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CBL & Associates Properties, Inc. (NYSE:CBL)

Q2 2009 Earnings Call

August 5, 2009 11:00 am ET

Executives

John Foy - Vice Chairman and CFO

Stephen Lebovitz - President

Katie Reinsmidt - Vice President Corporate Communication and IR

Analysts

Jay Habermann - Goldman Sachs & Co.

Quentin Velleley - Citi Investment Research

Craig Schmidt - Merrill Lynch & Co.

Michael Mueller - JPMorgan

David Wigginton - Macquarie Research Equities

Carol Kemple - Hilliard Lyons

Wes Golladay - RBC Capital Markets

David Fick - Stifel Nicolaus & Co.

Jim Sullivan - Green Street Advisors

Operator

Good day and welcome to the CBL & Associates Properties Incorporated conference call. Today's conference is being recorded, August 5, 2009. (Operator Instructions).

At this time for opening remarks I would like to turn the conference over to the Vice Chairman and Chief Financial Officer, John Foy. Please go ahead.

John Foy

Thank you and good morning. We appreciate your participation in CBL & Associates Properties Inc.'s conference call to discuss second quarter results. Joining me today is Stephen Lebovitz, President and Katie Reinsmidt, Vice President Corporate Communication and Investor Relations, who will begin by reading the 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, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, financial and otherwise, may differ materially from the events and results discussed in the forward-looking statements. We directed you to the company's various filings with the Securities and Exchange Commission, including without limitation the company's Annual Report on Form 10-K and the "Management's Discussion and Analysis of Financial Condition and Results of Operations" included therein for a discussion of such risks and uncertainties.

During our discussion today, references made to per share amounts are based on a fully diluted converted share basis. A transcript of today's comments, the earnings release and additional supplemental schedules will be furnished to the SEC on Form 8-K and will be available on our website.

This call will also be made available for replay on the Internet through a link on our website at cblproperties.com. This conference call is the property of CBL & Associates Properties, Inc. Any redistribution, retransmission, or rebroadcast of this call without the expressed written consent of CBL is strictly prohibited.

During this conference call, the company may discuss non-GAAP financial measures as defined by SEC Regulation G. A description of each non-GAAP measure and 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 Form 8-K.

John Foy

Thank you, Katie. We appreciate everyone joining us today to discuss recent events and second quarter results. Since the last quarter's conference call in May, we have made tremendous progress toward our goal of strengthening the balance sheet and accessing capital. In June, we successfully completed a follow-on equity offering, raising more than $380 million through the sale of 66.63 million shares of common stock at a price per share of $6.00, with the stock trading at a severe discount to the underlying value, the decision to issue equity was certainly painful, however, we believe that it was the right one, and one that will contribute to the long-term strength of the organization.

We've also made outstanding progress in working with our bank group to extend our lines of credit and are pleased to announce that we have achieved lender commitments for 99% of the aggregate facility capacity. These commitments cover $512 million of the $525 million secured line of credit that matures in February 2010 and the full amount of the $516 million unsecured line of credit that matures in August 2011. The commitments call for the facilities to be extended for approximately three years into 2013 and 2014. The extensions are practically the full capacity at both facilities is a major achievement, one that has not yet been replicated in the industry to this scale. The proceeds from the equity offering coupled with this progress on our lines of credit, allow us to execute a plan that addresses all of our maturities through 2011.

The commitments for the unsecured line of credit provide for drawing down amounts available under the facility to retire a number of non-recourse property specific mortgages that mature in 2009, 2010 and 2011. The assets will then be pledged as collateral to secure the facility. The mortgages will be retired at maturity so as not to trigger any prepayment penalties and the line will be gradually secured over the next 18 months. As a result of this plan we should have a design capital source for our CMBS maturities through 2011, leaving us only the institutional maturities to be refinanced with our long-term relationships and past successes in refinancing institutional debt; we believe that we will again be successful in refinancing or extending all of these maturities.

We were also able to negotiate the interest rate increases on an unsecured facility in stages, so that we would not experience a spike in interest expense from the early extensions. There is a 1.5% LIBOR floor which goes into effect in January 2010. We anticipate minimal changes to the existing debt covenants from the extensions and modifications of these facilities, while the market has yet to reward these achievements in price performance, they will have a positive long-term impact on CBL and our future successes.

During the quarter, we also closed on two 10-year non-recourse loans, including a $33.6 million loan secured by Honey Creek Mall in Terre Haute, Indiana and a $57.8 million loan secured by Volusia Mall in Daytona Beach, Florida. The loans are with existing institutional lenders and have an interest rate of 8%. These loans replace an existing $30.1 million loan secured by Honey Creek Mall and a $51.2 (sic) million loan secured by Volusia Mall. We used the $10.1 million of excess proceeds, plus cash on hand, to pay off the $30.2 million loan secured by Bonita Lakes Mall in Meridian, Mississippi. Bonita Lakes will be contributed to the collateral pool for the $525 million credit line.

These transactions successfully address all of our 2009 loan maturities. The $53 million non-recourse loan secured by Eastgate Mall in Cincinnati, Ohio, has been identified to be paid off at maturity in December of this year and included in the collateral pool for the $560 million credit facility.

We are continuing to focus on deleveraging. The equity offering was only the first step in our long-term plan to lower debt levels through the natural amortization of principal, as well as, dispositions and good, solid joint venture opportunities. We have seen an improvement recently in the disposition and joint venture market and are receiving a moderate level of interest from private equity, local players and 1031 exchange buyers, and we continue to explore these opportunities. We anticipate that in the near-term, we are more likely to complete smaller community center or office sales where financing is more readily available but are in discussions for transactions of different scales and scopes.

Before we get into the second quarter financial results, I would like to remind everyone that the second quarter 2009 FFO per share and earnings per share amounts were significantly impacted by the equity offering compared with the prior year, however, both periods have been restated for the 6 billion shares issued with the stock dividend in the first quarter.

We are pleased to achieve a 2% increase in gross FFO this quarter and excluding the impairment charges taken in the first quarter 2009, a 2.8% increase for the six months ended June 30, 2009 as compared with the prior year period. FFO per share for the second quarter was $0.71 per share compared with $0.77 per share in the prior year period. The current quarter FFO per share was impacted by the stock issued in the June offering. FFO included bad debt expense in the second quarter and six months 2009 of approximately $1.7 million and $3.8 million compared with $3 million and $3.9 million, respectively for the prior year periods. The higher bad debt expense in the prior year quarter was a result of significant bankruptcies and store closures. We continue to take a very conservative approach to writing-off any bad debt expenses and keep a close eye on receivables.

Gains on outparcel sales were $154,000 in the second quarter compared with $4.2 million or $0.03 per share in the prior year period. For the first six months of 2009, gains were $0.05 lower than the prior year period. FFO included lease termination fees of $0.01 and $0.03 per share in the second quarter and six months ended June 30, 2009, compared with $0.04 and $0.05 per share in the prior year periods. Excluding lease termination fees, same-center NOI increased 1.3% for the quarter and declined 40 basis points for the six months as compared with the prior year period. Our FFO and NOI results for this quarter illustrate the strength of our properties and the success of our continued efforts to reduce expenses and overhead.

Over the past few quarters we have outlined significant cost reduction measures, which are resulting in an estimated $36 million in annual cash savings. This quarter we are really starting to see the benefit of these efforts. Other highlights of the quarter include; debt-to-market capitalization ratio was 82.6% as of the end of June compared with 68.6% as of the end of the prior year period. The increase in our debt-to-market cap is primarily a result of the decline in our stock price. Debt levels were significantly reduced from the first quarter as a result of the proceeds raised in the equity offering.

Variable rate debt was 17.6% of the total market capitalization as of the end of June 2009 versus 15.1% as of the end of the prior year period. Variable rate debt represented 21.2% of CBL's share of consolidated and unconsolidated debt compared with 22% in the prior year period. Our cost recovery ratio for the second quarter was 105.8% compared with 96.3% in the prior year period. For the six months ended June 30, 2009, our cost recovery ratio was 101.1% compared with 96% in the prior year period, with 85% of the portfolio on fixed CAM, the cost recovery ratio year-to-date has been positively impacted by the expense reductions. For the second quarter, the ratio also benefited from a $1.3 million lower bad debt expense.

G&A represented approximately 4.1% of total revenues in the second quarter, flat with the prior year period. G&A expense represented approximately 4.2% of total revenues for the six months ended June 30, 2009 compared with 4.3% of total revenues in the prior year period. Our EBITDA to interest coverage ratio was 2.29 times as of June 30, 2009 compared with 2.27 times at the close of the prior year period.

We are maintaining FFO guidance for 2009 in the range of $2.28 to $2.39 per share, which was adjusted to reflect the increase in shares outstanding as a result for the equity offering. Major assumptions in our guidance include; NOI growth of negative 1.5% to 3.5%, and outparcel sales of $6 million to $9 million. Additionally, the guidance assumes we close both credit facilities in the third quarter. We will continue to update our guidance on a quarterly basis as necessary.

Contributing to our focus on maximizing internal cash flow in June, the Board determined to reduce the common dividend rate to the minimum required to pay a 100% of the taxable income for the remainder of 2009. The actions on the dividend to-date have resulted in an estimated savings of $160 million annually. The Board will continue to review the dividend policy quarterly. Taxable income estimates will be updated to incorporate quarterly results, as well ass the dilution from the equity offering.

Now I will turn the call over to Stephen for an update on operations during the quarter.

Stephen Lebovitz

Thank you, John. In June, we held our annual Connection leasing event in Chattanooga as a follow-up to ICSC's RECon Las Vegas convention. We welcomed over 120 retail representatives to Chattanooga for three days of deal making. The event was very successful and our leasing team reported strong progress on moving forward existing deals, as well as, starting new deals. While the focus of most national retailers is on renewals of existing leases we are tapping into the expansion plans of a number of regional retailers, such as electronics store hhgregg; Charming Charlies, an accessories store concept; and Earth Fare, an organic grocer.

Our leasing team actually leased over 25% more square footage in the operating portfolio in the first six months of 2009, compared with the prior year period. The increase in leasing has been primarily in the renewal of existing leases, with expansion plans limited for many retailers, maintaining their current base of successful stores is even more important. With the lowest occupancy costs in the peer group, our portfolio is attractive to retailers and we continue to benefit from this trend.

During the second quarter we completed over 1 million square feet of new and renewal leases in our operating portfolio, including 620,000 square feet of new leases and 390,000 square feet of renewals. We also completed 118,000 square feet of development leases. To date, we have completed approximately 82% of our 2009 renewals. For stabilized mall leasing in the second quarter on a same-space basis, rental rates were signed at an average decrease of 7.4% from the prior gross rent per square foot, this is a slight improvement over the first quarter numbers and we expect the rest of the year to be in this range. We are continuing to experience pressure on rental spreads; however, there were a couple of portfolio deals that had a disproportionate impact on the quarter results. One portfolio of 17 stores and one portfolio of eight stores together accounted for approximately 280 basis points of the 740 basis point decline in average rents during the second quarter.

We are still receiving a number of rent relief requests from retailers but have continued to maintain a hard line, which is evident in the continued stability of the stabilized mall-based rents in our portfolio. For instance, where we do grant rent relief, we keep the length of relief short and take a quid pro quo, such as a longer lease term, removal of a [card] restriction or other provisions.

We have had a number of inquiries on the calculation of leasing spreads recently and wanted to clarify to everyone that our leasing spreads represent leases signed in the quarter not stores opened. We believe this presents the closest thing to real-time market information rather than reporting spreads on stores open in the quarter, which would lag the market by several months.

Stabilized mall occupancy was flat sequentially at 89.1% and declined 190 basis points from 91% at the end of the prior year period. Total portfolio occupancy declined 60 basis points sequentially and 340 basis points from the prior year to 88%. The year-over-year decline was primarily a result of the closure of junior boxes in the associated center and community center portfolio. Of the roughly 50 junior, anchor and box locations that vacated as a result of the 2008 bankruptcies and store closures, we have 24 executed leases or LOIs totaling more than 675,000 square feet, while 34% of the junior box spaces have been re-leased, the new stores have not yet taken occupancy, few stores are slated to open later this year and the majority will open beginning in early 2010. We are still projecting year-end occupancy to be down approximately 200 basis points from the end of 2008.

Same-store sales declined 6% to $321 per square foot for reporting 10,000 square feet or less in stabilized malls for the 12 months ended June 30, 2009, while sales are continuing to experience pressure, our centers have been holding up better than the peer group, which is indicative of the stability of our market dominant strategy.

Year-to-date in 2009, the bankruptcy activity we are experiencing has been more in line with the average annual bankruptcy activity versus the onslaught that the market predicted. As debt financing becomes more readily available for retailers we may see additional companies file, however, many are choosing to focus on improving their operating margins and making it through the current environment.

During the quarter, Eddie Bauer filed for Chapter 11 but Golden Gate Capital has acquired their leases at auction. We are hopeful that the store closures from this transaction will be minimal. No Eddie Bauer stores in our portfolio have closed to date. We have 17 locations totaling 123,000 square feet and $3 million in gross annual rent. Garfield's Restaurants also filed for Chapter 11 during the quarter. We have 11 locations totaling 58,000 square feet and $1.8 million in gross annual rents. To date, three locations have closed, totaling 16,000 square feet and $500,000 in rents.

In July, Target, Ulta, and additional shops joined Kohl's, Marshalls, Michaels, and PETCO at Hammock Landing, our recently opened community center project in West Melbourne, Florida. The center is continuing to receive interest from retailers and is currently over 90% leased.

On October 11, we will celebrate the opening of the Promenade in D'Iberville, Mississippi, part of the Gulfport-Biloxi trade area. Target will open, alongwith Marshalls, Best Buy, Dick's Sporting Goods, Ulta, and others. The project is currently over 90% leased and committed. This fall, we will also open the first phase of Settlers Ridge in Pittsburgh, Pennsylvania. The project is currently over 90% leased and committed and includes Giant Eagle Market District, Cinemark Theatre, P.F. Chang's, REI, L.A. Fitness, shops and restaurants. Additionally, in October Hollywood Theaters will celebrate its grand opening at our development, The Pavilion at Port Orange, in Port Orange, Florida. This project is currently over 80% leased and committed.

We are pleased with the continued strength of the leasing of our development program. The location of all of our projects and their respective markets is very strong and we believe that these centers are positioned for long-term success.

We are pleased with this quarter's results, highlighted by the increase in our comp NOI number and in FFO. While we expect the economy to remain weak at least through the end of this year, we believe our properties are well-positioned and will perform better than properties located in major metropolitan markets. As a company, we have made significant progress in positioning our balance sheet to withstand the constrained credit markets and other economic factors. The liquidity risk that may have overhung CBL in 2008 and going into 2009 has been alleviated by the equity offering and the extension of over $1.5 billion in credit facilities and permanent financings. The world may be different when this economic cycle is over but CBL will be around to enjoy the new opportunities that emerge.

Thank you for joining us today and we will now answer any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from the line of Jay Habermann, please go ahead.

Jay Habermann - Goldman Sachs & Co.

John, in your comments you referenced, obviously, the progress you've made, you said step one, but you guys have cut the dividend, you've issued equity, you've announced the extensions, which will happen in the third quarter and you took some significant cost cuts, proper operating expenses in the most recent quarter and now you're talking about joint ventures and asset sales. I know the stock still trades at a fairly significant discount to peers but can you give us a sense of maybe step two, step three, and how you see this progressing in the next 12 to 18 months?

John Foy

I think Jay it's consistent with what we've done in the past. We've never announced a transaction until we've actually either closed it or signed a binding contract and I think we're making progress on that front as well. We have a lot of inquiries, a lot of things that are moving in the proper direction. So, we would anticipate and hope that we will announce some joint ventures and some sale of these properties over the next 12 to 18 months. We are focused on that and think that we don't have to do anything at a fire sale and we're going to make the right moves in the right directions on these properties. We're getting a lot of positive results from joint venture partners who have seen what we've done to really enhance our balance sheet and I think that behooves us as well. So, I would anticipate and hope that we will be successful in these efforts to bring in some good joint venture partners at fair numbers for all the parties involved.

Jay Habermann - Goldman Sachs & Co.

And I guess, just being a little more specific, I mean, leverage has certainly been a focus, I mean, with debt-to-EBITDA at 8.5, 9 times, some of your larger peers are closer to 6 or 6.5, where do you see target leverage moving in this cycle?

John Foy

As we've done with the equity offering, we see it moving down and just the amortization of our mortgages are fairly significant each year going forward and in our liquidity plans and studies that we do for our own Board of Directors, there are some significant things that we are seeing as well. We also see the ability to refinance these non-recourse debt levels that we've been successful on. I think the big thing is that the ability to put new debt in place likewise helps the joint venture opportunities as well.

So, I think that we should see, with the addition of joint ventures, pulling those debt numbers down significantly. All of our lines of credit are based upon a gross asset value test with our lenders and are not based upon a debt-to-market capitalization basis. We've been very conservative from the time we started the company to basically focus on that as well and I think that we are focused on pulling down those debt levels as well.

Jay Habermann - Goldman Sachs & Co.

Okay and then, in just turning a couple of more questions. Can you just comment on the property operating expense reduction? You were $39 million for the quarter versus $44 million last year. Can you give us a sense of where you found that significant savings year-over-year?

Stephen Lebovitz

Jay, its Stephen. There were a couple of items that definitely contributed to it; one was cutting back in maintenance and repairs and the amount of money that we spent there, also, renegotiations with our vendors. We cut 10% to 20% with landscaping and other third-party vendors. The third area is just the expense area where in terms of synergies and efficiencies that we were able to pick up on the personnel side and then the last thing is we did have less bad debt this quarter and that goes into operating expenses and so that was a contributor as well.

Jay Habermann - Goldman Sachs & Co.

So this isn't deferred maintenance, it's mostly the reduction in bad debt?

Stephen Lebovitz

Yes, that's a lot of it, that's a significant portion of it. We also had a pretty significant program of remodeling and renovations in the past, so a lot of our properties were in great shape, so that there was really no significant cutback in maintenance and repairs. We've kept the properties up to date and we've just been able to find ways of cutting back. I think we cut out a region and made consolidations there, so that people were more on top of things.

John Foy

Utilities is another area where we've been able to have some savings and we still have proper staffing at the malls but we've been able to just be more efficient with what we are doing there.

Jay Habermann - Goldman Sachs & Co.

Then you mentioned as well on the spreads, obviously, for leases signed in the quarter but if you reported on a different metric where you said for leases that actually opened or tenants opening in the quarter, how much of a spread is that or does that change your leasing spread?

John Foy

I don't know. We would have to look at it. I would imagine there's probably a two-quarter lag. So, you can look back and see what it was a couple of quarters ago. We can get that for you.

Jay Habermann - Goldman Sachs & Co.

Okay. Just trying to get a sense of, do you see spreads stabilizing at these levels or do you think we're going to see that gap out further in the back half of the year given the rent relief and the bankruptcies you noted before?

John Foy

I think it's going to continue at this level through the rest of the year. The retailers are under a lot of pressure from their investors to cut costs wherever. So, we're working with them. Their sales are down. But what we've been able to do is, even in areas or in situations where we've had lower rents on renewals; we have found other ways to improve the terms of the leases. We've lowered the breakpoint on sales. So when their sales do pick up, which we're going to start coming up against easier comps, so hopefully we'll see at least some stability there. We'll benefit from that. And then there's other provisions in the leases that we've been able to improve. So, it's been a give-and-take with the retailers and we've been able to help them in terms of reducing their expenses to a certain extent but we think we'll also position ourselves long term and we are maintaining the majority of our rents and we are renewing a higher percentage of rents and keeping people in place and that's definitely what our priority is today.

Jay Habermann - Goldman Sachs & Co.

And just a final question, the office buildings and the community centers that you referenced for sale or potentially for sale, can you give us a sense of the dollar amount? That sounds like that could happen perhaps here in the near-term and perhaps even some pricing as well.

Stephen Lebovitz

Jay, I think those office buildings and the community centers were basically the ones when we bought the Starmount portfolio and those are things that we are seeing and focused on to sell and get those, we think, as the debt market improves, we should see some things happen there as well. And I think we are getting to see a lot more interest in those properties as well.

Operator

We will move to next question from the line of Quentin Velleley, please go ahead.

Quentin Velleley - Citi Investment Research

I'm here with Michael Bilerman. Just going back to the bad debt, what is it, as a percentage of revenue this quarter and what are you expecting in your guidance numbers for the rest of this year? Can you just give us a bit of a comment as to what category of tenant is being most impacted?

John Foy

To date, we are seeing a flat there and we've given that one point -- our bad debt number was $1.7 million and we can compute that in the percentage of -- it's about 0.6%, 60 basis points of revenues that we announced. Your second part of the question? I'm sorry.

Quentin Velleley - Citi Investment Research

In guidance, are you expecting about 60 basis points as the run rate or does it increase in the second half of this year?

Stephen Lebovitz

We think it should be flat year-over-year, the 60 basis points. What happened last year was that you did see some step-ups in the third and fourth quarter as a result of significant bankruptcies from Circuit City and Steve & Barry's, so that really impacted it since. There is still some question as to some tenants out there that are questionable, but hopefully the turnaround in the economy and consumer confidence coming back and jobs being created that we won't see a replication of what happened in 2008. So we think that that's probably a pretty good run rate.

Quentin Velleley - Citi Investment Research

Looking at your average base rents, which have been pretty much flat over the last three quarters despite some of the negative spreads you've had. Is that just a function of the contractual rent increases that you've seen having or is there something else in there that helped keep those base rents flat?

John Foy

The base rents have been flat. The rent spreads that we record are gross rents, so those don't include some of the step-ups that we gain in CAM over their term of the leases. So we're not comparing totally apples-to-apples there because the base rents don't include the recoveries. So that in part accounts for some of the discrepancy there.

Quentin Velleley - Citi Investment Research

I think on the last call, you spoke on renewal tenants had a preference to sign one to two year leases, I think it was about 40% of the leasing that you were doing, has that trend continued?

John Foy

Yes, it's continued. Most of our renewals have been three years or less, and about half have been one to two years. So it's pretty consistent with what it's been and that is something that's been our preference as well. I think you've seen that in the peer group, most other people have mentioned that as well in their calls.

Quentin Velleley - Citi Investment Research

And when do you expect leasing to return to more normal lease terms?

John Foy

Sooner is better. We wish we knew that but we can't really crystal ball that. We are hoping the economy gets better and then that will definitely translate into better results for retailers and better results overall. I do know this year, the retailers have been really conservative with their inventory and with the amount of merchandise they've stocked and they've really positioned themselves for lower sales. It's a little too early to see what the forecast is for 2010 but we are going to be talking to a lot of the retail CEOs and get a sense for what they are thinking and hopefully they will be flat with this year and maybe even plan for some increases.

Stephen Lebovitz

But basically they have taken their markdowns and their price points have come down, so that your comp-store sales are always going to be impacted by that. So, it's going to be difficult for anybody to show a lot of comp-store growth based upon the fact that the consumer today is value oriented and the retailer's value oriented. So, pricing points with them is all being pulled down and so comp-store sales aren't necessarily indicative of the health of the retailer versus the margins.

Operator

We will move to our next question from the line of Craig Schmidt, please go ahead.

Craig Schmidt - Merrill Lynch & Co.

You have slightly lower rent sales and definitely lower operating expenses but higher tenant reimbursements, I'm assuming that's due to fixed CAM, and if that is the case, given these trends continue for the rest of the year, would that suggest that the retailers might be in a position to ask for lower fixed CAM?

Stephen Lebovitz

No, I don't think necessarily, because I think the fixed CAM that's put in place today is based upon formulizations and historicals what we've done with them in the past. I think that the reason the retailers are focused on fixed CAM is basically so that they can see what their total cost of occupancy is versus where, in the past it was based upon the pro rata. And therefore, they didn't have a good grasp of what was happening to us.

I don't think you're going to see it and I think that the total overall thing that retailers have in their mind is total cost of occupancy. And I think that's why you are seeing the results that we're having in these middle markets is that our cost of occupancy is good for these retailers. And I think that you are going to continue to see that in the middle markets versus in some of these major metro areas, where cities and people here have basically been more conscious of their budgets over the past, and you are not seeing huge deficit spending like California and in these markets where we are.

So I think that's why you're going to see stability in these middle markets, and I'm not so sure that it's ever going to change back to the way it was. So we are very comfortable and confident with regard to the middle markets. Historically, we've been in this business a long time and it's proven to be the case throughout the history that we've been in this business.

Craig Schmidt - Merrill Lynch & Co

Then the fact that you are saving on utilities and you are finding your staffing to be more efficient, that wouldn't seem to be an opportunity for the retailers?

Stephen Lebovitz

I think, Craig, they're basically focused on occupancy costs. And you know --

Craig Schmidt - Merrill Lynch & Co

And they are happy with yours.

Stephen Lebovitz

Yes. Well, they are not happy, but they can live with it.

John Foy

No, but they are saying we want to renew at a 13% total occupancy costs and I mean, they are not saying split it up how you want, but if we can lower our occupancy costs, then we can get a higher rent. And the discussion with the retailers is about that percent of occupancy costs on a gross basis. So that's the way most of the negotiations go.

Operator

We will move to the next question from the line of Michael Mueller. Please go ahead.

Michael Mueller - JPMorgan

Stephen, you mentioned you were talking about some of the boxes, the vacant boxes. I think you mentioned 50 of them. Two things there. One, can you run over the numbers again? How many were addressed in the square footage? And then, more importantly, for the stuff coming on in 2010 how much revenues are you talking about associated with this pool that's already been addressed?

Stephen Lebovitz

Well, just to go over the numbers again, it's roughly 50 boxes that we had vacant, and of that, we have 24 with executed leases or LOIs, and that totals 675,000 square feet, which is about 35% of the total square footage. So, it's not half as a number of leases. And we haven't said anything about the rents for 2010. So I can't really disclose that. Most of that, like I said, is going to come on first quarter and second quarter of next year. So, that's definitely going to help us out as we get into next year's numbers.

Michael Mueller - JPMorgan

If we are looking at those 50 boxes then, how much lost rent was there in aggregate on an annualized basis then, associated with the whole 50?

Stephen Lebovitz

It was about $18 million.

Michael Mueller - JPMorgan

And John, you talked about asset sales. You mentioned office, community center stuff, but you also mentioned some larger stuff that could be in the works. Is there an internal goal that you folks think about in terms of how much you would like to knock out in the next year or two? Because it seems like the numbers could be pretty small or they could be very large. I mean, is there some sort of bogey that makes the maturity schedule work and everything work over the next two to three years that you are shooting for?

John Foy

The focus, to certain extent, is we have a lot of lowly-leveraged properties. So that's good potential for bringing in joint venture partners on those. And then also you couple that. What you try to do is to match up the particular parties' needs. Is it yield that its driven by or is it IRR or things such as that? So it's taking all of those things into consideration that we look at to determine and work with these potential joint venture partners.

It's not going to be a cookie cutter that one size fits all. We are going to tailor it to each particular partner's needs and desires, and in turn hopefully they are going to see what our needs and desires are as well. As far as basically putting a number and a goal in mind, I think we're definitely focused on the ability to lower our debt numbers, and what we've done with the equity offering and the amortization that we are doing on our existing mortgage portfolio as well as other things, I think we can lower debt that way, but it will lower quicker and more significantly with joint venture partners.

So I think it's a combination of all of those factors in trying to make it work for all the parties involved.

Michael Mueller - JPMorgan

So could the equity proceeds or the cash proceeds that you are picturing be north of what you raised from the equity offering? Is that a reasonable scenario?

John Foy

I think it all depends upon the market and what we see and the opportunities and what is the cost of those funds. So we don't say that it's going to be $382 million, which would equate to what we've raised in that equity offering. But we think that ultimately it will be significant, coupled with the other items that we are doing to bring down our leverage.

Michael Mueller - JPMorgan

Last question. Going back to, I think it was Stephen's comment on leasing, where you said year-over-year, you're up 25% compared to last year. How does that split up between renewals and just maybe tackling 2010 stuff early as opposed to new leasing? Is it dramatically more one camp than the other?

Stephen Lebovitz

Well, the renewals, like we said, like I said in the script, was 390,000 square feet of renewals and 620,000 square feet of new leases. So say, roughly 1 million square feet that we did in the quarter. I can't tell you how much of it is early renewals for next year because we don't break it out that way.

Michael Mueller - JPMorgan

Okay. So nothing comes to mind in terms of -- the majority of the pickup was just attacking early renewals or something or a lot on the new leasing side? So it's kind of a blended mix?

Stephen Lebovitz

Yes, what I gave you, first of all, was backwards. It was 620,000 square feet of renewals, because as I was reading it didn't make sense, and 390,000 square feet of new leases. So that's 60% of the leasing was renewals. And as far as where it's coming from, it's really across the board. Some of the portfolio deals that I referenced, we are doing early renewals for stores that come up in 2010 and 2011, so that's a factor in the higher leasings and then just trying to be more proactive and get out there, given the economy and make sure that we are solidifying the tenants in the spaces.

Operator

We will move to the next question from the line of David Wigginton. Please go ahead.

David Wigginton - Macquarie Research Equities

Just circling back to the line of credit, how are you determining which properties you're going to be securing that line of credit with?

John Foy

What we basically did was we took our CMBS debt for those years and that was basically what we walked through with the bank group and that's how we came up with those. So what we focused on was the ability to take care of the CMBS for '09, '10, and '11 basically for most of it. And that's how we came up with those numbers and worked with the banks to make certain that they were comfortable with those properties as well.

David Wigginton - Macquarie Research Equities

Were any of your larger mortgages coming due next year? Will any of those be included in that? I don't know if (inaudible) lender or CoolSprings, are those CMBS debt or are those with life insurance companies?

John Foy

CoolSprings is with a life insurance company and that is not in the same lender. CoolSprings has had that loan since we opened the project and we would envision that we had discussions with them along the lines of what they want to do on that. And all indications are that they are comfortable with the asset and so we think that one will be put to bed. I think if you look at the 2010 maturities, I think the biggest portion of those or a lot of that is institutional mortgages. And a lot of them are with institutional people who we have dealt with for years and years, and we've concluded those basically in the past, so that's where we are.

Likewise, we have the right with the bank's permission, to substitute other collateral, etcetera. So, we could get a better loan in the open market today versus pledging the collateral then that's what we would do and just pull down that $560 million. So it's really been an incredibly good thing for us to have worked with Wells Fargo and the group of banks because we have been with each other for years and understand and have a great trust relationship. So we think that we can work through any of those situations and we think that it's going to be great for us.

David Wigginton - Macquarie Capital

How is the step-up in the rate going to work?

John Foy

The adjustment on the interest rate?

David Wigginton - Macquarie Capital

Yes.

John Foy

It basically is, as I said, it comes in to stages. The spreads will [lengthen] out once we close the loans and the LIBOR floor is what the most significant thing and that doesn't hit us till January of next year. So, the pricing and the spreads have definitely widened and it's on a matrix as to the gross asset value test and the leverage. So, it has widened and we've taken that into our adjustments and our projections or our thought process in the NOIs and other things that we're doing.

David Wigginton - Macquarie Capital

What is the ultimate spread then?

John Foy

The ultimate spread is, I think, 400 to 425, is the highest that it goes.

David Wigginton - Macquarie Capital

With respect to your same-store NOI guidance, I think you guys stuck with the negative 1.5% to negative 3.5% and it looks like, based on comments in the call and other questions that bad debt expense is going to be flat. Do you expect lease spreads just hanging where they are at now? Just wondering, where -- for the year, I think you are had negative 0.4% same-store NOI. Where is the decline going to come in the second half? Is it just merely a result of decline in occupancy or is there something else that I'm missing here?

John Foy

I think where we are seeing -- what we programmed for in our projections, is we think that there will be some pressure on leasing. We've taken a very conservative approach to it, be pressure for more retailers with regard to rent relief. We also think that what happened in the third and fourth quarter of last year was a lot more significant bankruptcies that occurred and the percentage rent numbers should be down, just based upon the fact that sales are not that great. We also have projected that our specialty leasing will be down somewhat just because of the fact that there's not as much people who are going to go into that business because they can't get the capital. I think we are being conservative with regard to those projections of the 1.5% to 3.5% negative, but I think putting all of those things together, we think that that is a reasonable approach to estimating the NOI.

David Wigginton - Macquarie Capital

With respect to the potential JV asset sales, are there any assets in your portfolio that are not available for sale right now to potential partners?

John Foy

I'm sorry, could you repeat that?

David Wigginton - Macquarie Capital

With respect to JV asset sales, are there any assets in your portfolio that are not available for sale?

John Foy

No. We have some tax protection on certain assets, but there are ways to work around those tax protections and in consultation with our tax experts, we think we could work around those. So the whole portfolio, if the right deal came along, we could do joint ventures on any properties.

Operator

We will move to the next question from the line of Carol Kemple, please go ahead.

Carol Kemple - Hilliard Lyons

On your new leases that were signed during the quarter, what retailers were those with?

Stephen Lebovitz

That was across the board. We publish our list of our largest retailers and so the disproportionate amount of renewals is coming from them. I can't give you specific names but I mentioned a few in the script that we had done deals with, Earth Fare and hhgregg, with some of the boxes, Bed Bath & Beyond and Best Buy; we've been doing things with them. Some other regional stores, including a couple of furniture stores have taken some of the boxes, some non-retail uses.

We signed a lease with Kaplan Education to replace one of the former Circuit City boxes. I mentioned Charming Charlies, who is a regional accessory store, whose been doing some expansions, and then, we've got the standbys with Limited and Finish Line, are stores like that that are core to our portfolio. So hopefully that gives you some color. And then, we've also done a lot of restaurants, we've opened six restaurants so far this year, so that's been a contributor as well.

Carol Kemple - Hilliard Lyons

Are there any areas of the country where you have malls that are showing improvement or certain areas where you are seeing more weakness?

Stephen Lebovitz

The Midwest has probably been the best area that we've seen in this quarter. Earlier in the year we have been seeing better results in Texas but that's kind of come down, just because of some of the factors there with border crossings and some of the health issues and the vacation areas have been softer, but the Midwest has really been stable, and we've gotten good results there.

Operator

We will move to the next question from the line of Wes Golladay, please go ahead.

Wes Golladay - RBC Capital Markets

In the third quarter, do you guys see any more incremental cost savings on the operating expense other than bad debt expense?

John Foy

No, actually, last year was when the operating expense savings kicked in, so we will be more apples-to-apples this quarter we got more of the benefit of that.

Wes Golladay - RBC Capital Markets

What flew through, in the second quarter what flowed through, would that all be reoccurring savings, with the exceptions of the bad debt expense?

John Foy

Yes, most of it will be.

Wes Golladay - RBC Capital Markets

And you guys were also able to hold your rent relatively stable even though you guys lost some of the tenants due to bankruptcy mid-quarter last quarter. What was able to offset the bankrupt tenants?

John Foy

Yes, we had some new properties come online that are in there this year, Pearland, for example, so some of the new developments have been a factor. We did open about 10 boxes at the malls. Some of them were just new that were replacing like West County. We opened XXI, and also three restaurants there. So, that came into play and that helped us out. We opened a couple of Barnes & Nobles this year and a Books-A-Million. So, a lot of that new activity, a couple of theaters have opened, so that helps us as well.

Wes Golladay - RBC Capital Markets

Have you looked at the TALF program at all and would you possibly participate in it?

Stephen Lebovitz

We have had discussions with a number of bankers about the TALF program and continue to have those discussions we are working with a couple of those guys to basically see how it works and how it can be structured and benefit us. So, we haven't ruled it out but we are not dependent upon it either and if we're able to structure the right deal, then it just enhances the total overall situation.

Operator

We will move to the next question from the line of David Fick, please go ahead.

David Fick - Stifel Nicolaus & Co.

Can you walk us through what your same-store numbers would've been, excluding lease termination fees, you have that handy?

Stephen Lebovitz

Yes, hold on one second, David, we are grabbing it, just a second. It's up 1.3, David.

John Foy

That's with the (inaudible) termination fees that number.

David Fick - Stifel Nicolaus & Co.

I will follow back with you later for more detail on that. Most of my other questions have been answered, just one clarification on the dividend. I think you'd indicated previously that it'll be minimal, pennies for the next couple of quarters, based on what you knew at the time. You've got another quarter's worth of information under your belt right now. You've commented John that you are going to continue to look at it. I think you already know what the dilution is, and so, do you have any sense right now, is it going to be $0.03, $0.05 or you wouldn't even has it as a guess?

John Foy

I think, David, I think what we're doing is, is that every quarter and almost daily, we are watching the net taxable income number, and that's what will drive the dividends. So, depending upon what happens and what we do in the quarter, that's what will drive the decision by the Board. And so, what we've announced when we did the equity offering is that we're trying to structure it basically where it'll be net taxable income to save that money granted. We, likewise, want to see the growth of the FFO and also see the growth of the company, so that we could increase that dividend or be in a position to do so when the Board meets. But net taxable income will be what will determine what the dividend is.

David Fick - Stifel Nicolaus & Co.

Is it possible then that there wouldn't be a dividend, how close are you? Do you have any sense for that at all? Is it possible that you've already paid out what you have to for the year?

John Foy

I think, we look at those numbers and I think the Board will make that decision and that will come up at this next Board meeting.

Operator

We will move to the next question from Jim Sullivan. Please go ahead.

Jim Sullivan - Green Street Advisors

Yes, there was an earlier question. Your first half same-store NOI was negative 0.5. Your guidance is minus 1.5% to minus 3.5%. My question was where is the big follow up coming in the second half? And I'm curious, specifically, how much of that is attributable to the prospect of materially lower percentage rents in 4Q09 versus 4Q08?

John Foy

I think, as we said earlier, is that we think that price of goods and value shopping by these people are basically forcing the ticket items to be much smaller, which will ultimately impact percentage rents. So I think that that's a significant portion of it as well and then specialty leasing, because of the number of people who have the capital or the banks that are going to loan them the money could basically take a risk of selling at the holiday season is going to be less. So I think it's those two elements and there's other factors that will come into view that will determine that.

Jim Sullivan - Green Street Advisors

And as you've dealt with tenants who are struggling, have you converted many tenants, a material number of tenants from fixed rents to percentage rents to keep them in the space and to keep the space productive?

Stephen Lebovitz

It's been a few, Jim, but it hasn't been significant.

Jim Sullivan - Green Street Advisors

Okay. And then, switching to occupancy costs, I'm curious how the negotiation is now going with your tenants with respect to occupancy costs versus say two or three years ago. I imagine two or three years ago, the starting point was somewhere in the 13 range and they would expect that to decline as their sales improved. Fast forward to today, your starting point sounds like it is still in the 13 range, but there is a lot of uncertainty as to what their sales are going to be and whether they will grow into a lower occupancy costs through higher sales. How does that negotiation go today, may be compare that to two or three years ago.

Stephen Lebovitz

A few years ago, we were pushing and starting more at 15, 16. The 13, kind of threw out there, that's not the case. Different retailers and different categories can support a different occupancy cost, and so each one is individual. It depends on the property, and it's just very hard to generalize about that to answer that question.

Jim Sullivan - Green Street Advisors

With respect to occupancy and your reported occupancy, how do you guys define occupancy in the mall portfolio? I'm specifically interested whether you include or exclude short-term tenants?

John Foy

Anyone who's got a lease for a year longer is in there and it's economic occupancy. So if they are paying rent, they are in occupancy.

Jim Sullivan - Green Street Advisors

Anybody under a year is excluded?

John Foy

That's correct.

Jim Sullivan - Green Street Advisors

What if you included that group of tenants, by how much would the occupancy increase?

John Foy

I don't know.

Jim Sullivan - Green Street Advisors

50 basis points? 500 basis points?

John Foy

I don't know. We can take a look at it and get back to you.

Jim Sullivan - Green Street Advisors

Finally, I get a little bit lost on the pricing related to the restructured bank facilities. Can you just walk through what the current pricing is, what the initial pricing will be after the restructured deals close, and then what the step-ups will be over time?

John Foy

Jim, it is in the press release, but basically, the existing debt, I think is at like 80 to 90 basis points over LIBOR pricing with no floor. And the new pricing basically is based upon a metrics depending upon gross asset value or leverage. So it's pretty detailed and it's set out in our press release that we've previously given.

Jim Sullivan - Green Street Advisors

And the fees associated with the restructuring?

John Foy

The fees are minimal. I think they are basically on track what they have been in the past. I don't think there was no extensive re-look at the fees, etc. What we basically have been able to do with the banks and the bank groups is we've been able to give them additional business. And we've had good relationships with them. So we've been very fortunate and they, I think, understand our story a lot better than you guys do.

So I think that's why they basically have gone along and extended the $1 billion worth of credit.

Operator

Thank you. Management, at this time there are no additional questions in the queue and I will turn the conference over to you for any closing remarks.

Stephen Lebovitz

We would like to thank everyone for their time this morning, and we will see some of you on the road in the next few weeks and if you have any questions, give us a call. Thank you.

Operator

Thank you, management. Ladies and gentlemen, at this time we will conclude today's teleconference presentation. We do thank you for your participation on the program. You may now disconnect and please have a wonderful day.

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Source: CBL & Associates Properties, Inc. Q2 2009 Earnings Call Transcript
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