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CBL & Associates Properties (NYSE:CBL)

Q1 2013 Earnings Call

April 30, 2013 11:00 am ET

Executives

Stephen Lebovitz - President & CEO

Farzana Mitchell - EVP & CFO

Katie Reinsmidt - SVP, IR and Corporate Investments

Analysts

Paul Morgan - Morgan Stanley

Christine McElroy - UBS

Todd Thomas - KeyBanc Capital Markets

Nate Isbee - Stifel, Nicolaus

Ben Yang - Evercore Partners

Rich Moore - RBC Capital Markets

Cedrik Lachance - Green Street Advisors

Quentin Velleley – CitiGroup

Carol Kemple - Hilliard Lyons

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the CBL & Associates Properties First Quarter 2013 Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded today Tuesday, April 30, 2013.

I would now like to turn the conference over to Mr. Stephen Lebovitz, President and Chief Executive Officer. Please go ahead, sir.

Stephen Lebovitz

Thank you, and good morning. We appreciate your participation in the CBL & Associates Properties, Inc. conference call to discuss first quarter results. Joining me today are Farzana Mitchell, Executive Vice President and Chief Financial Officer; and Katie Reinsmidt, Senior Vice President, Investor Relations and Corporate Investments, who will begin by reading our Safe Harbor disclosure.

Katie Reinsmidt

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 from the events and results discussed in the forward-looking statements. We direct you to the company's various filings with the Securities and Exchange Commission, including without limitation, the company's most recent Annual Report on Form 10-K.

During our discussion today references made to per share amounts are based upon a fully diluted converted share basis. During this call, the company may discuss non-GAAP financial measures as defined by SEC Regulation G. A reconciliation of each non-GAAP financial measure to the comparable GAAP financial measure will be included in the earnings release that is furnished on the Form 8-K along with a transcript of today's comments and additional supplemental schedules.

This call will also be available for replay on the Internet through a link on our website at cblproperties.com.

Stephen Lebovitz

Thank you, Katie.

2013 is off to a great start for CBL putting us on track for another strong year. We are pleased with the relative out performance of our stock year-to-date. And the good news is that we see sizeable outside remaining. The CBL portfolio is only getting better.

Last year we were very successful in adding several high growth properties that are a perfect fit with our market dominance strategy. We coupled this with a number of non-core asset sales through our disposition program allowing us to redeploy capital into higher growth investments.

We continue this activity into this year with the acquisition of the remaining 51% interest in Kirkwood Mall in Bismarck, North Dakota and more than $40 million in asset sales. We also have a growing pipeline of new developments as well as redeveloping the projects to further strengthen the market portion of our properties.

Operationally our portfolio sustained it momentum from last year and posted strong results for the first quarter even against a tough NOI comp last year. We were successful in achieving double-digit leasing spreads a major goal of ours for the year.

We also generated a 40 basis point increase in portfolio occupancy despite the short-term vacancy we intentionally created as part of our tenant upgrade strategy. Same center NOI growth was solid at 1% and FFO of $0.53 per share exceeded consensus growing 8.2%. The 40 basis point increase in overall portfolio occupancy to 92.2% was primarily driven by continued lease up in our community and associated center portfolios.

For stabilized malls, occupancy was relatively flat year-over-year at 91.7%. As the supply demand dynamic as shifted more in our favor, we have increased our focus on upgrading tenant mix and productivity.

During the first quarter, we intentionally allowed a number of spaces to become vacant where we saw opportunities to replace underperforming retailers with higher quality stores. While this decision creates downtime resulted in (flat markets seen) in the quarter, it will contribute to better mall performance and NOI growth later in the year and in the future.

In anticipation of these spaces becoming available leases have already been executed or out for signature with exciting additions to our properties such as Michael Kors, Crazy 8, Chico’s, White House Black Market, (Tele’s), Vera Bradley and H&M. The new leasing spreads almost 33% reported in the first quarter are indicative of the rationale behind this strategy.

As we have previous said, one of our major goals for the year is to achieve double-digit leaking spreads. We are pleased that overall for the first quarter leases for stabilized malls were signed in a 10.8% increase over the prior gross rent per square foot.

Renewal rents were signed in at 3.4% increase and new leases were signed at a 32.9% increase. We had a higher proportion of 2013 leases come up for renewals during the first quarter which put pressure on the average spread. However, we expect our renewal spreads to improve throughout the year.

We have reduced the number of renewals that are for terms less than 3 years to (theory) then 35% of leases assigned in the first quarter which reflects the improving quality of our releasing efforts.

First quarter sales were positive with strong results in January and a more moderate showing for February and March. January strength was assisted by the extra week in the calendar and while our March business at many of our malls was hurt by the prolonged winter weather, the month ended strongly with earlier Easter holiday.

Rolling 12 month portfolio mall sales increased to healthy 4.4% to $355 per square foot compared to $340 in the prior year period. We are still anticipating sales increases for the full year in the range of 3% to 4%.

I will now turn it over to Katie for her comments.

Katie Reinsmidt

Thank you, Stephen.

Subsequent to the end of the quarter we completed the acquisition of the remaining 51% interest in Kirkwood mall in Bismarck, North Dakota. The aggregate purchase price for Kirkwood mall is $121.5 million including the assumption of $40.4 million non-recourse loans with the fixed interest rate of 5.75% maturing in April 2018.

Kirkwood mall represents the tremendous opportunity for CBL. The mall enjoys significant growth in outside with tits proximity to the Bakken formation and benefits from the stability afforded from its location in the capital city. Mall sales were up double digits in 2012 as of $400 per square foot. Occupancy costs were low at around 9% providing a great opportunity to improve NOI through higher rents on renewal leasing.

We will continue to monitor additional acquisition opportunities that comes from our guest as well as look for off market transaction. Our disposition and capital market activity offer started off well.

In the first quarter, we raised over $105 million in equity capital through the initial tapping of ATM and from sales of non-core assets. On March 1, we put our $300 million ATM program in place. During the first quarter, we sold 2.7 million shares at a weighted average price of $23.58 per share near the quarter’s high. There were actually only four trading days during the quarter that toughed its price level. These sales generated net proceeds of just over $62 million.

During the first quarter we completed the disposition of five office buildings in Greensborough and Raleigh, North Carolina and Newport News, Virginia per net sales price of $43.5 million. We have five additional wholly-owned office buildings that we are completing final lease of bond and should be in a position to bring these market later this year.

So in non-core and mature properties such as office buildings, lower productivity malls and community centers continues as one of our strategies to provide additional capital. Our development and redevelopment pipeline is accelerating this year as well. We have several new development projects with construction during the first quarter, we were grand March on our new 65/35 joint venture development project in Slidell, Louisiana with Stirling Properties. Phase I of Fremaux town center is a 295,000 square foot power center development with Dick’s Sporting Goods, Michaels, Kohl’s, Cutsmart, T.J. Maxx, ULTA and additional shops and restaurants.

The project is located on the Northern Shore of Lake Pontchartrain across from the city of New Orleans and area that has experienced tremendous growth following Hurricane Katrina. Phase I is already 70% leased or committed with the grand opening slated for the second quarter of 2014 and the fashion-focused second Phase of approximately 300,000 square feet is well into the processing process.

In the Woodstock, Georgia we will be celebrating the grand opening of our new outlet center development, The Outlet Shops at Atlanta on July 18. The 94% leased or committed center will open with a terrific retail line-up including Saks Fifth Avenue Off 5th, Nike, Coach, Asics, Columbia Sportswear and Juicy Couture.

Atlanta will represent the fourth outlet center in our portfolio and we expect to make an announcement before ReCon of our new outlet project as part of our joint venture program with Horizon.

In June, we will open the crossings at Marshall Creek, our 103 1000 square foot shopping center development in Stroudsburg, Pennsylvania. The 88% leased or committed shopping center development will be anchored by Price Chopper supermarket and Rite Aid and will feature approximately 22,000 square feet of stores and restaurants.

With new construction at an all time low-time we have a tremendous window of opportunity to capture incremental market share at our existing properties. A great example of how we are executing on this strategy is our expansion project at Cross Creek Mall in Fayetteville, North Carolina.

Cross Creek is one of our most productive centers maintaining a full occupancy rate and generating sales approaching $550 per square foot. In 2012, the mall underwent an interior and exterior renovation with updated entrances, lighting, flooring and new ceiling areas and other amenities.

During the quarter we started construction on 46,000 square foot exterior expansion that will allow us to accommodate a number of retailers that are in-demand by the market. This expansion is 91% leased or committed with retailers including Chico’s, Loft, White House Black Market, Men’s Wearhouse and Reed's Jewelers. And we will open later this year.

We also recently announced a restaurant at Volusia Mall in Daytona Beach, Florida as an expansion to the property which is located immediately across Daytona Motor Speedway. The project includes IHOP, Olive Garden and Bahama Breeze with opening scheduled for late 2013.

We are working on a number of other redevelopments and expansions in several of our properties and see this activity is generating ongoing outside to CBL financially and in terms of our ability to strengthen the market dominance of our properties.

We will be free-leasing these projects in Los Vegas and hope to be in a position to make additional announcement as this progress.

I will know turn the call over Farzana to provide a financing update as well review of our first quarter financial performance.

Farzana Mitchell

Thank you, Katie.

During the quarter we continue to make progress towards our goal of obtaining an investment grade rating. To achieve this objective, we are making strides towards establishing a balance between secured and unsecured debt. Late last year, we completed the conversion and expansion of our unsecured credit facility to $.12 billion, in February we called on the extension and modification of $105 million line of credit converting it to a $100 million unsecured line of credit and are fully funded $50 million unsecured term loan.

The line of credit matures in February 2016 and as a spread of 185 basis points over LIBOR based on our current leverage, which is an annual savings of 40 basis points from the previous facility. The term loan matures in February 2018 and is at 190 basis points over LIBOR.

We are utilizing our combined $1.3 billion of credit facility to pay off maturing loans. Today we have approximately 30% of our total NOI encumbered. The encumbered NOI probably will go further as we retire additional maturing loans on wholly-owned properties over the upcoming years.

To maintain capacity on line we envisioned putting a 5 to 7 year term loan in place later this year to provide liquidity for investments in our growing development pipeline and to retire maturing loans.

Ultimately when we achieve an investment grade rating we will issue long-term fixed rate unsecured corporate debt with the focus on lattering our maturities and reducing our cost of borrowings. We anticipate this process could take through 2014 but are pleased with the progress that we are making in our dialog with the rating agencies.

For properties owned and joint ventures we will continue to obtain property level financing in March we closed a new tenure of $100 million loan that the fixed interest rate of 3.4705% secured by Friendly Center in Greensboro, North Carolina and retired the existing $77.5 million.

We also closed on a $16 million secured by Renaissance Center Phase II, our community center in Durham, North Carolina. This tenure non-recourse loan that the fixed interest rate of 3.4895% replaced the exciting $15.7 million loan. These properties are owned in a 50:50 joint venture. Excess proceeds from these loans were used to retire loans secured by office buildings in the same joint venture.

In January, we retired a $63.6 million loan secured by Westmoreland Mall which was scheduled to mature in March and $13.5 million recourse loan on stage for crossing subsequent to the quarter end, we retired the $228 million unsecured bank term loan as well as $72 million loan secured by South County Center in St. Louis, Missouri.

With these activities we have addressed all of our maturing debt obligation for 2013, as we look ahead, to 2014, the $32 million loan secured by North Park Mall opened to pre-pays this December which we intent to retire with the lines of credit.

Regarding the Westfield Preferred unit, our guidance assumed a mid-year pay off and we remain on track to redeem these units. One thing of the redemption has been a question that we have received quite often.

As Katie mentioned, we raised over $105 million in the first quarter to ATM equity issuance and disposition. In the near-term, we plan to fund the redemption by using these – this recently raised capital and our lines of credit. While we do not view the lines of credit as a long-term solution it does provide us with time and flexibility to raise a more permanent source of equity. These sources may include proceeds from additional disposition of a non-core and mature assets, additionally depending on the trading level of our stock we can continue to access our ATM.

We ended the quarter with $841 million of available on our lines of credit. Our financial covenant ratios remain very sound with an interest coverage ratio of 2.64 times as of March 31, 2013 compared with 2.46 times as of March 31, 2012. And a fixed charge coverage ratio of 2.05 times as of March 31, 2013 compared with 1.91 times as of March 31, 2012.

Our debt to total market capitalization was 51% as of March 31, 2013 compared with 55.7% as of the same period last year.

First quarter 2013 FFO was $0.53 per share and 8.2% increase over the prior year period. Improvements in FFO for the first quarter were driven primarily by top-line revenue growth from our same center portfolio and contributions from the recent acquisitions.

Despite the assumption of debt from recent acquisition, interest expense was relatively flat during the quarter as a result of lower weighted average interest rate from the pay-off of higher rate loans favorable financing and lower rates on the lines of credit as compared with the prior year period.

G&A as a percentage of revenue was 5% for the quarter compared to the 5.6% in the same year in the prior year period. G&A in the first quarter 2013 declined as a result of one-time expenses in the first quarter 2012.

Our cost recovery ratio for the first quarter was 94.4% compared with 96.9% in the prior year period. The cost recovery ratio in the current quarter was impacted by an increase in snow removal expense of approximately $900,000 and bad debt expense of $485,000 compared with the prior year period.

For portfolio same center NOI grew 1% for the quarter, while this is at the low-end of our full-year guidance, we anticipate NOI growth to improve throughout 2013. Same center NOI growth was negatively impacted by the increase in snow removal and bad debt expense. Excluding these items, same center total portfolio NOI would have increased to 1.8% for the first quarter and 1.4% in the mall portfolio.

The growth in same center NOI is primarily being driven by improvements in rental rates and overall revenue increases. We are maintaining our FFO guidance for 2013 in the range of $2.18 per share to $2.26 per share despite the dilutive impact of the 2.7 million shares issued through the ATM during the quarter as well as the asset sales.

The guidance incorporates, our same center NOI growth forecast of 1% to 3% and portfolio occupancy improvements of 25 to 50 basis points for the year end nearing 95%. Our guidance also assumes the redemption of the Westfield Preferred units by mid-year using availability on the lines of credit and cash on hand. As always our guidance doesn’t include any non-announced transaction.

I will now turn the call back to Stephen for closing remarks.

Stephen Lebovitz

We had a great start to 2013, which was highlighted by the third consecutive annual increase in our common dividend of approximately 5% announced in February. We are enthusiastic about the depth of new development and redevelopment opportunities for generating ongoing growth in the CBL portfolio. While there is no shortage of negative headlines, our customers still shopping and underlying improvement and employment in the economy is helping our mall performance.

As everyone is aware events at JCPenney had created concerns over their future. With 75 JC Penny stores in our portfolio, we are certainly watching that situation closely. JCPenney stores I have seen over the past month look much better as a result of the investment in new shops and new concepts they have added such Joe Fresh, Izod and Levis.

We are confident that the new management will fix their pricing and marketing issues and sales to recover as the year progresses. We are also encouraged by their recent increase in credit availability and the vote of confidence they received from savvy investors. At the same time we are keeping the current inventory of anchor locations that we believe could be at risk and potential replacement strategies.

The market office seems to forget the resiliency of the mall business. In past years, malls have absorbed significant consolidation in closures to our major department stores, box and small shop retailers not to mention competition from the Internet and emerged stronger and more profitable than ever.

The overwriting facts at these examples is that well-located mall in a dynamic market is a great asset to own. Our strategy of owning the dominant are the only mall in its trade area is designed to ensure that over time our portfolio can absorb changes in the retail landscape and emerge even stronger.

We are looking forward to a productive ICFC recon in Las Vegas next month and hope to you see many of you there as well. We now be happy to answer any questions you may have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from the line of Paul Morgan with Morgan Stanley. Please proceed.

Paul Morgan - Morgan Stanley

Hi, good morning.

Stephen Lebovitz

Good morning.

Paul Morgan - Morgan Stanley

On the Westfield preferred and funding plans for that, I mean, the stocks at, you know, about a five year high, I appreciate that you did fair amount of activity last month in the ATM, but as you think about what you assumed some of your guidance and then the opportunity to pick out a bigger chunk just with a larger equity offering, I mean, why not do that and then how are you thinking about really kind of the long-term use of the $400 million via the ATM?

Farzana Mitchell

Hi, Paul. This is Farzana. We have been quite successful. We put the ATM program in place on March 1 and since then we have successfully raised over $62 million. And at this low cost of raising that stock issuance through ATM, we think we can continue with this process and access the ATM that we have put in place up to $300 million.

So we feel pretty good about it and I think that will help us to raise enough capital and with the asset sales we should be able to replace the $410 million of Westfield preferred units that we have to redeem later in the year. And I think that will be leverage neutral.

Paul Morgan - Morgan Stanley

So you think of the ATM is running both Westfield issue as well as your ongoing development equity capital needs there in?

Farzana Mitchell

We are looking at all our options that’s ATM and obviously we have that in place specifically knowing that we have to redeem the Westfield unit. And with asset sales and other opportunities that we may have in terms of other potential other joint ventures. We really have a lot of options on our table. So we should be able to be leverage neutral.

Paul Morgan - Morgan Stanley

Okay, great. And my other question, listen more in kind of the retailer side, I mean, you talked about two things, one in the context of NOI, your bad debt expense, if I heard it right was up and kind of was in the context of what seemed like pretty low kind of bankruptcies I was wondering if you have any more color there.

And then as well on the tenant upgrade plan, I mean maybe, if you could just give a couple of examples of, I mean, what, is it a subset other mall specific to redevelopment or improvement to specific malls or is it broad based and kind of how that’s progressing?

Stephen Lebovitz

Sure. I will take the second question first. And we had roughly 600,000 square feet of tenant fall out during the quarter which is about 15% higher than it was in the first quarter of last year. And like I said during the call, we really decided that instead of letting those guys continue to write it out at percent high deals or low rent high deals on a short-term basis that this is the time to bite the bullet and to go ahead and seek better quality replacements for a lot of that square footage.

And it was a change in our strategy that something that we over the past few years as we said we prioritized occupancy and looked at that is really that the primary driver and now we’re moving more into a quality focus in terms of replacing tenants that aren’t productive or that aren’t paying market rents. And we feel like it’s going to be successful. It’s definitely hurts our short-term results because we have down time, while those tenants are being replaced and the construction is occurring.

But as the year goes on those spaces is still open up and we feel like it will serve as well as the year continues and going to the future. So, I think that’s an important distinction. It definitely impacted our vacancy and it impacted NOI for the quarter. But its one quarter and we don't want to blow one quarter at a proportion by any means. So, that’s the second question.

As far as that debt expense, it is higher on a comparable basis, it still not significant that there hasn’t been a lot of bankruptcies or follow-up from bankruptcies and we had a little bit more this quarter compared to last year. Last year was the lowest ever in the first quarter. I think we had like two or three stores closed. This year, it was seven or eight stores, so it’s not a lot.

But on a comparable basis it did impact our numbers and so we thought that was worth pointing out as well as the high snow removed since. We are on mostly fixed camp and so we have to absorb that as an expense instead of being able to pass that through to the tenants.

Paul Morgan - Morgan Stanley

Great. It sounds like the tenant upgrade thing is, kind of statement of confidence in your ability, as opposed to this rolling or I don't know if you had the option to roll people over on another short-term deal but I mean in my reading right that this is, you may have had that and its like okay now we’re going to try to get a longer term release signed from a new that coming in?

Stephen Lebovitz

Yeah, I mean absolutely. I mean we’ve got stores companies like Abercrombie and GAP have announced for a while that they are downsizing their number of stores and because of our relationships, they worked with us and they kept stores open and the rent haven’t been great. But it’s helped contain NOI but now like I gave a list during the script, the stores and we’ve got a very robust program with some great retailers, Chico’s and Whitehouse, H&M, Lucky is one I did mention jewelry stores.

Yeah, they are just a whole list of retailers that we’re expanding throughout the portfolio. They are good names. They’re going to be more productive for this space and also they just give new life to the centers when you have a new retailer and that’s what the customers like because that new and fresh addition to the malls. So, it’s definitely a statement of confidence. And we’re having success with our new leasing results that we’ve been able to show in. There are some retailers that are continuing to struggle and you know we were working to replace those as well PacSun, RadioShack, People, GameStop, people like that or it’s not like its over in terms of certain retailer is downsizing, that’s always part of it.

But that does gives us an opportunity to take advantage of the demand and the others, no need construction happening in our markets. So, their retailers that want to come in. And when we have the only mall in the market which we do in most of the cases, that’s the place they want to be.

Paul Morgan - Morgan Stanley

Great. Thank you.

Stephen Lebovitz

Thank you.

Operator

Our next question comes from the line of Christine McElroy with UBS. Please proceed.

Christine McElroy - UBS

Hi, good morning everyone.

Stephen Lebovitz

Good morning.

Christine McElroy - UBS

In your stabilized mall portfolio, I’m trying to get a handle on what’s driving your average base trends which are flat year-over-year, I would think that with embedded contractual rent growth and positive releasing spread that there would be a positive comp there. Can you talk a little bit about what’s (in hiking) that number?

Farzana Mitchell

Hi, Christy. I’m sure, I’ll answer that question for you. It is flat year-over-year, if you just look at the reported numbers but we mentioned this last time, we had four properties that were not there in the comparable period. And they are getting to that El Paso, Dakota and Corporate malls. All these four properties have base rents lower than our portfolio average based rent which is actually if you take those out, we would be up at $29.70 and what is really showing us that we have tremendous opportunity to increase these base rents particularly at Dakota Square Mall and Corporate Mall. So, this is – we know we see this as a positive going forward and hopefully our base rents will continue to increase.

Christine McElroy - UBS

Got you. And first on the, talked about paying off Westfield prefer to mid-year, are you able to be a sort of little bit more specific on the timing given that you’re funding with the one of credit and just following up on Paul’s question, I thought, I heard you said earlier that you will ultimately fund the Westfield – the Westfield Preferred with more permanent equity, does that mean that longer term you expect the full amount will be replaced with equity and would you expect to exercise the formality ATM by year-end?

Farzana Mitchell

Let me answer the question on the Westfield Preferred. We cannot really give you a specific guidance as to when we will be redeeming them that the process that we have to go through. And it’s a sensitive process and we just cannot give you that information but we estimating mid-year, later part of the year and so that’s baked into our numbers. I do mention earlier we have asset sales and we still have the ATM program that is in place. We have 240 somewhat million dollars left on it. So, that’s sufficient I think, we will continue to monitor development pipeline and based on our activity. We also mentioned we will exercise; we will go out for a term loan later on this year. So, we have plenty of liquidity to stay leverage neutral.

Christine McElroy - UBS

So, I think that there is no incremental asset sales baked into your guidance and I think from what I’m hearing there is no incremental ATM issuance to get baked into your guidance. So, does your guidance assume that balance of the preferred paid down remained on the line of credit per year-end?

Farzana Mitchell

Yes, later, since we – as we mentioned no transactions are baked into our guidance. So, new equity issuance through the ATM is not baked into our guidance. We will update our guidance next quarter we issue if and when we issue additional equity. As to the present, what we’ll prefer, we have a baked in, the later part of the year to pay that of from our lines of credit.

Christine McElroy - UBS

Okay.

Farzana Mitchell

And that will replace 5% with you know average of 2.5 or so percent, weighted average interest rate on our lines of credit.

Christine McElroy - UBS

And then just lastly regarding the space that you intentionally allowed to go vacant in Q1, can you quantify the impact that had on occupancy, Steven, I think you mentioned that earlier and what should the timing be on the sort of releasing that space throughout the year in terms of the incremental sort of NOI impact given the leasing that you’ve already done?

Stephen Lebovitz

Yeah, Christy, it’s well. I think what we’ve said is that for the year, we’re still looking at 25 to 50 basis points. One of the things changes in some cases the space that we that became vacant is being occupied by stores over 10,000 square feet. So, those are necessarily going to the average and so that something that would help us in terms of NOI and FFO but wouldn’t necessarily help our occupancy but if you look at just what we lost, it’s probably you know close to you know 50 basis points of occupancy. So, the company that definitely we look to avoid, I’m sorry; I gave you the wrong number.

Okay, sorry, it’s actually closer to 200 basis points, I was way off on that one that the fallout impacted us. So, as we continue to lease that up we’ll see the increase, its first quarter; it’s natural, is usually the lowest quarter anyway. So, it just brought first quarter down below would’ve been otherwise.

Christine McElroy - UBS

Okay. Thank you.

Operator: Our next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed.

Todd Thomas - KeyBanc Capital Markets

Hi, thanks. Good morning. I'm on the Jordan Sadler, as well..

Stephen Lebovitz

Good morning.

Farzana Mitchell

Good morning.

Todd Thomas - KeyBanc Capital Markets

Good morning. Just so first question is just following up on the change in strategy, can you clarify whether, is that a change in strategy that was you specific to the first quarter and some of the post-holiday season temporary tenants or is that just the process you know you’re expecting to continue throughout the balance of the year and you know are you actually accelerating the process of converting 10 spaces throughout the portfolio had it permanent?

Stephen Lebovitz

Yeah, I think, I wouldn’t say it was a point in time. It’s been more of an evolutionary strategy and as we made progress with sales and occupancy over the past 18 months and releasing spread. We’re just continuing to push that harder and one of the things I mentioned is our leases under three years, it’s down under 35% and that’s a dramatic improvement of where we were two years ago or even a year ago and our releasing spreads are about 10%.

So, I think what it really shows, its just an ongoing improvement in our portfolio and it’s been a recovery process but now we feel like can play more offensive with our leasing strategy. So, I wouldn’t say it’s just one – its just a thing we decided on January 1 but its something we’ve been pushing and we’ve been planning for, I mean to take some time to queue up these deals and in a lot of cases it’s a year plus to get the deals into the position to be ready to go up for signature or for leases to be signed. So, it’s something we’ve been working towards but now we’re really starting to implement it more aggressively.

Todd Thomas - KeyBanc Capital Markets

Okay. And I may have missed the comments on renewal spreads those came in, there are still at the low end just above zero for the malls. What’s keeping renewals spread from improving and what’s the expectation throughout the balance of the year for leases expiring that you’re renewing?

Stephen Lebovitz

Yeah, we think it’s going to get better. The first quarter has the highest percentage of renewals and so it’s when we, I guess have the toughest comps in terms to that and we see it improving over the course of the year. Yeah, we look at the numbers every quarter and it seems like we have a lot of good results and we still have a few that drag us down to a certain extent. And so we’re pushing to minimize those as much as possible but on an average basis the renewal spreads were still up about 3% on an average – in terms of the average and like you say positive on the initial. And we do see that continuing to improve.

Todd Thomas - KeyBanc Capital Markets

Okay. And for new lease deals that were signed in the quarter, so the 118,000 square feet, do you have a range in terms of occupancy cost or whether leases were signed?

Stephen Lebovitz

Yeah, I mean I think, we’re still in the mid-12 on occupancy cost as the percentage sales and typically when a new lease gets signed, its lower. So, the retailers want to see some upside. So, those will typically tend to be at the lower end of the range.

Todd Thomas - KeyBanc Capital Markets

And then just last question KDA, I think you hinted that there could a new outlet say announcement (with) Newest Horizon is, is that right?

Farzana Mitchell

I did hint that, yes.

Todd Thomas - KeyBanc Capital Markets

And when you work with Horizon, can you tell us what type of preleasing thresholds you look forward before making formal announcement to decide to move forward on a site?

Farzana Mitchell

Yeah, Todd we look at to get – achieve about 60% preleasing levels before we move forward and find the lands and putting a shovel in the dirt.

Todd Thomas - KeyBanc Capital Markets

Okay, thank you.

Farzana Mitchell

Okay. Sure.

Operator

Our next question comes from the line of Nathan Isbee with Stifel, Nicolaus. Please proceed.

Nate Isbee - Stifel, Nicolaus

Hi, good morning.

Stephen Lebovitz

Hi, Nate.

Stephen Lebovitz

Hello, Nate.

Nate Isbee - Stifel, Nicolaus

Good morning. Just getting back to the occupancy question, I’m still unclear, you said you had 600,000 of fallout in the first quarter of this year which is 15% higher than last year. If you were to look at that number, without just taking your last year that’s your, the strategy you took then or what the situation allowed? What would your fallout have been, had you not taken the hard line this year?

Stephen Lebovitz

Yeah, I think what’s confusing about it, Nate is that, it’s not 600,000 more, it’s a 100,000 square feet more than it was last year.

Nate Isbee - Stifel, Nicolaus

Right. That seems correct.

Stephen Lebovitz

So, right, so that’s really the difference in the calculation and that’s why it’s more confusing and also when you go from fourth quarter to first quarter, there is fallout anyway because of the seasonal business. So, the combination creates a larger short term affect but when we look at the year-end, we’re still looking at that up 50 basis points.

Nate Isbee - Stifel, Nicolaus

So, if you were to look at, what fell out because of your harder line you say about 100,000 square feet?

Stephen Lebovitz

That’s right.

Nate Isbee - Stifel, Nicolaus

Okay.

Stephen Lebovitz

On a comparable basis, yeah.

Nate Isbee - Stifel, Nicolaus

All right. Thank you. That’s helpful. And then was there any change in the methodology and how you computed same store sales this quarter?

Farzana Mitchell

We (attempt) that in the fourth quarter Nate. That we reported both ways in the fourth quarter and then we started reporting it using our new methodology which excludes license agreement. So, that’s how we reported this quarter and we reported on a comparable basis just apples-to-apples.

Nate Isbee - Stifel, Nicolaus

Okay. And then the 340 for the prior year period, what was that, how was that computed?

Farzana Mitchell

That is the same way that we computed the other one without license agreements. So they are apples-to-apples.

Nate Isbee - Stifel, Nicolaus

Okay, great. And then I might have missed this, did you say if you issued any shares quarter to date in the ATM?

Farzana Mitchell

We did not say.

Nate Isbee - Stifel, Nicolaus

Okay. Would you like to say?

Farzana Mitchell

We have a few trading days that were opened this quarter that will – we have (inaudible) into place there. It’s only a few trading days there. So, we’ll, we haven’t really issued any meaningful amount.

Nate Isbee - Stifel, Nicolaus

Okay, thank you.

Stephen Lebovitz

Thank you.

Operator

Our next question comes from the line of Ben Yang with Evercore Partners. Please proceed.

Ben Yang - Evercore Partners

Yeah, hi, good morning, thanks.

Stephen Lebovitz

Hi, Ben.

Ben Yang - Evercore Partners

How’re you doing? You mentioned monitoring JCPenney location we thought risking your portfolio, did you comment on how many of the 75 you thought that were at risk? And then also, I mean is there any common themes for this particular stores maybe right geography or sales or maybe this also (inaudible), any common themes worth commenting on the situation?

Stephen Lebovitz

Sure. Well, first of all, I didn’t say exactly what you said in terms of JCPenney location being at risk. What I said is, we monitor anchor locations that we consider out risk. So just to clarify and in fact with JCPenney in the past couple of weeks, we approached them on a couple of locations just to get a sense for what they are thinking. And they are not, they’ve shown no interest in closing stores, selling stores, giving that part of stores, anything like that.

So, that might change but so far to date, that’s what they’re telling us and in fact it’s not driven by higher productive stores or lower productive stores we were at one of our malls last week and the JCPenney stores it’s a small stores. It’s only 50,000 square feet but it does under 5 million in volume and we had a potential expansion of the mall and we could have incorporated their store and they said no, it’s very profitable. We have no interest in having discussions with you. They have a low occupancy cost. And so, they are still even with their 30% sales decreases, they are still making money at their locations. But we want to be, we don't want to get caught and that was my point. We’ve looked at on the locations; we look at who is in the market, who is not in the market, who we could relocate and we’ve got redevelopment strategies that we’re working on at properties because we’re seeing demand from a lot of boxes and restaurants and new retailers.

And really we don't have in a lot of cases anything else to do other than to try to get back department stores and redevelop them, the JCPenney stores have great locations in most of the malls. They are the point location in the center. So, look if we could, if we ended up getting some back, it would be a positive. I don't think we want them all back at once but that’s something that we would see as an opportunity for us.

Ben Yang - Evercore Partners

Okay, okay. So, you do have anchors on the watchlist some of them are JCPenney, are you finding it more difficult maybe lease up some of the space in malls that are anchored by a JCPenney and maybe also the Sears based on some of your recent discussions, are tenants taking the more cautious approach and then maybe also building on that. The lending community maybe a little bit more cautious on underwriting malls that are co-anchored by those two particular department stores?

Stephen Lebovitz

Yeah, we haven’t I mean, your question about the retailers is being more cautious and not leasing around JCPenney or Sears. I mean its mall specific and it’s not really driven by JCPenney or Sears and every mall has 50 yard line locations and end zone locations. And the end zones are always tougher. I mean that’s just a way to layout works but there is different retailers that go in different locations in the malls and we’ve seen any pull back from retailers and our occupancy isn’t driven at all by people being concerned about JCPenney or Sears in terms of leasing adjacent to them.

So, that’s not something. And then in terms of lenders again we haven’t seen an impact, I think everyone is watching it. And JCPenney is some given their credit and their capital market activities, everyone is looking but they still have an equity capitalization of almost 3.5 billion, I do 13 billion in sales. So, they are down, no question but we don't view and I don't think lenders view them as the bankruptcy risk.

Ben Yang - Evercore Partners

Okay. That’s helpful. And just final question going back to Nate’s question on the (definite changes) and sales per square foot, it looks like the impact of excluding these temp tenants is actually wider today than it was a year ago. And I guess I would have – I would have guessed that the impact on sales would actually diminish as these temp tenants burn off, so I'm curious why it might be moving in the opposite direction?

Stephen Lebovitz

I don't think it’s changed I mean it was, when we report in the fourth quarter, it was a $7 different. So roughly 2% and…

Farzana Mitchell

Ben, you also have to keep in mind that last year when we reported sales per square feet, we had not acquired the outlook centers but maybe this year and the prior year period that we are reporting on a same store basis.

Ben Yang - Evercore Partners

I see, okay. That’s make sense. All right, great.

Stephen Lebovitz

Thank you.

Operator

Our next question comes from the line of Rich Moore with RBC Capital Markets. Please proceed.

Rich Moore - RBC Capital Markets

Hi, good morning guys.

Stephen Lebovitz

Good morning.

Rich Moore - RBC Capital Markets

I’m curious on the line of credit, today. What is the balance, today, post, putting the term loan that matured, as well as the recent mortgages you put on there, what is the availability, I guess, on the lines of credit?

Farzana Mitchell

Well, it’s from the $840 million that is available, we paid off the $228 million and the $72 million. So, approx all of $500 million still available.

Rich Moore - RBC Capital Markets

Okay. Okay. So, then if you take out the Westfield Preferred in the middle of the summer, let's say, and put that on there, as well, you're basically out of capacity on the lines of credit, I would think. So it seems that you have to do the – if you're going to do another unsecured term loan, or you are going to do some more asset sales or additional, or additional equity, et cetera, you would have to do that, actually, fairly soon, I would think?

Farzana Mitchell

Rich, yes. We would still have over $150 million or so and after paying of the $410 million plus, we do have internal cash flow from a property. So, we cannot discount that. So, but we do plan on putting a term loan later on in the year, it will be an unsecured term loan either five or seven based on the pricing and looking at what the forward curve looks like. So, we will make a decision and we’ll also look around maturity schedules and make sure that we ladder in such a way that we don't have any big junky maturities coming up in any one given years. So, that’s other factors that will play into it but we are working on it right now.

Rich Moore - RBC Capital Markets

Okay. Thank you. And then on the discussions with the credit agencies, you get the feeling from them that by year end 2014, your process could be complete, is that what you are thinking?

Farzana Mitchell

Yes, we are working on at the minimum two rating agency that’s not all three. We believe that we by 2014, we certainly will have two out of the three and hopefully maybe all three by the end of 2013, 2014. So, we were working towards that goal and we will report as we make progress.

Rich Moore - RBC Capital Markets

Okay. Great. Thank you. And then the last thing I had guys was, I think the recovery ratio bounces next quarter back to normal, is that kind of about this quarter I guess second quarter bounces kind to back to its minimal normal level, is that accurate?

Farzana Mitchell

Yes. That’s correct.

Rich Moore - RBC Capital Markets

Okay, great. Thank you guys.

Stephen Lebovitz

Thanks Rich.

Operator

Our next question comes from the line of Cedrik Lachance with Green Street Advisors. Please proceed.

Cedrik Lachance - Green Street Advisors

Good morning.

Stephen Lebovitz

Good morning.

Farzana Mitchell

Good morning.

Cedrik Lachance - Green Street Advisors

Just in regards to asset sales, and when you look at the low productivity malls you've discussed as potentially wanting to sell, have you identified any property in particular already?

Stephen Lebovitz

We have a few that we’ve identified that we’re looking at and talking to brokers about. It’s more on off type opportunities where we see a good chance to secure a regional type buyer for these assets. So, that’s really the strategy we’re following with but yeah we’ve got some that we’ve got plan identified.

Cedrik Lachance - Green Street Advisors

Okay. But nothing is formally being marketed currently?

Stephen Lebovitz

We have one that’s in the market and a couple of others that we think will be coming to market in the next 60 days. So, we’re moving ahead with those.

Cedrik Lachance - Green Street Advisors

What are the sales per activity of these three properties?

Stephen Lebovitz

They are less than 300 a foot.

Cedrik Lachance - Green Street Advisors

Okay. And in terms of deciding which property you needs to be sold, what are the key metrics that you look at that make you feel like its time to sell those assets?

Stephen Lebovitz

That’s really a combination Cedrik. I mean some of them might require investment that we would rather direct our investment to other properties and also definitely the lower sales per square foot since we want to raise the overall sales per square foot about of our properties. And NOI growth in terms of where we see that heading.

And again, like I said we made the acquisitions of the properties in North Dakota because we see above average NOI growth. And these malls are, they are matured, they are solid, they are stable but if we don't see the growth potential then we think it’s a good time to sell them and the market has improved. There is more buyers who are interested in assets that have sales per square foot that are lower than 300 foot and so we think it’s a good timing to explore and see if we can use this as a way to raise cash and also to upgrade the portfolio.

Cedrik Lachance - Green Street Advisors

And based on what you've observed from the buyers, what is their primary source of debt financing, and where does it come from?

Stephen Lebovitz

I’d say its banks, you know banks are the primary source in some cases CMBS but I think the banks are the most like the source.

Cedrik Lachance - Green Street Advisors

Okay. That’s it for me. Thank you.

Stephen Lebovitz

Thanks Cedrik.

Operator

Our next question comes from the line of Quentin Velleley with CitiGroup. Please proceed.

Quentin Velleley – CitiGroup

Hi, there.

Stephen Lebovitz

Hi Quentin.

Quentin Velleley – CitiGroup

Just in terms of the term loan later this year, and I know it sounds like it's a little bit early to be asking the question, but how should we be thinking about the size and may be the pricing and a bit more clarity in terms of timing?

Farzana Mitchell

As I mentioned earlier, Quentin it’s we just want to wait and see. We do have the pricing were relatively be less expensive than our lines of credit because it’s full funded. So, it just a matter of, also looking at our debt maturities and the forward curve as I mentioned earlier to see how the spreads will come in, what way we would like to strike. So, it’s, later on maybe next quarter, we’ll have a better and so for you, we’ll let you know what the size would be.

Quentin Velleley – CitiGroup

Okay. And then just in terms of St. Louis, the two outlet projects, looks like one will be opening pretty full, and the other one not so full. Can you just give us an update, a sense of the impact on some of the full price malls that you have in that market?

Stephen Lebovitz

Quentin what were you talking about again which outlet projects?

Quentin Velleley – CitiGroup

The two in St. Louis.

Stephen Lebovitz

Oh, okay. So yeah, I mean we missed the St. Louis part. So, saying in general what’s the outlook for outlet center...

Quentin Velleley – CitiGroup

Yes. You've got – now you've got new supplies coming into the market, one, will open quite full, and the other not quite so full. And what the impact might be. Whether you're starting to see anything out of your discussions yet?

Stephen Lebovitz

Sure. Yeah, I think it would be misleading to say there is no impact because there is clearly a lot of new retail coming into the market between the two projects, the Simon Project from our point of view is marginally better because it’s a little further from Chesterfield Mall but it’s still is within five miles.

So, it’s not material and Chesterfield Mall from our point of view but we’ve been able to do is to position at to complete against the outlets and to differentiate itself by putting in American Girl, it’s got the top theater in the market, restaurants did extremely well there with Cheesecake factory. And you’ve got good interests from some other concepts that good quality concepts that they want to come in. So, I think we’re working hard at and also from a marketing point of view but its new retail coming to the market and its close by and it’s going to be competitive.

Quentin Velleley – CitiGroup

Okay, thanks.

Stephen Lebovitz

Okay, thank you.

Operator

Our last question comes from the line of Carol Kemple with Hilliard Lyons. Please proceed.

Carol Kemple - Hilliard Lyons

Good morning.

Stephen Lebovitz

Hi, Carol.

Carol Kemple - Hilliard Lyons

What are your all's thoughts on acquisitions at this point, and what kind of properties are out on the market, currently?

Stephen Lebovitz

Sure. On acquisitions, there really hasn’t been a lot of new property that comes on the market since the call in February, the Matrix portfolio was the main thing that was on the market. And I think that’s being digested by some of the buyers which does not include us.

But beyond that, there is a few single assets here and there, Colony in Albany traded to KKR, we didn’t participate in that process. The legends in Kansas City also was bought KKR. We didn’t participate in that. So, I would say there is some single asset opportunities out there but our strategy is really to continue to try to find the out-market transactions with our overall corporate strategy of dominate malls and in middle markets only game in town and that’s what we are continuing to do.

Carol Kemple - Hilliard Lyons

Is there anything you’re seriously looking at right now?

Stephen Lebovitz

We always looking, I don't know how you define serious but there is always things out there that we’re looking at but there is nothing that we’re close to any amounts and so on.

Carol Kemple - Hilliard Lyons

Okay. Thanks

Stephen Lebovitz

Thank you, Carol.

Operator

And I would now turn the call back over to Mr. Stephen Lebovitz for any concluding remarks.

Stephen Lebovitz

Okay. Again thank you everyone. We appreciate your participation this morning and look forward to seeing you in Las Vegas in a couple of weeks and then at NAREIT in June. Have a good day.

Operator

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask you please disconnect your line.

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