CBL & Associates Properties, Inc. (CBL) 2018 Q3 法說會逐字稿

Good morning everyone, and welcome to the CBL Properties Third Quarter Earnings Conference Call. (Operator Instructions) Please also note, today's event is being recorded.

At this time, I would like to turn the conference call over to Ms. Katie Reinsmidt, CIO. Ma'am, please go ahead.

Thank you, and good morning. Joining me today are Stephen Lebovitz, CEO; and Farzana Khaleel, Executive Vice President and CFO. 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 supplemental non-GAAP financial measures to the comparable GAAP financial measures was included in yesterday's earnings release and supplementals that will be furnished on Form 8-K and is available in the Invest section of the website at cblproperties.com.

This call is being limited to 1 hour. (Operator Instructions) If you have questions that were not answered during today's call, please reach out to me following the conclusion.

I will now turn the call over to Stephen.

Thank you, Katie, and good morning, everyone. 2018 is a milestone year for CBL as we celebrate our 40th anniversary and 25th year as a public company. During our company's history, our industry has evolved and changed, but no point compares to what we have seen this year. For 2 of our major anchors, Sears and Bon-Ton, to file Chapter 11 and close over 30 of their stores representing more than 4.5 million square feet in our portfolio is unprecedented.

While we anticipated these filings and began preparing for them years in advance, the reality is nevertheless challenging. Sears was the catalyst for the development of many of our malls. As a result, they enjoy premier locations in our centers. While initially the mall specialty stores relied on department stores such as Sears to generate traffic, it has been quite some time since this has been the case. No question, the closing of these boxes is disruptive in the short term, but because of the prime real estate they occupy, I am 100% confident that this also presents a once-in-a-generation opportunity to transform our properties from traditional enclosed malls to suburban town centers that include fashion, value, dining, entertainment, fitness, service and other mixed uses such as hotels, residential and office -- the type of property that today's customer desires.

Given the magnitude of this opportunity, we are focused on extending our debt maturity profile, providing us with the runway necessary to accomplish these redevelopments both from a timing and liquidity point of view. As Farzana will discuss shortly, we are making excellent progress on the recast of our term loans and lines of credit with our bank group and appreciate their support. We look forward to updating the market as soon as we have definitive news to report, but I can assure you that we are heading in a positive direction.

With this perspective, while we are never satisfied with negative numbers, we are pleased to deliver in-line results and to reaffirm our full year 2018 guidance this quarter. As reported yesterday, third quarter adjusted FFO per share was $0.40 and same-center NOI declined 6.1%, an improvement from the year-to-date trend.

While our key operating metrics are still under pressure, we are making headway towards improvement. Sales have been our bright spot this year, with most retailers reporting positive results, where our portfolio trailing 12-month same-center mall sales increased to $378 per square foot from $376 per square foot for the prior year period. This trend should translate into an improved leasing environment in 2019.

We are making progress on portfolio occupancy with a sequential improvement of 90 basis points to 92%. We have experienced less specialty store filings in 2018 as compared with 2017. However, the recent filings of Brookstone, Mattress Firm, Samuels Jewelers and Bevello contributed to the increased draw on our reserve this quarter. We are optimistic that 2019 will also be a relatively benign year for specialty store bankruptcies given the strong economy and improved retail sales environment.

As I mentioned, we have over 30 former department store boxes closing in our portfolio this year. We have been anticipating these events for years, starting with our first sale-leaseback with Sears in 2013, and have a realistic plan to address these closings with reasonable capital spending. In order to help the market better understand our Sears and Bon-Ton store activity, we have included a new schedule listing each store's status in this quarter's supplemental. Katie will review projects currently under construction in a few minutes, but I also want to provide a summary of our Sears and Bon-Ton exposure as well as our plans for these boxes.

First, regarding Sears. At the end of the second quarter, we had 38 Sears locations, excluding Janesville that was sold in July and a property where we only have a 10% interest. Assuming all the announced store closings occur by year-end, we'll be left with 21 operating locations. Of the 17 store closings, 10 stores are leased, 4 owned by Seritage, and 4 owned by Sears or third parties.

One of the Seritage stores has already been substantially redeveloped, and we understand they have plans in various stages on others. Of our 10 leased Sears locations, 3 are stores we purchased last year and have active redevelopments in planning stages with 2 set to commence within the next 6 months. That brings us down to 7. We have leases executed or out for signature on 2 of these and LOIs or active discussions on the remainder. We are also in active negotiations on a number of stores that are still operating in anticipation of future closures. We expect that some of the stores owned by Sears will be sold directly for third-party redevelopment. In fact, in a couple of instances, that has already occurred. Novant Health recently purchased a Sears store in our Hanes Mall in Winston-Salem for future medical office. Sears is currently operating in the location on an interim basis.

Our gross annual rent for the Sears stores announced as closing to date is approximately $5 million. The majority of this rent was for storage that we had recaptured in 2017 as part of our sale-leaseback transaction where we had expected to proactively terminate the leases in the next few months to begin redevelopment projects. As such, we do not expect any material revenue loss in 2018 related to the closures or to co-tenancy. The major impact on us from these Sears closures will be in 2019 when we will have a full year of rent impact as well as any associated co-tenancy.

Based on store closings announced to date, the 2019 co-tenancy exposure is in the range of $7 million to $10 million. While we are hopeful that Sears will be successful in reorganizing, we believe it is smart to plan for the worst case. If we assume a Sears liquidation occurs sometime early in the year, we estimate the additional co-tenancy exposure would be in the $4 million to $8 million range.

While co-tenancy clauses and leases are far from uniform, most are triggered by the closing of 2 or more anchors. As we approach our redevelopments, one of our major priorities is to limit downtime where we have more than one anchor closure. Across our portfolio, we have 11 locations where we have Bon-Ton and Sears, including locations where Sears is still operating. We have replacement activity occurring on each of these with executed or out-for-signature leases on 8 and LOIs under negotiation for the other 3. We are also working with a number of retailers to revise co-tenancy language to reflect current market conditions and are having success in this effort.

Shifting to Bon-Ton. In August, we had 14 locations closed in our core portfolio, including 10 leased and 4 owned by others. Of the 10 leased locations, we have leases executed or out for signature for 6 and LOIs or prospects under negotiation on the remainder. Two replacements are scheduled to open before year-end. Total redevelopment spend for all 6 boxes is currently estimated at $10.5 million.

We are paying close attention to the capital requirement of backfilling these closing stores. I want to highlight that across our portfolio we have 9 anchor replacements occurring with little or no investment by CBL and several others that are in process. While we have certain properties where a more significant investment is warranted to create higher long-term value, we are watching the total spend closely through this process. We expect total annual redevelopment spend to remain in the $75 million to $125 million range for the next 3 to 4 years to complete all the necessary redevelopments in our portfolio.

Through these projects and our general focus on diversifying our tenant mix, we are expanding the types of uses we are bringing to our properties, positioning them for long-term success. Year-to-date, over 63% of our total new leasing was executed with nonapparel tenants, including dining, entertainment, value and service uses. We have executed contracts, LOIs or are having active negotiations with 50 restaurants as well as 14 entertainment uses, 9 hotels, 4 multifamily, 2 grocery uses as well as fitness, medical office and self-storage. Uses such as hotel, multifamily and storage are generally through joint venture partnerships, ground leases or pad sales, which allow us to bring these uses to our properties while also minimizing required capital.

I now would like to discuss the reduction in the dividend, which we announced yesterday in the earnings release. Our primary financial priority is to preserve liquidity and strengthen our balance sheet. As announced last quarter, we have been evaluating an adjustment to our dividend to a level that maximizes available cash flow for investing in our properties and debt reduction.

After an analysis of projected taxable income for 2019, including assumptions of disposition transactions with lenders, we are reducing the common dividend for 2019 to an annualized rate of $0.30 per share from $0.80 per share. The reduction will preserve an estimated $100 million of cash on an annual basis. Based on the midpoint of 2018's guidance range, this equates to roughly $285 million of free cash flow after the dividend. This enhanced liquidity will fund debt reduction as well as EBITDA-generating redevelopment that is essential to stabilize income and ultimately create long-term value.

Reducing the dividend is not the only measure we have taken to create additional liquidity. While we already run a lean organization, we have implemented a program to create efficiencies in operations; reduce overhead, including executive compensation; and reduce spending in general. We will also continue to opportunistically dispose of assets to generate equity. While adjusting our dividend is a difficult decision, we believe it is in the best interest of the company to do so.

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

Thank you, Stephen. Before I get into our operating performance and current redevelopment pipeline, I want to say that while we definitely are facing current challenges, our entire organization is energized by the opportunities we have in front of us. CBL is a resilient and determined company, and we have a plan to stabilize our operating results and create growth going forward. We are optimistic about our future.

Our leasing team is making solid headway towards recouping occupancy loss from bankruptcies and store closures. Same-center mall occupancy for the third quarter was 90.8%, representing a 120 basis point increase sequentially and a 90 basis point decline from the prior year quarter. Portfolio occupancy of 92% represents an increase of 90 basis points sequentially and 110 basis point decline compared to the last -- to prior year. Bankruptcy-related store closures impacted third quarter mall occupancy by approximately 77 basis points or 142,000 square feet.

While our leasing activity continues to be strong, leasing spreads remain under pressure. During the quarter, we executed over 835,000 square feet of leases, bringing year-to-date leasing activity to nearly 3 million square feet. On a comparable same-space basis for third quarter, we find roughly 450,000 square feet of new and renewal mall shop leases and an average gross rent decline of 13%. Spreads on new leases for stabilized malls declined 9.5%, and renewal leases were signed at an average of 13.8% lower than the expiring rent. We signed 3 new leases this quarter where the prior rents were above market or we agreed to lower rent due to the time the space had been vacant. Excluding these 3 deals, average spreads on new deals would have been positive for the quarter and flat year-to-date. Packages with certain retailers that have had prolonged sales declines weighed on renewal spreads.

Third quarter sales continued the positive trend for the year. Rolling 12-month sales reached $378 per square foot compared to $376 per square foot in the prior year. September sales at six properties were impacted by closures related to Hurricane Florence, including Mayfair Town Center in Bloomington which was closed for 10 days. We expect October sales at these centers to rebound and are looking to end the year with a positive holiday season.

For the third consecutive year, we will close our centers on Thanksgiving to highlight the national tradition of Black Friday. Our customers will line up for doorbusters and special promotions starting at 6:00 a.m., and will be treated to events and entertainment throughout the weekend.

As Stephen stated, we have a tremendous amount of redevelopment activity occurring in our portfolio. These projects are critical in stabilizing our performance and growing income. As we replace former department store space, we are achieving rents that are multiples of what the vacating stores were paying, as well as driving significant new sales and traffic to the whole center.

During the quarter, we started construction on the first phase of the redevelopment of the former Macy's at Parkdale Mall. Dick's Sporting Goods, Five Below and HomeGoods will open next summer. In June, Flix Brewhouse, a specialty theater operator featuring films, food and microbrews, opened at East Towne Mall in Madison, Wisconsin. Later this year, we'll open H&M, Planet Fitness and Outback Steakhouse at the former JC Penney at Eastland Mall in Bloomington, Illinois.

Construction is progressing on a Sears redevelopment at Brookfield Square in Milwaukee, Wisconsin, which is one of the stores we purchased last year through a sale-leaseback. The first phase of this project includes the new Marcus Theatre BistroPlex dine-in movie experience, WhirlyBall Entertainment Center, and two restaurants. In July we completed the sale of a portion of the Sears parcel to the city for development of a hotel and convention center, which commenced construction in October.

We are planning for a fall opening of Bonefish Grill and Metro Diner in the former Sears Auto Center location at Volusia Mall in Daytona Beach. Aubrey's Restaurant and Panda Express are under construction here in Chattanooga at Northgate Mall in the former Sears Auto Center space.

At Jefferson Mall in Louisville, Kentucky, we are under construction to add Round One Entertainment Center, which will open in November in the former Macy's. We commenced construction on Dave and Buster's at Hanes Mall in Winston-Salem in former shop space near the Sears wing, with the opening scheduled for 2019. As Steven mentioned, Novant Health recently purchased this property's Sears location for a future medical office facility.

In Greensboro at Friendly Center, O2 Fitness is under construction replacing a former freestanding restaurant. The new 27,000 square foot location is expected to open later this year.

In early October, we provided Sears with notice to terminate the lease at Hamilton Place here in Chattanooga. The store was also on the closing list that Sears issued as part of their bankruptcy. While we'll be announcing more details on the project shortly, it will include entertainment, dining and hotel components.

Cheesecake Factory is already under construction on the pad in the Sears parking lot opening in early December. Construction on the remainder of the project will begin in Spring 2019.

We opened our first self-storage facility in late September. This is a joint venture project on vacant land adjacent to Eastgate Mall in Cincinnati. Our second project, located at Mid Rivers in St. Peters, Missouri, will open in December. We have two other projects in planning stages that we anticipate constructing in 2019.

These partnerships are a great way to create value across our portfolio. We contribute land as CBL's share of the equity so there's no cash investment required. Once stabilized, we can look for the best time to monetize.

Now, I'll turn the call over to Farzana to discuss our financial results.

Thank you, Katie. Third quarter adjusted FFO per share was $0.40, representing a decline of $0.10 per share compared with $0.50 per share for the third quarter 2017. Major variances included $0.05 per share from lower property NOI, $0.01 per share higher net interest expense, $0.01 per share dilution from asset sales, $0.01 per share higher G&A, primarily related to a one-time expense from the retirement of our COO, and $0.02 per share lower income tax benefit.

While NOI continues to decline as anticipated, the pace has decelerated. For the third quarter, same-center NOI decreased 6.1% or $10 million, with $12.3 million lower revenue and lower expenses of $2.3 million. Real estate tax recovery declined $2.9 million which corresponded with $2.8 million of lower real estate tax expense.

Property operating expense was relatively flat while maintenance repair expense increased $0.5 million.

Based on our results year-to-date and current budgets for fourth quarter, we anticipate achieving 2018 adjusted FFO at the mid-to-high end of the range of $1.70 to $1.80 per share, which assumes a same-center NOI decline at the mid-to-low end of negative 6.75% to negative 5.25%.

Guidance continues to include a top-line reserve to take into consideration the impact of unbudgeted bankruptcies, store closures, rent reductions, and co-tenancy. Based on our results year-to-date and projections for the rest of the year, we expect to utilize approximately $16 million to $18 million of the reserve. We will provide guidance for 2019 in February, which will include a comprehensive impact from Bon-Ton and Sears co-tenancy as well as the benefit of the new tenants that will open throughout the year both in our mall shops and replacement anchors.

During the quarter, we successfully completed the refinancing secured by the Outlet Shops at El Paso. The new $75 million, non-recourse 10-year loan was completed at an attractive rate of 5.103%, compared with the approximately 7% rate on the previous loan. We generated nearly $65 million in net proceeds to CBL.

Coupled with the $30 million in excess proceeds to CBL from the CoolSprings Galleria refinancing earlier this year and the nearly $90 million in proceeds from dispositions closed year-to-date, we have substantially funded the $190 million paydown of our unsecured term loan completed in July.

In October, we closed on a construction loan to fund the redevelopment of Sears at Brookfield Square. The loan has a total capacity of $29.4 million, with a 3-year initial term and 1-year extension option. The interest rate is variable at LIBOR plus 290 basis points. We anticipate securing similar construction financing for larger redevelopment projects to help minimize our cash outlays.

As Stephen mentioned, we are making excellent progress towards completing the refinancing of our $350 million unsecured term loan which was extended to October 2019, as well as on major lines of credit totaling $1.1 billion in capacity which matures in 2020. We anticipate rolling all of our term loans and credit facilities into one secured facility with a term loan component and a line of credit.

We will extend the maturity of this new facility for several years, providing us with sufficient time, liquidity and flexibility to execute our strategy. While we know you all are eager to hear about the sizing and other details since this is a work in progress we are not able to discuss specifics until we close. However, we assure you that through this process we are focused on balancing the quality and integrity of the properties supporting both the bond and the new facility.

Our total pro rata share of debt at quarter-end was $4.69 billion, a reduction of approximately $78 million from year-end 2017. We have been waiting for the court to finalize the foreclosure of Acadiana Mall. Based on the most recent update, we now anticipate this will occur in 2019. We have entered into a forbearance agreement with the lender for Cary Towne Center. The property is currently being marketed for sale on behalf of the lender. Any disposition proceeds from a successful transaction would apply towards the loan balance of approximately $43 million, with any deficit being forgiven. While we are early in the process we expect to close on this transaction in 2019.

With $201 million outstanding on our lines of credit at the end of the third quarter, we have over $490 million of liquidity available. At quarter-end, net debt-to-EBITDA was 7.1 times compared with 6.7 times at year-end 2017. The increase was primarily due to lower total property level NOI.

Our expectation is that this metric will improve by year-end 2019 as debt levels are reduced and we benefit from lease-up and new NOI from projects coming online.

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

Thank you, Farzana. CBL has an incredible team of experienced professionals fully committed to navigating the challenges we face in implementing our strategic priorities. I want to recognize and thank our entire organization both home office and in the field, for all they do on behalf of CBL. We truly appreciate you.

As I said earlier, while we have a lot of work to do, we are confident in our plan and our future. We are receiving a tremendous amount of demand for the former department store spaces across our portfolio, which demonstrates the versatility and value of this prime real estate. The transformation of our portfolio through this process will put CBL in a position to thrive. We will no longer be a traditional enclosed mall company. Instead, we will be a company with a portfolio of retail-focused, suburban-town-center mixed-use properties that are dominant in their markets.

As we demonstrated with the reduction to the dividend and measures taken to reduce expenses, we are committed to ensuring CBL has adequate liquidity and flexibility to execute on our redevelopment and other strategic initiatives without the pressure of near-term maturity.

Thank you for your time today. We appreciate your continued support. We will now open the call to questions.

(Operator Instructions) Our first question today comes from Todd Thomas from KeyBanc Capital Markets.

First question, I appreciate the Sears and Bon-Ton disclosure. The associated co-tenancy exposure that you talked about, I was just wondering if you could run through the mechanics of that -- the typical cure period, how long you have to cure the vacancy and how long tenants have before they're faced with either terminating the lease or reverting back to full rent?

So, like I said during my remarks, co-tenancy varies significantly across our portfolio. It varies by property, it varies by retailer, it varies even within the same retailer because properties we acquired over time, we inherited different language. So the short answer is, it's really impossible to answer that question. But what we've done is we've gone through, space-by-space, property-by-property, and done a projection of where we see the co-tenancy. Like I said, it's typically triggered by more than one anchor closing. So, two or more anchors close before co-tenancy is triggered and that's why we're focused on the 11 properties where we have overlap in terms of exposure with Sears and Bon-Ton. Usually, there is a cure period. It can be 12 months, 18 months, but during that period the tenant goes to reduced rent and then they can stay, or they can leave. And sometimes there's named anchors, sometimes there isn't. Sometimes the replacement language gives us flexibility but like I said, we're working with retailers to really refine the replacement language so it acknowledges current market conditions and the types of anchors that we're bring in: the food, entertainment, service, value, all these anchors that today are different than traditional department stores. So there's a lot to it. We try to give with the numbers, just the range that we see for next year. Like we said earlier in the year, the Bon-Ton exposure was $3 million to $5 million. The Sears numbers we gave in the call. And also if the rest of the stores close. So we tried to disclose to give everyone a sense of where the exposure lies.

So just to clarify, so you had said that it's $7 million to $10 million based on what you see today, but if Sears were to liquidate earlier in the year it would be $11 million to $18 million. Is that for the portfolio overall including Bon-Ton and all centers where there's potential overlap? Or was that just -- just the Sears exposure?

It's for the total, so everything together.

Got it. And then Stephen, you talked about prospects for 2019 to be a little bit better, more favorable here, more benign in terms of the unexpected store closures and bankruptcies. Can you just comment on the traditional apparel retailers and other tenants in the portfolio, which have seen sales rebound here but might still be looking to rationalize their footprints, or talking about store rationalization programs a bit still? I'm just curious how far through the 2019 expirations you are in lease negotiations at this point, and if you could provide some commentary around some of those retailers.

Sure. Well, I think you make a good point that there has been recovery with a lot of the legacy retailers, and that's one of the reasons for that optimism. And we started to see the sales bump and improved this year, and that definitely creates a more favorable backdrop. And you just look at our largest retailers, L Brands, Foot Locker and Signet, and American Eagle and companies like that. And they've had improvement in their results. Ascena has had improvement during the course of the year, which is encouraging. And no question, 2017 and 2018 have been tough. A lot of retailers had high occupancy costs and so we've had to address those through renewal discussions when they're in a struggling position financially. So it's been bankruptcies and also some of those rent adjustments that have really contributed to our numbers. But we do feel like we've worked through the worst part of it and as we head to '19 we've got a more favorable environment with the legacy retailers, and at the same time the strategies of replacing them with new uses, more regionals, more locals, and just different types of users. The 63% of non-apparel like I quoted, you know, those strategies now are kicking in and are going to have an impact. So I'm not saying we're out of the woods, and we still have to deal with co-tenancy and not all retailers are thriving. But I think we're headed in a more positive direction as we look ahead.

Okay. And how far through the 2019 expirations are you, and what sort of renewal percentage do you think is reasonable to assume for 2019?

Yes, I'd say we're probably 60% to 70% already. We have a lot of the renewals happen in the first quarter, and so those have been addressed and if they haven't been signed they're well along in the process.

Our next question comes from Christine McElroy from Citi.

Just in thinking about setting the new dividend level at the $0.30 or $60 million, I'm assuming that payout ratio is now soon to be 100% of taxable income in 2019. I'm wondering if you can sort of walk us through the pieces of that reduction and how we should think about the level of taxable income? And you mentioned potential dispositions next year. I'm assuming that some of those are losses that are going against the taxable income. Can you sort of walk us through the pieces of how much of that is same-store NOI decline, increase in interest expense, and those losses on sales?

I'll try to address your question, but I cannot really walk you through all the different steps as you are requesting. But suffice to say that Cary Towne Center and Acadiana Mall, that we are projecting to be sold in 2019 or returned to the lender. Those two transactions will generate significant losses. So it's balancing, the balance of what we know today in terms of the impact, full impact of bankruptcies in 2019 as well as the significant losses that we would be incurring from these two transactions actually is where we have determined the $0.30 to be. That's our best estimate now. And as time goes on we'll look at it as we get into 2019, but that's where we have set the dividend based on what we know today.

Okay, and just a follow-up on Todd's question on co-tenancy and I want to echo his comment that I really appreciate the disclosure in the back of the supplemental. Just for clarification, does the two-or-more-anchor rule triggering the co-tenancy, is that regardless of whether or not you own the box? So, I counted 27 of the Sears boxes that are not owned by CBL, whether it's owned by Sears currently or Seritage or a third party. I'm wondering just how to get a handle on maybe the recurring nature of that co-tenancy, if you're not in control over the re-tenanting of that box? Did that make sense?

Yes, it makes sense and there really isn't a correlation. We have Sears that we don't own, that have zero co-tenancy impact on any retailers because of where the Sears is located in the shopping center. So whether we lease it or own it isn't really the determining factor. We've made a concerted effort, I'll say, over the past five years to take Sears out of co-tenancy where we can. So we've limited it and the range that we're giving you, we feel is conservative and also we're working with the retailers to restructure where we can. But we just wanted to give a sense of where those numbers are. But really, the fact that we don't own the Sears, we don't view as a negative at all because if someone else wants to come in and buy it then they'll work with us because of the REAs and the ownership and they'll want flexibility with what they can do with it. And if no one else comes in and buys it, then we will -- the price will be a lot lower for us to eventually control it. So we don't see that as an urgent driving factor at all.

Is potentially gaining control of some of those boxes inherent in your $75 million to $125 million annual spend?

Yes.

Our next question comes from Rich Hill from Morgan Stanley.

I'm sorry if you mentioned this previously, but of the dividend cut, how much of that was driven by taxable income?

I did not give you the precise number because it is -- you know, it is not an easy calculation to lay it all out. But like I said, the driving factor is the Acadiana Mall and Cary Towne Center. Those are the dispositions that we have projected, and that will really generate the biggest portion of the taxable losses.

And I recognize that you don't want to go into details about the extensions of line of credit, but Stephen, I think you did mention on the last call that maybe it would have to be secured. Can you maybe comment about how you're thinking about the covenants relative to maybe having to secure that line?

I'll answer that question. Like I said, we cannot give out more details on it right now, but we are getting close to wrapping this up hopefully either by year-end or in January. But as I've mentioned, we are very cognizant of the bond covenants as well as the bank covenants, and they will be -- we are working through those and it will become flexible where we will make sure that the bond covenants are well taken care of and gives us ample room to -- for any changes, like dispositions of properties or anything like that. So, we can't give you really the details so if you can be patient --

Sure, of course.

-- and wait until the end of the year or first part of next year, you'll see where what we have done is really a very good strategy for us to operate in a flexible environment.

Got it. And maybe just one more quick question, then, a modeling question on my end. But when -- in your covenants, when you -- when I hear, "encumbered asset value," is that based upon book or is there any way we should be thinking about that?

Yes, it is based on book, on the bond side.

Our next question comes from Caitlin Burrows from Goldman Sachs.

I guess I was wondering maybe as it relates to G&A, I know you said that in the quarter there was a slight impact due to severance. But it does look like even excluding that, G&A would have been up year-over-year while obviously FFO is down significantly. So I was wondering if you could just comment on whether you're losing any ability to scale, or just kind of what's causing the difference in direction of FFO or same-store NOI versus G&A.?

Yes. You do get some quarterly distortions and we definitely expect G&A overall to be down next year because of some of the steps that we've taken that I mentioned, some efficiencies that we've developed through our management and through other areas of the company -- executive compensation reductions, and just other opportunities that we've created to cut costs. So that'll reduce G&A for 2019. There's living parts during the year, we've had some higher legal expenses that contributed this year. That's probably the biggest contributor for this quarter.

And then just maybe in terms of occupancy, you guys improved sequentially in the third quarter but have been down year-over-year for a little while now. So just what's your outlook in terms of the potential to stabilize occupancy based on the maybe leases that you've executed by now but not actually opened?

We're clawing back from the bankruptcies in 2017. We wish it was faster, but it is taking time and we should see more headway in 2019.

And then just one quick one if I could on the co-tenancy. Just wondering, is the numbers that you gave, is that assuming that none of the -- is that kind of a worst-case scenario, or is that assuming that some of the activity you already have in process, so that you expect to happen call it mid-year 2019, actually does open and cures some of the potential negative side?

It does assume, if we have an executed lease, like for several of the Bon-Tons, that they will open as scheduled. We have a couple that will open year-end this year. So it does assume, taking anything into consideration that we actually have executed. It does not assume we have additional box leasing that occurs, though.

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

Looking at renewals, I see that as kind of key in turning around same-store NOI. I'm wondering in 2019 if you still have a number of tenants that need to right-size rents due to declining sales?

Like I said, we've been working through that process. It's really driven by retailers that didn't formally file for Chapter 11, but are struggling. And they've been well-publicized and we've worked with them to restructure to avoid that. And like I said, I don't think we're done, but we think we're done with the majority of that. So we should see some improvement in 2019 given the better sales environment that we have this year and the strength of the economy.

So in terms of some leases that you amended, that might take care of people that would be rolling in this case, that you've already dealt with it?

That's correct.

Our next question comes from Jim Sullivan from BTIG.

Just a point of clarification on the co-tenancy, and I do appreciate the additional guidance here. But when we think about the model for 2019, is the co-tenancy, the negative co-tenancy impact, is that in addition to what we built into the model for leasing spreads? In other words, if you do have a co-tenancy impact that leads to a new lease or revision in the lease, does that also show up in those leasing spreads? Or is there some overlap there? Or no?

They're really separate. The co-tenancy is a onetime adjustment that occurs, and typically, it only is in place for a finite period of time. So that's a 2019 impact. The renewal spreads are in separate situations where the lease has a new negotiation. We are working, as part of the renewals, to clean up co-tenancy like I said. So that could help, but we wanted to be conservative in what we provided you today.

Okay, good. And second question, and this is for Farzana in terms of the renegotiation. In terms of the new facility that you expect to put into place and, I guess, have a term sheet by the end of the year, do you expect that there'll be substitution rates?

And meaning replacing -- taking tenant properties out and adding properties, if that's your question?

Yes. So I'm just looking about the liquidity and the ability to sell assets that might otherwise be securing the new line.

Right. Yes. Yes. We will have that flexibility because we should be able to -- if we -- they will have an allocated loan amount. So based on that, we should be able to -- if we go out and get financing for that property on a longer term, we should be able to pay that off and put a 10-year loan on it. So yes, that -- we will have those types of flexibility, and that's what we are excited about.

Our next question comes from Jeff Donnelly from Wells Fargo.

Actually, if I can maybe continue Jim's questioning about that -- what you're working on, Farzana. I'm just curious, do you foresee this package maybe having features in it where maybe you guys are mandated to pay down debt over a particular time frame? Or lenders are going to try and capture some portion of this cash flow? Is it -- are terms like that being considered?

Yes. Can you be patient? We'll be putting that out hopefully soon. So I don't want to give out all the information because obviously, we're in the process and getting close, and it would be imprudent for me to say anything right now. Because if I said something and it doesn't happen, then you'll hold me to it.

Understood. Understood. Thought I'd try, but...

Good try.

Yes. Switching -- I guess switching gears, maybe just building back on Craig's question. It sounds like you've been sort of working through a bunch of more challenging retailers. Does that mean that you think your renewal leasing spreads in 2019 could actually flip positive because they've weighed down by a handful of tenants you're working with this year? Or is it really more realistic to assume that renewal spreads might remain under pressure next year, but they'll be sort of far smaller declines than we've seen year-to-date in '18?

I think it's too early to say. I mean, we are optimistic, and there's a lot of reasons we think it's going to be better. I -- but there is still pressure, and certain categories, certain retailers are switching that pressure and negotiating hard as far as the renewals. So I just can't give you an answer right now.

And just concerning the anchor re-tenanting that you've already put in place in the past few years, ones that have already taken occupancy, I'm just curious -- do you have any statistics on those initiatives where -- that frankly might be being obscured by the portfolio metrics you provide, where the new anchors open, then you've seen a discernible improvement in foot traffic or mall sales, or shop tenant occupancy, or retention or rents that like I said, are obscured at the portfolio level because sometimes the benefits do extend beyond the walls of the box that you've replaced itself? So, have you guys compiled any metrics like that? I'm just curious, because not a lot of the landlords out there have really highlighted the improvement in the mall or the potential for improvement outside of the actual box replacement.

We have definitely seen how the improvement -- the replacement of the former Sears has helped the rest of the mall. CoolSprings Galleria in Nashville. The year after we replaced Sears we had an 18% increase in sales for the entire center. We were able to add Cheesecake Factory and, more recently, California Pizza Kitchen to the mall. Other retailers, such as Altar'd State and one of their first Beautiful Soul stores have opened. So we've had just -- it's really helped the property and it helped the area where the Sears was. We had Sears there, we're doing roughly 5 times the amount of business in sales out of that box that Sears was doing. The income is up significantly. We replaced them with an entertainment user, Kings, Ulta Beauty, two restaurants, H&M, American Girl, and Outdoor Outfitter. So I mean, it really is transformative. And we're under construction here at Hamilton Place in Chattanooga with Cheesecake Factory. In itself, they're going to do as much business as Sears did, and they're right in the parking lot. And then we're hopefully going to be able to announce the rest of that project in the next few months. And again, it'll transform the property and it'll benefit -- I can't tell you it's going to be 18% in this case, but we're looking at it in each property and we have better ways to measure that now through Wi-Fi and traffic camera counters, and aspects like that. So it's something that we're definitely going to continue to quantify as we go forward, but no question, it's a big positive.

And just maybe one last question. I think you guys said that you'd be at the mid-to-high end of 2018 FFO, but I think on some of the operating metrics year-to-date you're at sort of the weaker end of NOI guidance and the bankruptcy reserve. Is there -- maybe you mentioned in the call and I missed it -- is there something else that I guess I'm not seeing, that's going to -- that leads you to think it'll be towards the higher end of FFO? Is it gains on sales? I'm just curious what that is.

It's mostly going to be outparcel sales. We've already reached the higher level of that outparcel sales. We had $11 million or so year-to-date. We expect that to be a little bit, go up even higher next -- maybe another $2 million or so. That's part of the reason. And others are just different, you know, interest expense might -- even though it has gone up a little bit, we have some other savings so that's really where we end up with a little bit higher on the FFO side.

Our next question comes from Michael Mueller from JPMorgan.

Just going back to two things. One, the dividend. I guess I know you're not quantifying, or breaking everything down, but mentioned a couple losses that are going to weigh on taxable net next year that's going to enable you to have a much lower dividend. So should we think of that as that $0.30 dividend level as being kind of a one-shot deal for one year because in 2020 you're not necessarily going to bank on having a couple of sizeable losses to weigh down taxable net? Is that how we should think of it?

All we're looking at is 2019. And given where we are, keeping the liquidity in the company, the dividends, the cheapest source of income so we felt like this was the right level for 2019. And 2020 is a long way off at this point.

And then going to the co-tenancy, the $7 million to $10 million base case before a Sears liquidation, just wanted to confirm -- you said that's for everything? That's not just Sears, that's for any other boxes as well?

That's correct.

Okay. And just as a follow-up to that, so if we're going to average it at $2 million a quarter, if we look at Q3 earnings, how much of that $2 million is already in the run rate versus how much is incremental to come next year?

I mean, not much of it has kicked in for this year. Really we have the Bon-Tons just closed in August. So hardly any of that. It was in Q3, there'll be a little in Q4, but we're really looking at this impact for 2019.

Our next question comes from Spenser Allaway from Green Street Advisors.

Can you guys talk a little about how you're thinking about your exposure to JCPenney, kind of given the headwinds that the department store industry continues to face? Have you guys looked at what the co-tenancy impact would be in the event that JCPenney actually announced store closures early next year?

We've looked at JCPenney but not in the level of detail that we have with Sears and with Bon-Ton. And we communicate with JCPenney regularly. We have a sense of what stores might be on the watch list. We feel really good about our portfolio with them. I mean, they've -- they're going to benefit from Sears closing, from Bon-Ton closing. They're going to pick up sales from both of those. There'll be an immediate short-term hit from going out of business with Sears, for the stores that are closing. But then that should translate into helping JCPenney sales, and they've added appliances and more home and more areas that'll capture some of that market share. So we feel good about JCPenney and their future, and they perform well in our portfolio. It's their customer. So that's not something we're losing sleep about right now.

And then I know you guys have a capital budget as it relates to kind of backfilling these tenants -- or sorry, these anchor boxes as they kind of come back to you. But as you look forward into next year and get ready to set guidance, will you guys be including a cushion for additional closures, particularly on the co-tenancy aspect?

We will. We'll have a reserve. But we don't know the amount right now, and the good thing about between now and February, we'll know a lot more so when we give guidance we'll have a lot better sense than if we tried to do it now.

Our next question comes from Tayo Okusanya from Jefferies.

Farzana, just going back to Jeff's line of questioning, I understand all the recasting going on with the line of credit and the term loan. But how do we think about mortgage debt? Because you do have still a decent amount of mortgage debt that will be maturing in '19 and '20.

Yes. Happy to answer that question. '19 is really a benign year. If you think about it, we have two loans, Volusia and Honey Creek. They're about $60 million and we're in discussions with the lender on that. And the $350 million term loan is really the term loan we've been recasting. So if you take that out, it's not a big year for 2019. So generally speaking, if we get this recast done and put it over a longer-term maturity, all we have to do is pretty much deal with the secured loans that are coming up. 2020 we have approximately $250 million in secured loans that's coming up -- $270 million based on the current maturity date -- current loan balance. But assuming it's financed at the maturity date, it's going to amortize down to $250 million. We have a couple of big loans there, Barnesville and Valley View and Greenbriar, we'll work on those ahead of time. But it is not until 2020 and at mid-year 2020, and some towards the end of 2020. So we expect that we have markets are going to be better, and hopefully, we can get these financing done. So I really feel pretty comfortable with where the secured maturities are.

And our last question today comes from Jim Sullivan from BTIG.

This is also a question for Farzana and really follows on from Tayo's question. Farzana, do you have any sense in terms of CMBS origination, to what extent the recent disruption in the space caused by Sears and Bon-Ton is resulting in any material change in terms that are being offered? To what extent is the market much tougher than it was in your sense?

Well, market has been tough. CMBS is very cautious on retail, just like everybody else is. But the good news is that there are other pockets of money that you can tap, and are some of the dispositions that we have done, people have tapped other pockets of money, not necessary CMBS. But CMBS is still available on better properties, meaning properties at higher sales per square foot, and also depends on the level of the loan-to-value ratio or the debt yield. The debt yield have generally moved up. So it just, property-by-property, you cannot generalize it. But at the same time, I would say that it is a little tougher environment for CMBS for property-specific retail real estate. The bigger ones are harder to do. The smaller ones are generally easier to do.

And you mentioned sales per foot. Is there kind of a red line where it's just almost impossible to get CMBS financing at a certain productivity level?

Well, you know, we haven't been out getting financing on -- we've been very selective. We did CoolSprings and we did El Paso, both had great sales per square foot. So I don't know if a red line, but at the same time I would say $400-plus is a better place to get the CMBS financing.

Ladies and gentlemen, we have reached the end of our allotted time for today's question-and-answer session. I'd like to turn the conference back over to Stephen Lebovitz for any concluding remarks.

Thank you again for your time today. Like I said, we appreciate your support. We'll see many of you at NAREIT next week. Thank you, and have a good day.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your lines.