting a robust holiday season, projecting increases in sales in excess of 3.5%, the highest in 3 years.

As we mentioned delinquent, we only have 1 ground up development project that we are pursuing. The Shops at Eagle Point is a 233,000-square foot open-air center located in Cookeville, Tennessee. It is anchored by Publix, Academy Sports, Ross, Ulta Beauty, PetSmart, as well as shops including Panera Bread, Chipotle, Five Guys Burgers & Fries, and AT&T. The project is a 50/50 joint venture and is 87% leased or committed. Site work has commenced with a grand opening targeted for fall 2018.

Sales of our power and community centers similar to Eagle Point have provided us with an alternative source of attractively priced equity. Except for the Cookeville project, our focus is on redevelopment. Later this month, Dillard's will open at Layton Hills Mall in Salt Lake City. The new store replaces a Macys that closed earlier this year. We will soon be announcing an entertainment user to replace the former Macys at Jeffersonville Mall. And at Parkview Mall, we have leases executed or out for signature with three box users to replace the Macys that closed earlier this year. We have several additional anchor redevelopments that we anticipate commencing construction on in early 2018. We are finalizing leases and construction plans and hope to announce these projects within the next few months

IN our redevelopments, we are emphasizing entertainment, food & Beverage, health and wellness and non-retail uses such as hotels, multifamily, grocery and even convention center at one location. Overall, including redevelopments, we have deals with 57 food operators executed, out for signature, or in active negotiation. We are also in discussion on 6 hotels, one apartment, two self-storage facilities, and we are exploring the potential to add medical office at a number of centers. Many of these nonretail uses are structured as joint ventures, ground leases or land sales which reduced our required capital.

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

Thank you, Katie. Third quarter 2017 adjusted FFO per share was $0.50, with full year same-center NOI declining 2.6%. FFO per share, as adjusted, for the quarter was $0.07 lower than third quarter 2016. Major variances impacting FFO included $0.04 per share due to lower total NOI including declines in percentage rent and increases is real estate tax; $0.02 per share of dilution from asset sales completed in 2016 and year-to-date; $0.01 lower fee income. Third quarter's decline in same -center NOI was greater than anticipated at $4.5 million with revenue down $4.2 million and expenses up $0.4 million. The decline in revenues was primarily due to lower occupancy, closures and rent reductions related to tenants in bankruptcy and lower renewal rates as we have already discussed in detail.

Real estate tax expense was higher by $2.1 million this quarter, offsetting savings we achieved in operating expenses. We are updating our full year guidance to incorporate the lower third quarter results as well as a more conservative outlook for the fourth quarter based on leasing completed to date and in process. Our updates adjusted FFO guidance of $2.08 to $2.12 per diluted share assume full year same center NOI in the range of negative 2% to negative 3%. The reduce NOI growth assumption accounts for approximately $0.05 of change in FFO.

Other variances include approximately $0.03 per share lower expected contribution from non-same-prop centers and sold properties, lower fee income of $0.01 and $0.02 per share higher interest expense resulting from assumed increases in LIBOR as well as the impact of the additional unsecured notes and term loan partially offset by really retirement of secured loans.

We were very active during the quarter on the financing front, completing the extension and modification of two term loans due in 2018 at favorable terms. We also exercised the extension option for the $350 million term loan not extend the maturity to October, 2018 and have one remaining option that will extend the final maturity to October, 2019. We accessed the public debt market, generating approximately $225 million in additional liquidity with a follow on offering of 5.59% unsecured notes due in 2026.

We subsequently retired $206 million of secured mortgages at a weighted average interest rate of over 7% including the loan secured by Hanes Mall and the Outlet Shoppes at El Paso. Hanes was due in October, 2018 and w were able to negotiate an early payoff. Both assets are high quality, Tier 1 assets, adding to our unencumbered asset pool and allowing us to benefit from the interest savings.

We ended the quarter with total pro rata debt of $4.7 billion, a decline of more than $220 million from yearend. The decline what a result of asset sales year-to-date and the conveyance of 3 properties. Outstanding amounts on our lines of credit declined to just $80 million as of September 30 from $181 million as of June 30. We ended the quarter with net debt to EBITDA of 6.7x.

We are continuing our discussions with the exiting lender for potential modification of the loan secured by Acadiana Mall. We will announce details when the agreement has been finalized.

We also have entered into preliminary discussions with the lender for the loan secured by Hickory Point. We restructured this loan last year but have seen additional deterioration in operating metrics. As a result, during the fourth quarter we recorded a $25 million impairment to adjust the carrying value of the asset to fair value. We have begun the process to seek a further modification of this loan and will provide more information once an agreement has been reached.

As Stephen mentioned, the focus on improving our balance sheet over the last several years has put CBL in a strong financial position to withstand the short-term EBITDA decline as we reposition our properties. We have addressed many of our 2018 maturities well in advance and have reduced our line borrowings to provide maximum financial flexibility. Our meaningful free cash flow is a prime source to fund our capital needs.

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

Thank you, Farzana. Over the last few years, the CBL organization has made significant strides in advancing our portfolio, our balance sheet and all aspects of our company. This quarter's results are definitely a setback, but we have seen many ups and downs over CBL's 40-year history and we are confident that we will return to better days. Our properties and our retailers are clearly facing challenges and we are into the midst of a secular transition away from apparel and other traditional retail and towards new and different uses. We are nimble and proactive in our strategies and are confident in our dominant locations and active management. Our balance sheet is in excellent shape. Coupled with our significant free cash flow and the additional amount we will retain with the dividend reduction, we have ample resources to execute our redevelopment plans and maintain a strong credit profile. We are confident that we have a path forward to not only weather the current storm, but to position our properties and our company for long term success. We will now take your questions. Thank you.

(Operator Instructions) Nick Yulico, UBS.

Stephen, I guess I'm surprised to hear that you cite the dividend as well covered by AFFO. The same was true last quarter and yet you cut your dividend by 25%. So can you explain what is going on with your taxable income. For your prior dividend, how much were you paying out of taxable income? And then why is taxable income now going down so much?

Hi, Nick, this is Farzana. So the dividend cut really impacts the next year. So when you look forward to 2018 and look at our taxable income, we are looking at 2 factors. Properties that were sold in 2017 and then also the reduction in our FFO going forward from the bankruptcies and from the renewal rates. So the combination of those 2 elements is really what's driving the 2018 taxable income looking forward. So based on that, we are saving $50 million or so in cash flow. So we'll continue to have our dividend well covered.

Okay. Second question is on compensation. Is the Board considering changes to the executive comp plans in light of today's news? And specifically, I'm wondering about the pay of your Chairman, why the Board still thinks it is justified to pay your Chairman, the founder of the company, a salary. That salary has actually gone up over the last 10 years. Some other REITs that have company founders as chairman have taken different approach, some have cut their chairman salary, some pay no salary. Why does your chairman still deserve a salary based on the performance of the stock in recent years and the 25% dividend cut today?

Nick, the Board reviews compensation and it's the Compensation Committee of the Board that has that in their purview. It's not something that we address in an earnings call and our Board will definitely tale all factors into consideration in the compensation plan and in their compensation decisions. And that's really the reason we have a Board is to make decisions on those types of matters.

Okay, I guess I'm just wondering, has this topic come up in the past and was just never addressed? Or it's now a topic you guys are, the Board is finally going to address?

I would say that all topics regarding all senior management come up on a regular basis with the board. They are very tied in with the company, they are very vigilant and active in their role, and so it's not like this type of thing hasn't come up in the past on a regular basis, and it will continue to come up as they do their job going forward.

Christine McElroy, Citigroup.

Stephen, just regarding the dividend cut, you mentioned in your remarks that it's not a decision obviously that's made lightly. Regarding the need or desire to preserve liquidity and increase free cash flow, is it more about sort of anticipating necessary future capital spend and maybe you expect to get more anchor boxes back? Or does it have anything to do with sort of your ability or your expected ability to access and raise capital on a go forward basis such that you kind of needed to do this to avoid future issues?

Well, we feel like we have access to capital. We've demonstrated that. We've taken steps to improve our balance sheet. S it's more the first reason you list. We have the redevelopment program now, we have the 5 Sears that we bought in the sale leaseback earlier this year, and we're working on the plans to move those redevelopments ahead. We'll have more -- there were two Sears in our portfolio that we announced closing today even though the leases don't run out for couple of years. One of them is not owned by us, one of them is a lease. So we know we're going to get more from them. We know that we're going to get more from other department stores. So it does position us with capital to invest in the redevelopments. And the redevelopments are really key to the path forward that I talked about because we need to make this transition away from a high percentage, too high a percentage of traditional apparel and retail and bring in the different uses. And it's happening. Like I said, it just doesn't happen overnight But I think the cash flow, we don't want to increase leverage, we want to keep our credit metrics where they are. And we've looked at our taxable income projections like Farzana said, and this $50 million a year is a meaningful amount.

You talked about the rent relief. It sounds like how quickly these issues have escalated in the third quarter and you talked about them coming from both bankruptcy, lease restructuring as well as renewals. IF I think about the breakout of the two between the bankruptcy discussions versus the renewal conversations, and the reason I ask is, presumably the bankruptcy related stuff is sort of isolated to this year. And depending on activities this year. But while the renewals is more of like an ongoing problem, right? So I'm wondering how we should be thinking about these adjustments as you have further conversations with retailers that are not in bankruptcy but are obviously struggling and how that might impact sort of your ongoing leasing in Q4 and going forward?

Sure, that's a lot of questions in one, but I would say that the bankruptcies really have the two components. One is the store closings, but then the one that hit us harder than expected was the rent adjustment for the stores that are staying open. Retailers are under a lot of pressure because of factors that are occurring in their business. Whether it's the deflation in sales, transition to more of a value offering, investing in online which soaks up a lot of the profit that they get from their stores. So there are these factors going on that are putting downward pressure on what retailers can pay and be profitable going forward. And especially when they're in bankruptcy, then they have the leverage on us. So that was -- the amount that we were getting from the stores staying open was definitely a factor. And then for retailers that are kind of on the bubble so to speak, there is a lot of efforts on our part and our peers in the business to keep them afloat. We're doing shorter term renewals with them so we can get the space back and pursue replacements. But in the meantime, we want to keep that income flowing. So there is downward pressure or higher pressure by retailers on the rents and that's what you're seeing in the renewals. It impacted our outlook for the fourth quarter as well and in what we put for the guidance for the year. The benefit of the strategy that I talked about of trying to bring in the new uses is, these uses don't have the same kind of pressure. It's not like restaurants aren't competitive, but they have stronger demand in this market. And health and beauty and fitness and some other categories have al not more tailwind and a lot less oversupply than some of the apparel categories that are seeing the most challenges today.

Richard Hill, Morgan Stanley.

I do appreciate your transparency this quarter. Just a question, maybe a high-level question for Farzana. Can you walk us through sort of your discussions with lenders maybe using Acadiana Mall as an example Not looking for nay updates on Acadiana Mall, but do you find it more challenging to negotiation with lenders than you did maybe 6 months or a year ago? How are you finding the market conditions at this point?

Sure. We really only have two properties here that we've been discussion, Acadiana and Hickory Point. So if I have to take those as two properties to reference, it is they understand what's going on, they understand the secular change, they understand what's happening with retail. So in some respects they are helpful but in other respects they are somewhat limited by their REMIC rules. So they are trying to balance the two. We continue to challenge them to find creative ways to look at their REMIC rule. We are the best operators in the market. Who else would create value for them other than themselves? Which they give it to other management companies that really don't have the relationship and the wherewithal that we have. So our goal is to create value and somehow participate in that value at the end of the say. So I want to saying some respects they understand it, but it's still challenging.

Just one follow-up question if I may, just to make sure we're on the same page. When you refer to REMIC rules, you really mean the ability to actively redevelop a project, and that that falls under REMIC rules, right?

That's right. They cannot take collateral, or if they want to add collateral, then if we have to release it, they cannot do that. There are a lot of different barriers that t they have. So it makes it a bit difficult to redevelop the asset beyond the confines of the collateral that they have.

Todd Thomas, KeyBanc Capital Markets.

This is Drew on for Todd today. Just to follow-up on the leasing spreads a little bit, as we think about the tradeoff between spreads and occupancy, can you just dig in a little bit more on what the conversations are like with retailers and if we should expect renewal spreads like this moving forward. Or are those conversation =s maybe improving? And was there anything in the quarter that affected spreads meaningfully that was noteworthy other than some of the things you mentioned earlier, Steve?

Like Katie said, there were a few deals that disproportionately affected the spreads this quarter. And she talked about those, some of the GAP Banana deals and a couple of others that were up for renewal. They had very high occupancy costs that were driven by multi years of sales decreases. And so the renewal spreads impacted that. I would say the other thing that hurt our renewal spreads is we always have ups and downs in renewal spreads, and over the past few years it's evened out and we've been positive for the most part. It's typically been in the mid-single digit, low single digit range. And some of the retailers that typically drive the positive spreads have had their sales challenges this year and those are some of our major retailers like L Brands or Foot Locker or Signet. This, I think what they're going through this year is temporary and short term and they're going to bounce back and they are great companies, they are fortress retailers in our portfolio. But because of the sales pressures they've had this year, we haven't been able to see some of the increases as their leases roll. And those leases have longer terms. So we put it all together, that's going to contribute to the negative amounts.

Got it, that's helpful. Thank you. Just one last one on the new development, maybe you can talk a little bit about the decision to move ahead with the development of the community center in Tennessee and if there's any more deals like that in the pipeline and just how you guys are thinking about that sort of thing.

Yeah, so timing is not perfect. We realize that, in terms of making the announcement today. These developments take years and the process that they go through. This was one that it's got Publix as an anchor, it's almost 90% leased ad we're just starting construction. And like we said during the remarks, what we've done with centers like this is stabilize them and then we've sold most of our community centers and it's been a good source of equity. So that would be our sg for this at the right time. We don't have, like Katie said, this is it, we don't have any other development projects that we're pursuing. Our focus is 100% on the redevelopment which is a meaningful program within our portfolio and is appropriately placed from a capital investment point of view. So that's really the story there One other just point on your earlier question I did want to raise, and I talked about it a little during my remarks, but we have seen sales stabilize and get better over the course of the year and overall, that's going to help us as we get into renewal spreads next year. So even though we do have the pressures that are reflected this quarter and some of the deals where the occupancy costs are out of whack, we still I think are looking at the sales stability and assuming we have the holiday sales like ICSC and NFF are predicting, that should give us a better backdrop as we're doing negotiations come early 2018.

Craig Schmidt, BofA Merrill Lynch.

Good morning. It's Jeff Spectrum here with Craig. I just have one quick question, then Craig has a follow-up. I guess just thinking about the comments on the dividend reduction and how serious that is, the $50 million saving in cash from that, I guess if you could share a little bit more with us on the Board decision and the steps that lead to I guess your cash flow analysis. Like is this for the current redevelopment pipeline? Is this today? I mean for just this year? Because I think just big picture, Stephen, I'm just listening and you're moving forward the construction, but like I feel like the dividend reduction, like this is a moment clearly you need to prepare very seriously for the number of boxes that may close in 2018. And I'm just not connecting the dots on like how far this takes the company through that redev pipeline and how much cash you need or have.

We're generating $200 million free cash flow after the dividend, after the dividends on the preferred, after debt service. So we have that. And the $50 million allows us to maintain that based on our most current taxable income projections. But at the same time, we do, we have to pay out taxable income. I mean we can't just arbitrarily cut beyond that. So we go through a process where we project taxable income, we update the board, we have a robust discussion about kind of what the assumptions are that go into that and come to a decision about the right level. When we look ahead to the redevelopments, I mean the spend doesn't happen overnight. It doesn't happen at one time. It gets spread out over a number of years. The 5 Sears and the 3 Macys that we purchased earlier this year, those redevelopments are going to open in late 2018, 2019, 2020. So you're looking at a 4 to 5-year timeframe. Those projects are roughly $150 million over a year over the next couple of years. So we have that as a source from free cash flow. And also, like we said, there are strategies that we take to minimize the investment, whether it's ground leasing, selling pads, other types of ways that we can raise funds to offset the costs. So we're very mindful of the investment today and also going forward that there are going to be more of these redevelopment projects as there are going to be more boxes that we recapture.

Okay. As a follow-up, I just wondered, given the challenges to retailers particularly in the renewals, are some of the of yields on your redevelopment projects going to be under pressure?

The quick answer is yes. The pressures on the redevelopment yields are costs are up, that's just a reality because of the market and the demand for other types of real estate. So the construction costs are driving those yields. Then there is pressure in terms of the rents that we're seeing. So we're still pushing every way we can to generate those yields at the highest level that we can, but there clearly is pressure.

Jeff Donnelly, Wells Fargo.

Just a question, Steve, about how you're thinking about next year, particularly around renewal spreads. Just in meetings in September I think it was your sense that store closures next year could be lower in 2018 than they were in 2017, but you felt leasing spreads could actually be worse next year just because of the continuing erosion in landlord negotiation leverage. I guess just kind of given there you are year-to-date with leasing spreads, do you think it will erode further from this point or do you thing for example like the 15% or 16% cuts that we saw in renewal spreads, is that sort of the number that you the retailers are going to need going forward?

Yeah, Jeff, thank you. I think when we had those meetings, we didn't have the full numbers for this quarter. We knew they were going to be under pressure. I can't say that we anticipated it would be at this level. I can't tell you with certainty, but this is pretty severe in terms of the negativity. When we look at the new deal flow, we should see better results from the leasing, so we'll have better spreads on new leasing. And the renewals, there's just a lot of factors that go into it. The first quarter is when we have the highest number of renewals, so that's where we'll see the most pressure. I don't think it's going to get worse and I think as sales stabilize, like I said, it will provide a better backdrop. But that being said, I can't say it's going to get significantly better over the near term either.

Just as a follow-up, when you go to do these renewals with some of these tenants, like for example the ones in the quarter, can you talk about some of the other I guess qualities of the lease. Are these sort of shorter leases, are they longer leases? Do they have maybe bigger bumps because you're sort of cutting back their rents, but you have like a steeper increase? I'm just curious if there's a mechanism to give you guys flexibility down the road. Granted it might not be next year, but down the road to maybe capture some sort of reaccelerate in sales to the extent that happens?

Yeah, they're definitely shorter. Typically 2 to 3 years. In some cases, not all, we have recapture, relocation rights. And then we also set the breakpoint so with sales being lower and the rents being lower, that is sales do grow we can participate in the upside. That's an important feature for us. Those are I would say the major characteristics that are changing.

Caitlin Burrows, Goldman Sachs.

I was just wondering, on the credit rating side, you're on the edge of investment grade with negative outlooks at both S&P and Moody's. So I'm just wondering, how do you think the agencies take the quarter? What have your recent discussion ben with them and how long do you think they might give CBL to recover before possibly downgrading?

Hello, Caitlin. Yeah, we continue our discussions with the rating agencies every quarter and every time we see a change, just like this, and we are in discussions with them. But they also are forward-looking, so they are not just looking at a quarter by quarter transaction or situation. The transformation that we are going through, they realize that it will take time. And as Stephen pointed out, it is a secular change and we're looking at so many different non-apparel users that are coming to our space because we do have the best real estate in our portfolio. So all of that takes time. So they are looking forward looking. From that aspect, I cannot say what changes they will make, but our credit metrics, if you look at our credit metrics, they are very strong. And the liquidity, they also look at our liquidity. It's very important for us to use our free cash flow and use our liquidity to redevelop and spend the money into growing our portfolio and not increasing leverage. And that's the key. We have brought our leverage down significantly, our debt to EBIDTA has crept up a little bit tis quarter, but that is an important component that we worked on. So the balance sheet improvement has been tremendous as Stephen already pointed that out. And that's what gives us the stability to withstand this EBITDA decline.

And then I guess just on that, you mentioned that they want to make sure you are kind of using your liquidity in a good way including redevelopment. Previously you guys had mentioned a plan to spend I think it was $125 million a year on redevelopment. Just wondering how that has shifted over the past 6 months or a year. It has gone down significantly on the properties under redevelopment, although I know in Katie's prepared remarks she did mentioned a number of things that sounded like they were in the works. So just wondering how that size of spend, what you're thinking now?

It's still roughly in that range. The projects, redevelopment projects are taking a little bit longer, but we're also adding more to it, so I think that's still a good range to use.

Okay, then just one more quickly if I could just on Acadiana. I'm just wondering right now what are the mechanics of this since it originally matured in April and you're in discussions with the lender. Kid of what happens in the meantime? Do you pay interest or accrue?

Yes, Caitlin, in the meantime we continue to pay the debt service, the normal debt service. And we will, the discussions are continuing. We'll announce it when we complete the process. We continue to manage it, we continue to --it's business as usual. And if we have some major investment to make, we get their approval because we use the excess cash flow to invest back in the property and the lender has discretion to give us those approvals.

Michael Mueller, JPMorgan.

I'm just wondering, are the concessions and restructurings that you talked about, are they reflected in the rent spread statistics?

Some are and then some are not part of the same-store amount that goes into the rent spreads that we disclosed. So that's why we said it was partly from the rent spreads, but part from the restructurings on deals that are either bankruptcies or renewals.

And the renewal spreads were mid-teens on the downside. If you're thinking about the adjustment that did not show up in that statistic, would you say that on average they are comparable to that mid-teens production, worse, better? How should we think about those?

Hey, Mike, it's Katie. It's a little difficult to give you a number on that separately. I don't think the declines were more severe, but you have to remember that if it's less than a year lease, it doesn't go into our spreads because it's a short-term lease. So anything that's over a year is really what gets captured in that number. But I wouldn't think it would be materially worse than that. Maybe specific locations if they had a really severe occupancy cost that needed to come down, but on average, probably in line.

I guess one question we get asked a lot is, what is the plan B if you would if all of a sudden we're in 2018 or 2019 or something and all the Sears boxes come back at once? I mean have you thought about that internally? How would the game plan be different than the blocking and tackling you are kind of doing today just by getting the slow bleed back?

We think about that, too. We don't expect even if there is some kind of event with Sears that all the boxes are going to come back because they still own over half our stores and they're going to try to maximize real estate value over time. But still, you've got to plan for the worst and hope for the best. So we do, for each Sears we have an active pan as far as what we would do with it, both short and long term. And given that, we would obviously take an effort to limit the capital investment as much as possible because there would be more stores. But we have the full availability of our lines of credit, not that we want to have to draw anywhere close to that, but it's there's. And if we needed the capital, there's also project financings that we could do on a discrete basis that we haven't pursued. So we have other sources we could tap if necessary. And we do have a plan, and each one is different, each one is market dependent and each one has a different set of users that makes sense given the dynamics of that market.

Jim Sullivan, BTIG.

Question on the full year guidance in terms of same store NOI, down 2 to down 3 for the full year. Based on where you are currently, that assumes a spread, a potential spread for the fourth quarter of down 3 to down 7. That's seems to be a really wide spread given where we are, it's the start of November. I just want to make sure that I'm reading that right, number one. And number two, to get to the weaker end of that rage of down 7, there would have to be come additional shoe to drop, a bankruptcy or something else. Is that correct as I'm talking about it?

Hi, Jim. I'll try and address your question. If you look at from the downside of it, the bottom of it, it's not that big, it's not 7%. So obviously it's in that range and I'm not trying to be evasive about, but it's more towards -- compare it from the bottom of the change that we made. So it's not going to be as significant as your sizing. But we also take into consideration all factors, not just the income, but it includes percentage rents, it includes specialty income, and all of that. So I'd say to you that you'd be looking at the bottom end of the guidance change, the change in the guidance. Not the big range.

Okay. Then the second question, looking at the leasing activity on page 30 of the supp for the third quarter with what you had at the end of the second quarter, the big deterioration appeared to be in the renewal category for leases commencing in 2018. So as we think about the opportunity to reverse the negative same store, does that mean that the impact of these negative spreads hasn't really show up yet in terms of the leasing activity that was done in the third quarter and that really it's going to be kind of a 2018 event?

Well it does definitely show up in this quarter and fourth quarter which is why we made the change in the guidance now. But really it's just saying for this specific pool, this is what we're looking at for next year. But there are so many parts that go into the full guidance range that we'll look at, that we'll come up with when we finish our budgets for the year and when we come out with our guidance in February. So I wouldn't go and put too much stock in just this one statistic.

Okay, then finally for me, Stephen, you made a comment where you talked about so-called fortress retailers having the pressures that so many into the industry are facing today. And you've I think given your opinion that this is temporary. It's a question we get a lot from investors, what gives one the confidence that these trends are temporary as opposed to something that's secular in nature?

What I was saying, Jim, is I think in some of these cases the sales pressures that they've seen this year are temporary. We have a lot of confident that Victoria Secret is going to bounce back and Signet with Zale's and Kay. So that's what I was referring to. But I think your question is a broader one and it's a good question and it really does go to this strategy that we're shifting from a heavy reliance on apparel and retailers that duplicate the same types of merchandise and creating over time a mix that's more balanced, that's more sustainable, that has uses that are going to offer the customer a different kind of experience, it's going to being them out of their homes, into the properties, and generate more traffic. That doesn't happen overnight, but like I said, we only did 25% of our leasing year-to-date to what I would consider our bread and butter retailers. And the other 75% are to these other kinds of uses. So we're making that transition in real time. We can't do it overnight but we are making it happen. We are retail real estate, we're not a retailer, so we can alter our mix, we can alter the strategies in terms of who we put in the properties and that is really what is going to make us sustainable long term and that's the longer-term path forward.

Tayo Okusanya, Jefferies.

One of the things you mentioned in the press release was there was lower projected contribution from temporary leasing and permanent lease up of space. I'm just curious, what should that really tell us in regards to demand for space as you're trying to backfill all the vacancies? For some of the nontraditional uses that you are considering, what kind of rents are those tenants willing to pay versus the kind of in place rents today?

So the rents for specialty or temporary are never at the same level as the longer term leases. Typically, they are 25% to a third of what we would get on a longer term lease. But there also isn't the investment that we have in a new lease because they're taking spaces as is. We're still seeing really strong demand from these locals and regionals to come in and backfill the spaces. I talked last quarter about our popup shops that we're putting in where we have different users every week or every two weeks in a lot of locations. And we used a lot of the former Limited spaces to do that across the portfolio. And that's a great way to incubate the new uses and bring in some of these new users I'm talking about. But we don't get the same dollars from those uses. So our goal is to transition them over time into longer term leases.

What about when you're bringing in a permanent tenant, but a nontraditional tenant, like medical office use or whatever have you. What kind of rent are they willing to pay versus the kind of inline retailer that used to be in that space?

Those rents are good. They're comparable and you've got to look at every category. Restaurant, they have a different economic structure. We've done a lot of ground leases on pads with restaurants because they are more capital intensive. We're working on a couple of theaters. We're very early in medical, so I can't really comment on the economics of that. But we feel like the economics of these other uses are actually going to be positive for us long term and are going to drive growth in the company and that's why we're pushing that direction.

Linda Tsai, Barclays.

Maybe you sort of touched on this briefly in a prior question, but relative to the dividend cut and the $50 million that you gain, are you reprioritizing the levels you're allocating towards debt repayment versus redevelopment any differently? And then how much of that CapEx spend might be characterized more as maintenance CapEx?

So we're consistently spending in the range of $50 million a year on CapEx and that's been the run rate for the past few years and that's roofs and parking lots and other types of capital items that are just ongoing at the properties. So we don't see that changing. As far as debt reductions, we have amortization on our secured loans that is still in the range of $60 million a year, so that's continuing and that does bring our debt levels down. And we're not making any change in allocation, we're just making sure that we've got comparable amount of free cash flow abv to use for the different uses.

Thanks. Then yesterday at Limited Brands Investor Day, they noted that 23% of their fleet are in C-malls and have remaining leases of less than two years. Is this a situation where they're exiting some of your malls or is it more that you're offering concessions since you view them as strong flagship brands that you want in your malls over time?

No, we're not seeing them exit. And I mean their occupancy costs are attractive from their point of view. Their sales are strong. They've had a clip this year, but I see them recovering. And I think that over time they are going to continue to be a really important part of the mix at both, at all types of malls and other retail properties just given how strong a retailer they are and given their focus going forward.

Sorry if I missed this, but what's your temporary occupancy?

You didn't miss it, because we don't disclose it.

Carol Kemple, Hilliard Lyons.

My question is about the taxable income expectations for 2018. When you were looking at that, were you -- what kind of assumptions were you making regarding occupancy and leasing spreads in 2018?

Sure, Carol. We don't specifically look at occupancy. We look at, really what we look at is the cash flow, what is the FFO, what is the NOI. And remember, I mentioned earlier we sold a whole bunch of properties. So we have lost FFO from our sold properties in addition to the rent concessions and the lower renewal spreads that we have. So all of that is baked into looking at the taxable income for 2018. So it's not so much specific to occupancy, it's just what's the FFO, what's the NOI and what is the taxable income. It is a pretty complex calculation, I want to say that to you even though I'm giving you a pretty simple answer.

I guess what I'm trying to get is, if next year we have a similar level of bankruptcies and you all have to do similar rent concessions, could we see another dividend cut?

Like I said, this is something that we take very, very seriously and consistency in our dividend is super important to us. We are conservative, we want to make sure that the dividend is important to our shareholders, it's important to us, and so looking forward, we feel like we're in a good position

DJ Busch, Green Street Advisors.

Stephen, when the company and the Board were going through some of the options, were asset sales in the Tier 1 pool considered? Or are there some types of restrictions or covenants in selling some of those assets by your unsecured lenders?

I'm not sure I understand your question about -- for what purpose? To fund the other redevelopments or --

When you're thinking about raising capital, there's couple of different avenues you could make. The dividend cut form a taxable income perspective makes sense, but as far as looking forward and thinking about raising capital, and especially where your stock is traded relative to the underlying asset value, whether that -- whatever that discount may be, you've had a weak cost of capital. Have you guys considered liking into the Tier 1 pool and selling some of those assets to raise some capital?

I'll say just generally, we look at everything. We sold the Outlet Shoppes at Oklahoma City last year and it was a very favorable transaction both in terms of the money raised. That was a Tier 1 asset. We've in the past, we've done JVs on Tier 1 assets. We continue to look across the board. We've sold outparcels as a way to raise capital. There's a lot of different ways and we're looking at the whole portfolio, looking at the transaction market, looking at the relative valuation. Dispositions has been an important source of capital for us, too, and it's been strategic in terms of selling some of the assets where we saw there were going to be challenges. But we haven't been limited to that. We sold the community centers and those have been low cap rates. So I guess that's a long way of saying we look at that, we look at everything.

When I look at, just switching gears a little bit, when I look at Tier 2, the sales and occupancy were down a bit which you addressed. But in the past, I guess when we've seen bankrupt or certain tenants leave the pool, the sale per square foot actually gets proposed udo a bit by a thinner but better tenant pool. But it doesn't seem to be the case this time. Does that imply that some of that tenants that have left were actually better than the portfolio average into the Tier 2 assets? Or am I reading too much into that?

No, what's hit us in Tier 2 is some of these border malls that are still under a lot of pressure. Like the malls in Texas on the border because of the peso and some of the other factors there in the North Dakota malls. Those have hit us. And then Acadiana is still in that pool because it's an energy market, so it's more some outliers that have put pressure on the overall category. And overall, the retailers that have gone out are lower productivity, so if anything, that helps our sales.

Christine McElroy

Oh my God, now there's pressure. It's Michael Bilerman with Christine. So Stephen, as the board and management deliberated the dividend reduction, were there advisors involved in helping the company navigate that, investment banks, or lawyers?

Yes, on both counts there were, of course. That's part of all our deliberations.

I guess if you step back about 3.5 years ago, you came up to the street with a business review, portfolio review and sort of where the company wants to move forward. Which it seems you had bankers involved in helping you craft the strategy of portfolio construction and sales and debt reduction and methods to do that. I just wonder, is there a larger strategic review that the board or management is trying to undertake other than just trying to keep their head about water on cash flow? And whether that's entering the discussion and whether there's something that's being taken a little bit more seriously form a strategic perspective going forward?

I would say, Michael, that we're doing more than keeping our head above water. We're glad that we did what we did over the past 3 years in terms of the sales and in terms even more of what we've done to our balance sheet. So the goal of this not to have to play defense, it's to be able to play offense and to have the resources and liquidity and the room and the coverage and all that so we can do that. And that's where our company and our board is headed. As far as broader strategic reviews and processes, like I've said in the past, that's something that -- we're a public company. So that's part of deliberations and considerations in any public company takes into account. And this year and over the past few years, circumstances change. Our board and we review it constantly. We never stop doing that based on current consideration. So I think we're doing everything you talk about, but we don't look at this as a drowning company at all. We look at it as having a really good future.

I just want to come back on the dividend I guess from a next year standpoint. I think Farzana said it was just a matter of putting it the same taxable income of where it could be next year. So it's about $0.25 differentiation effectively. I don't know if that implies there was going to be $50 million or $0.25 less in FFO next year, which is just bringing it down to what that level is. So if FFO is going to come down next year, because that's where taxable income is, if they are going to follow each other. If $0.25 (inaudible) reduce the dividends to the same level of free cash flow that you have in 2017.

So I would say it's not correlated exactly that way because taxable income and FFO don't track each other. There's a lot of esoteric factors that go into taxable income. So it's something that you have gains, you have losses, you just have a lot of things that go into it. So it's just not, the math doesn't exactly work that way. The other thing I'd say is that like I said, we don't want to have a pattern of cutting the dividend. We hated to do it just period like we did, but we also were stewards for the shareholders and we felt like it was the right things to do. We're looking ahead and it's something that we certainly don't want to repeat. If anything, we want to be back in the position where we can get it back to where it has been.

I guess what I was saying is the $50 million is not incremental to where a standing state is in 2018. Given the difficult property environment that's causing a drag on your earnings, and the sales and everything that you've done balance sheet wise, that's creating more earnings headwind into 2018 and so it's not incremental $50 million of free cash flow believe cash flow itself is coming down.

No, it's incremental. And we'll give guidance in February, Michael, and we will outline it clear. I think the thing today is that we wanted to make this announcement as part of our earnings, we wanted to do it as part of a call so we could communicate it. We didn't want to do just a press release in couple of weeks. It's not ideal and we hate that people were caught off guard about it because that's not the best way to do this. B but on the other hand, like I said, we felt like it was important to get it out there as soon as we came to the conclusion and the board that it was the right thing to do at this time. So thanks, and like I said, we'll give good guidance after next quarter in February.

And thank you, everyone. We appreciate your time today and your support. Have a good day.

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