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

Q3 2009 Earnings Call Transcript

November 4, 2008, 11:00 am ET

Executives

John Foy – Vice Chairman, CFO and Treasurer

Katie Reinsmidt – VP, Corporate Communications and IR

Stephen Lebovitz – President and Secretary

Analysts

Jay Habermann – Goldman Sachs

Samit Parikh – Oppenheimer & Company

Paul Morgan – Morgan Stanley

Christine Mulkerrin – UBS

Ross [ph] – UBS

Quentin Velleley – Citigroup

Michael Bilerman – Citigroup

Michael Mueller – JP Morgan

David Fick – Stifel Nicolaus

Rich Moore – RBC Capital Markets

Stuart Seeley – Morgan Stanley

Operator

Good day and welcome to the CBL & Associates Properties Incorporated conference call. Today's call is being recorded and will be available for replay beginning today at 1:00 PM Eastern Time and running through November 12, 2009 at 11:59 PM Eastern Time by dialing 303-590-3030 or 1-800-406-7325 and entering the passcode 4065656. At this time for opening remarks I would now like to turn the conference over to the Vice Chairman and Chief Financial Officer, Mr. John Foy. Please go ahead, sir.

John Foy

Thank you and good morning. We appreciate your participation in the CBL & Associates Properties, Inc. conference call to discuss third quarter results. Joining me today is Stephen Lebovitz, President, and Katie Reinsmidt, Vice President, Corporate Communication and Investor Relations, 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, 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 direct 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 "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 third quarter results. Earlier in the year, we outlined a plan to access equity sources and collaborate with our lending group to address our upcoming maturities. Although there is still work to do, we have made landmark progress in successfully achieving these goals.

We recently closed the extension on both of our major credit facilities totaling nearly $1.1 billion, including our $525 million and $560 million credit facilities. We retained 100% lending capacity on both facilities, which is a major accomplishment in the current environment and a positive indication of the confidence of our lending relationships continued to provide.

Given our current stock price, our FFO multiple and implied cap rate is well below our historic average and the current period average. We continue to explore a number of opportunities to raise additional equity to joint ventures, dispositions and other means, which we believe will better recognize the embedded value in the CBL portfolio. There is strong interest from several different sources to joint venture portfolio of our malls, including attention from foreign equity and pension funds.

As the year continues, the level of interest has increased and the conversations are becoming more positive. However, we are still in preliminary discussions and feel that there is no pressure to complete a joint venture unless it makes good economic sense. We are in the process of selling our interest in Plaza Macaé in Macaé, Brazil. So we can bring the funds back to the US.

In mid-October, we entered into a purchase and sale agreement to sell our interest in the mall for $24.2 million to a third party. Subject to due diligence and customary closing conditions, we anticipate closing this transaction in the fourth quarter. As part of this transaction, we have recorded a $1.1 million non-cash impairment charge in our results this quarter.

As we indicated last quarter, we anticipated experiencing and continued effects of occupancy and rent pressures through the second half of this year, which was evident in the decline in the same-center NOI for the quarter. However, we are seeing relative NOI stability year-to-date in the mall portfolio as well as improvements in occupancy and stable overall base rents.

Gross FFO was down approximately 1.5% for the quarter and nine months as compared with the prior year periods. FFO per share for the third quarter was $0.50 per share compared with $0.78 per share in the prior year period. FFO in the quarter was diluted by $0.26 per share as a result of the $66.6 million shares issued in the June offering. FFO for the nine months was $1.87 compared with $2.30 for the prior year period.

FFO for the nine months was diluted $0.40 per share as a result of the 66.6 million shares issued in the June offering. FFO was also reduced by $1.1 million impairment charge related to the sale of our interest in Plaza Macaé. FFO in the prior year period benefited from $8 million of fee income received from affiliates of Centro, which was partially offset by $5.7 million of marketable securities write-down.

Other highlights include minimum and percentage rent declined approximately $7.5 million for the quarter and $17.5 million for the year from the prior year periods. Approximately $2.5 million of the decline in the quarter and $5.5 million of the decline for the year, which related to lower lease termination fee income. The remainder of the decline was a result of lower occupancy and rent pressure, partially offset by a $2 million increase in straight line rent for the quarter and nine months.

Bad debt expense in the third quarter and nine months 2009 was approximately $810,000 and $4.6 million compared with $1.7 million and $5.6 million respectively for the prior year periods. Gains on outparcel sales were $0.01 per share in the third quarter compared with $0.05 per share in the prior year period. Gains on outparcel sales were $0.02 per share for the first nine months of 2009 compared with $0.12 per share in the prior year period.

Excluding lease termination fees, same-center NOI in the mall portfolio declined 1.8% for the quarter and 30 basis points for the nine months as compared with the prior year periods. Same-center NOI for the total portfolio, excluding lease termination fees, declined 2.2% for the quarter and declined 90 basis points for the nine months as compared with the prior year periods. Same-center NOI was negatively impacted by the year-over-year declines in occupancy, rent pressure, as well as lower specialty leasing and sponsorship income.

Other highlights of the quarter included our cost recovery ratio for the third quarter was 99% compared with 97% for the prior year period. For the nine months ended September 30, 2009, our cost recovery ratio was 100% compared with 96% in the prior year period. While tenant reimbursements have declined from prior year levels due to lower occupancy, the cost recovery ratio year-to-date has been positively impacted by the expense reductions and approximately $1 million of lower bad debt expense.

G&A represented approximately 3.4% of total revenues in the third quarter, flat from the prior year period. G&A expense represented approximately 3.9% of total revenues for the nine months ended September 30, 2009 compared with 4% of total revenues in the prior year period.

Debt-to-total market capitalization ratio was 74.6% as of the end of September 30 compared with 71.2% as of the end of the prior year period. The increase in our debt-to-market capitals is primarily a result of the 52% decline in our stock price from September 30, 2008. We have significantly reduced debt levels using the proceeds raised in the June equity offering.

Variable rate debt was 16% of total market capitalization as of the end of September 2009 versus 18% as of the end of the prior year period. As of September 30, variable rate debt represented 22% of CBL share of consolidated and unconsolidated debt compared with 25.2% in the prior year period. Our EBITDA to interest coverage ratio was 2.3 times as of September 30, 2009, flat compared with the prior year period.

We are maintaining FFO guidance for 2009 in the range of $2.28 to $2.39 per share. Major assumptions in our guidance include outparcel sales of $6 million to $9 million, the estimated impact on interest expense as a result of closing both the credit facilities at higher LIBOR spreads, and NOI growth of negative 1.5% to 3.5%. We anticipate coming in closer to the negative 1.5% same-store NOI growth. We are finishing our budgeting process for 2010 and anticipate providing guidance when we report fourth quarter earnings.

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

Stephen Lebovitz

Thank you, John. I will be walking everyone to this quarter’s operating highlights and then we will open it up for questions. We continue to see the benefits of our dominant mall strategy come through in our portfolio occupancy and sales metrics. Our properties still provide one of the peer group’s lowest occupancy cost, which is attractive to retailers looking to renew profitable stores and for opportunistic expansion.

The volume of leasing completed in the operating portfolio in the third quarter was approximately 1.25 million square feet of new and renewal leases, including 500,000 square feet of new leases and 750,000 square feet of renewals. We also completed 90,000 square feet of leases in our development projects. To date, we have completed nearly 90% of our 2009 renewals, with non-renewals trending slightly lower than 2008.

For stabilized mall leasing in the third quarter on a same-space basis, rental rates were signed at an average decrease of 13% from the prior gross rent per square foot. We are continuing to experience pressure on rental rates and anticipate this will continue until we see improvement in sales trends. We are generally signing the tougher deals for shorter lease term, which affords us the opportunity to regain market rents when sales trends improve.

This quarter, certain categories, including jewelry shades [ph] and sit-down restaurants, disproportionately impacted spreads. Together, the negative deals in these categories accounted for roughly one-third of the decline in average rent spreads for stabilized malls. While these rent levels were lower than we would have liked, we are building an upside potential to higher percentage rent rates and lower break points.

Stabilized mall occupancy was up 120 basis points sequentially to 90.3% and declined 180 basis points from 92.1% at the end of the prior year period. Total portfolio occupancy increased 120 basis points sequentially to 89.2% and declined 300 basis points from the prior year. We are still anticipating year-end occupancy to come in roughly 200 basis points lower than the prior year for the stabilized mall portfolio.

The year-over-year decline in occupancy was primarily a result of the closure of junior boxes in the associated and community center portfolios. Of the roughly 50 junior box locations that vacated as a result of the 2008 bankruptcies and store closures, we have 28 executed leases or LOIs totaling nearly 800,000 square feet or more than 35% of the available square footage. The new leases represent 25 retailers. So we have been able to attract interest from a broad range of users for these locations.

Several analyst reports last night commented that tenant allowances increased in the quarter compared with the prior year period and that this increase enabled us to buy our sequential increase in occupancy. This is simply not the case. We report tenant allowances as funded, not as the leases are signed. The tenant allowances paid this quarter do not correlate with the leases signed in the quarter. In fact, some of the allowances paid are for leases signed over a year ago.

While tenant allowances did increase in the third quarter, this increase is consistent with what we have experienced in past years. Year-to-date tenant allowances are flat with 2008 levels and about $13 million lower than 2007 levels. On a per square foot basis, tenant allowances for leases executed in the quarter are actually less than 2008 levels.

Same-store sales trends improved throughout the quarter. September sales have shown the most progress, declining less than 2%. For the 12 months ended September 30, 2009, sales for reporting tenants 10,000 square feet or less in stabilized malls declined 6.6% to $317 per square foot. While sales continued to decline, our portfolio decreases are less than those of most of our peers.

Recent trends have been encouraging and are expected to continue with the second half of 2009 performing better than the first half. However, we anticipate that the holiday sales reason will reflect the significantly reduced inventory levels and heavy discounting that we are seeing from retailers. It will be challenging for volume to increase enough to reach prior year’s sales levels.

While it is difficult to predict the level of bankruptcy we will experience going forward, we have been encouraged by the number of retailers reporting improving margins. During the quarter, we experienced limited new bankruptcy activity with filings from two national retailers; Finlay, which operates Carlyle and Bailey Banks & Biddle jewelers, and JDH Enterprises, which operates Lims and Basics [ph]. Together they have 15 locations totaling 41,000 square feet and $1.4 million in annual gross rents. To date, our lost annual gross rents from store closures is running less than 1% of annual revenues.

On October 11, we celebrated the grand opening of the The Promenade in D'Iberville, Mississippi, part of the Gulfport/Biloxi trade area. The center opened more than 96% leased and committed for the first phase, with Target, Marshalls, Ulta, Dick's Sporting Goods opening to huge crowds. All of the stores have been trending well above their plan. We understand that of the 26 stores Target opened that week, the store at The Promenade was number one.

Just a few days ago, we opened the first phase of Settlers Ridge in Pittsburgh, Pennsylvania, more than 94% leased and committed. Cinemark Theater, P.F. Chang's and REI, as well as a number of specialty stores have opened to a very strong reception from the market. In just a few days, the 150,000 square foot Giant Eagle Market District will celebrate its grand opening, and later this month, L.A. Fitness will open to the public.

These new developments have garnered a very strong response from the retail community, and we are pleased to open both with leased and committed rates in the mid-90s. The positive reception of the projects is indicative of the successful positioning of the centers in their respective markets.

In December, Hollywood Theater will celebrate their grand opening at The Pavilion at Port Orange in Port Orange, Florida. The remainder of this center will open in spring 2010. That project is also well leased and committed currently at over 92%. We are seeing relative consistency in our quarterly results with the sequential increase in occupancy and year-over-year stability in base rents.

We anticipated that the second half of the year would mathematically be more difficult to the cumulative effect of the negative leasing spreads and lower occupancy. We are experiencing encouraging sales momentum. However, until a sustained positive sales trend emerges, there will continue to be pressure on rents.

We expect some of that pressure to be mitigated going forward, as retailers begin to take occupancy in the re-leased junior boxes and small shops, as well as contributions from the recently opened developments. While there is no question that the operating environment is difficult, our results are demonstrating the benefits of our market dominant strategy, notwithstanding these challenges.

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

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) And our first question comes from the line of Jay Habermann with Goldman Sachs. Please go ahead.

Stephen Lebovitz

Hi, Jay.

Jay Habermann – Goldman Sachs

Hi, good morning, everyone. I’m here with John as well. John, can you speak to 2010? I know some of the larger debt maturities that you do have, for example, CoolSprings, Burnsville, York and St. Claire. I know you negotiated successfully the debt extensions this year. But give us a sense of capital needs for the next 12 months, and I guess even as you think to your further capital raising plans beyond the joint ventures, any update there will be helpful.

John Foy

We have approximately about $495 million of refinancings total to get accomplished in 2010. Of that number, $179 million – say, $180 million are CMBS loans, which we have covered with the line of credit and negotiations we did with Wells Fargo. That lease is about $316 million with institutional first mortgages. Of that $316 million, we have – will have applications within the next 30 to 60 days for $178 million of that. That lease is approximately $127 million with institutions that we have done business with in the past and have just recently renewed with. So we feel very good about the ability to renew those. The debts of the NOI coverage of the – debt market coverage on those is in excess of 20%. So it’s really a good – more than adequate coverage to refinance those debts.

Jay Habermann – Goldman Sachs

And where are you seeing rates today for new mortgages?

John Foy

I think they are bouncing around a little. I think we’ve seen in the 7% to 8% range depending upon the amount of leverage on the asset as well as some amortization that might be included in that.

Jay Habermann – Goldman Sachs

Okay. And you mentioned joint ventures, foreign capital equity partners, can you give us some sense of just how much you are looking at or what you’d like to accomplish in the near-term? And I guess as you look out even to 2012, does it give you sort of a desire to perhaps seek to raise additional equity at this point in the cycle?

John Foy

I think with the cost savings that we have implemented of over $165 million or so with the dividends, cutbacks that we’ve had, and also with the equity that we raised, we don’t see the need or the necessity to raise additional equity. We definitely focused on deleveraging our balance sheet, and there are definitely conversations going on with joint venture partners. As we mentioned, they are very preliminary and the amount of those will basically depend upon how we see those structured in the economic deal that we can see, and then the ultimate use of the capital to see how we can grow the company with that money.

So we have not targeted a specific number to do joint ventures, but the numbers and the various parties that we are dealing with have significant sums of equity that they can invest. And it depends upon the party that’s involved. Some are smaller, some are larger, but there appears to be a lot of equity money now chasing transactions. I think it’s more of an indication that people are seeing or feeling that the market may be has flattened. And I think likewise the ability to show that we have debt on some of these assets that they can jump in to as well give us some good cash-on-cash return. So I think that’s attracting the people and I think that the market is now coming to realization that the moon is not falling in and that we are going to have good results.,

Jay Habermann – Goldman Sachs

In the negotiation process at this point, is it really coming down to price or is it timing? I mean, give us some sense of where the potential investors are looking at it? Are you at this point holding off given where you think pricing might be in the market?

John Foy

I think it’s a combination of those. And I think that as we see the debt markets are starting to open up more as well that that in turn gives us the ability to show that those returns to our joint venture partners are better. So I think it’s a combination, and I think as things move along and as I think our results this quarter show that occupancies are getting better and that the total overall portfolio is starting to perform better that it attracts more attention and it strengthens our leverage position with potential joint venture partners.

Jay Habermann – Goldman Sachs

Okay. Just two more smaller questions. Can you just list the percent of leasing done for next year, 2010? And also, can you speak to the outparcels that you have in your guidance, where you stand on those?

Stephen Lebovitz

Hey, Jay, it’s Stephen.

Jay Habermann – Goldman Sachs

Hey, Stephen.

Stephen Lebovitz

We are just about 50% of ten leasing that’s done. And then the outparcels – what was your question again? I’m sorry.

Jay Habermann – Goldman Sachs

I think you guys have guided to $6 million to $9 million. So that indicates that you still have quite a ways to go for the balance of the year.

Stephen Lebovitz

Yes, we have contracts signed and we feel confident that that’s going to get done.

John Foy

On a significant amount of those, that normally a lot of them close in the fourth quarter for tax reasons and 1031 exchanges. So it’s pretty typical that in the fourth quarter we see a closing and it really gets down to almost the last two or three weeks of the quarter, because I think people feel the tax pressure to a lot of these 1031 exchanges. So we feel pretty good about where we stand on those contracts because we have experience that shows that that’s what has happened in the past, granted nothing seems to be working, like it has in the past. But we have, as Stephen mentioned, signed contracts on a number of those.

Jay Habermann – Goldman Sachs

Okay. Thanks, guys.

Stephen Lebovitz

Thanks, Jay.

Operator

Thank you. And our next question comes from the line of Samit Parikh with Oppenheimer & Company. Please go ahead.

Samit Parikh – Oppenheimer & Company

Hi, good afternoon, everyone.

John Foy

Hi, Samit.

Samit Parikh – Oppenheimer & Company

To follow up on Jay’s question on the capital markets, how do you feel about lender capacity overall in 2010 I guess for your space, specifically the life insurers? And you said that you are seeing interest rates in the 7% to 8% range. How sustainable do you think that is next year?

John Foy

I think what we are seeing is that and hearing more indications and getting more interest from the life insurance people today, I think that they basically are seeing and feeling the same thing as that there is tending to be a bottoming out there. As far as capacity is concerned, I don’t think there is enough capacity in the life insurance companies to take care of all the CMBS financings. And that’s why we were proactive with regard to the approach that we took basically so that we’ve taken care of all of our CMBS financings through the year 2011. So I think, Samit, I agree that the capacity is not going to be there to take care of all the CMBS. I think the capacity is definitely there with those institutions who you have relationships with, who you produced with in the past, and who you continue to work with in the future. So I think from our perspective, we feel very good and confident about the ability to refinance what we have with the institutions.

Samit Parikh – Oppenheimer & Company

Okay. And also when you were talking about lots of equity money on the sidelines chasing transactions, what type of assets are seeing that this money is chasing? Is it really just the highest quality stabilized stuff, or are you seeing people – money on the sidelines essentially chasing higher yielding, more opportunistic investments?

John Foy

I think it all depends upon the person or the group that you’re working with. I think a lot of people are very sensitive with regard to yield. And on the other hand, I think other groups are sensitive with regard to IRRs and what that looks like over that period of time. But I think all are basically looking at stability in those assets and not looking necessarily at a portfolio of $400 a square foot assets. I think that assets have shown a stability over the long periods of time or basically of interest to them too if they are looking for yield. So I don’t think that you can say that they are looking at any specific category because I think it’s amazing how many different approaches and different people and different discussions there are out there as to various things that we see in the markets and the ability to see them – a lot of them want to preserve their capital, a lot of them want yields. So I think it’s difficult to just outline and say one, and I think with our portfolio, we have that ability to meet the needs of any of those parties.

Samit Parikh – Oppenheimer & Company

Okay. And then just to follow up on that, speaking of IRR, anything you’ve seen – do you have any maybe sense of what specific IRR requirements for some of this money on the sideline might be?

John Foy

I think it depends – I’d like to go back to the party that’s involved, but you have a lot of hedge funds out there who are basically looking – you know, IRR is significantly high in the double-digit area. But on the other hand, if you look at these other people, they are basically more realistic with regard to the IRRs they are looking for and the ability to take those people and work with those. So I think some of them are looking at cash-on-cash returns and some are looking at IRRs. The ones we are talking with are not – we think they are more realistic with regard to those and that we think that they are not in the significantly high-double digit areas.

Samit Parikh – Oppenheimer & Company

So then for those realistic people as cash-on-cash returns of 9 to 10, is that realistic or is that too high spell?

John Foy

Well, I think it depends on the asset and the size of the transactions. I think it can probably go lower than that, and I think that your numbers are unreasonably unrealistic.

Samit Parikh – Oppenheimer & Company

Okay. Thank you.

John Foy

Thanks, Samit.

Operator

Thank you. And the next question comes from the line of Paul Morgan with Morgan Stanley. Please go ahead.

John Foy

Hey, Paul.

Paul Morgan – Morgan Stanley

Hi, good morning. Just a little bit on the leasing side, I just want to be clear on the part of your supplemental where you provide the spreads, you’ve got about $500,000 of – 500,000 square feet of leasing in the quarter and then kind of below, you also say total leasing in the quarter is like 1.3 million. Is the difference between those two just as many anchors and anchors or are there types of like short-term leases that don’t get put into the spread calculation?

Stephen Lebovitz

Yes, it’s two things. It’s – anything over 10,000 square feet isn’t in the leasing spread number, the 500,000 square feet. And then also certain deals just aren’t comparable for various reasons. The spaces don’t match up or factors like that [ph], the square feet aren’t the same. So those aren’t in there as well.

Paul Morgan – Morgan Stanley

But if you were to just do like a 12-month extension, that would be in there?

Stephen Lebovitz

Yes. Yes, everything is in there. Yes, 12-month extension, 24-month, ten-year.

Paul Morgan – Morgan Stanley

Okay. All right. And then you said you’ve done 50% of the 2010 leases. I mean, are those spreads on a consistent basis with what we are seeing in this quarter based on what you’ve done for the expiring leases for next year?

Stephen Lebovitz

Yes. It’s a little hard to say. I mean, they are for the most part renewals. And hopefully it’s a little bit better than what we saw in this quarter. They were a few deals, like I said, a few categories in this quarter that really skewed the results. And it’s interesting because if you just – there were actually two restaurant deals that were 15,000 square feet, and those alone accounted for over 200 basis points of the decrease. And what we did in those situations is that the restaurants had gone bankrupt and a buyer came in and bought the fixtures and bought the business and didn’t take any allowance from us. So they weren’t able to pay the same rent, but they came into the space with very little downtime. So we thought that made the most sense given the circumstances, but it did hurt our spreads.

Paul Morgan – Morgan Stanley

Okay. And then what drove the increase in the straight-line rent in the quarter?

John Foy

It was the adjustments in the rent that basically you adjust down and then you basically adjust back up.

Paul Morgan – Morgan Stanley

You mean, is this rent basically a deferring rent or short-term release, that type of thing?

John Foy

It’s reoccurring rent, and it’s short-term rents as well.

Paul Morgan – Morgan Stanley

So short-term discounted rents, and so you are straight-lining over there, is that what you are saying?

John Foy

It’s the short-term period of that. So let’s say that we gave some rent relief and then it picks back up six months later or a year later. So you put all of that into the equation, and then there were some write-offs basically. The big significant number between this year and last year was that we wrote off a lot of tenant allowances from those big boxes. So that was the big significant number when you compare ’08 to ’09. And then in addition to that, the straight-lining basically had an impact on it.

Paul Morgan – Morgan Stanley

How – I mean, we’ve had issues with other companies who had to ultimately write off those accruals. I mean, how are you viewing that decision to do that short-term release? I mean, what’s the kind of credit quality and your comfort that you will actually be able to kind of recoup that discounted period?

Stephen Lebovitz

It’s not – I mean, we go through a process deal-by-deal and it’s really only in the cases where we view that there is a bankruptcy risk or significant distress with the retailer that we are giving them the type of short-term relief to get them through the cycle. And in terms of gross dollars, it’s less than 0.5% of revenues. So it did impact the straight-line number, but it’s not in the grand scheme of things for the company. It hasn’t been that material.

Paul Morgan – Morgan Stanley

Thanks. My last question just on expenses, what’s been the big driver of the expense cuts? And do you think you continue – as those anniversary, do you think there is more potential to reduce the expense line to keep NOI protected or are you running up against some constraints there?

Stephen Lebovitz

Well, we’re definitely going to run up against get more difficult comps because we started doing the expense reductions last year. So it’s going to be more difficult as we get later into this year and into next year to see the same results. Not that we are not continuing to work to push down expenses further, but we did take the lower hanging fruit at the beginning. As far as what areas it’s been, utilities has been a big priority and we’ve been able to have some real good success in terms of pushing down costs there. Landscaping and maintenance in general, we’ve just tried to be more efficient and more conservative to save money where we have. Snow removal is less this year, which has been a factor of the weather. And then on the personnel side, we’ve looked to be more efficient. So there is a lot of different categories to go into it. And like I said, we are still working to do more.

Paul Morgan – Morgan Stanley

Thank you.

John Foy

Thanks, Paul.

Operator

Thank you. And our next question comes from the line of Christine Mulkerrin with UBS. Please go ahead.

Christine Mulkerrin – UBS

Hey, good morning, guys. Just a follow-up on Paul’s question. I know that you are doing quite a bit of this junior anchor box leasing. Can you just give us a sense for what type of spreads you are seeing on that space that’s over 10,000 square feet?

Stephen Lebovitz

Yes. The spread for those spaces is actually down 9%. But it’s a little misleading because there is a couple of spaces where we’ve done shorter term deals at lower rents while we are working to get someone in the space. And those spreads are disproportionately worse compared to most of the deals. The longer term 10, 15-year deals that we’ve done with people like Bed, Bath & Beyond or hhgregg or Jo-Ann Fabrics or Nordstrom Rack, people like that have been at good positive spreads. But the four or five shorter-term deals have been behind this decrease.

Christine Mulkerrin – UBS

To what extent did those larger sort of over 10,000 square foot boxes contribute to the sequential occupancy jump in Q3? Is there any way to sort of break that out?

Stephen Lebovitz

A few opened, but for the most part, are opening in fourth quarter and into next year. We didn’t break it out. And I don’t have the exact number for you.

Christine Mulkerrin – UBS

Okay. Maybe we’ll follow up on that. Just in your re-leasing spreads, it’s pretty clear that you are having to push a little harder to get the space leased. In the office sector, we’ve seen free rent jump to about six months on average from three months. I know it hasn’t really been commonly used in mall leasing, but are you offering any free rent in this environment?

Stephen Lebovitz

No, we haven’t offered any free rents. One other thing, you can see the impact of the boxes when you look at the community center and the associated center stats, that’s the improvement there. So I don’t think you will need to follow up on that.

Christine Mulkerrin – UBS

Got you.

Stephen Lebovitz

And then that we have not – we have not offered free rent and we haven’t heard of it happening with any of our peers. And it’s just – you don’t see that in the mall business like you might in other sectors.

Christine Mulkerrin – UBS

Okay. I’m on with Ross [ph] as well. I think he has a question.

Ross – UBS

Yes. Hi, good morning.

Stephen Lebovitz

Hi, Ross.

Ross – UBS

John, you’ve been talking about joint ventures now I think for most of the year. And I think understandably you r focus has been on getting the lines of the term loans taken care of and on the equity front. But in terms of the joint ventures and the volume and asset sales over the next year, do you have just a bogey of what you think you’re going to be able to do? I mean, do you have to do $1 billion a transaction to get the balance sheet where you’d really like it to be?

John Foy

No, I don’t think we have to do any to get the balance sheet where we – we are comfortable with the balance sheet where it is. We’d like to see some improvement with regard to the balance sheet, but we don’t feel any pressure whatsoever to basically force and do a joint venture that we don’t think is in the best interest of our shareholders. So we haven’t – we don’t have any bogey. We don’t have any preconceived idea of what it is. We continue to explore with the number of people various opportunities that they see and try to fit in with their parameters to make it work for both of us.

Ross – UBS

So can I take that – so if I look through the other side of the cycle here to when mall companies get back into the external growth business, whether that’s acquisitions or development, that’s a current leverage profile of the company. Is that a level where you think you’d be able to start doing external growth off of, say, two years from now?

John Foy

Yes. I think, Ross, what’s attractive to us about these joint ventures as well is to make certain that our joint venture partner provides additional capital so that when the market turns and when we all feel that there are opportunities, then we would make acquisitions with our joint venture partner. So that’s one of the things that would keep us focused on that. We’d like to and we’ll continue to deleverage the company. The significant savings that we’ve done with regard to the dividend will help delever that as well. And the amount of mortgage that we amortize each year is a significant number as well. So just those things in and off themselves will help delever. And then the ability to attract and bring in a joint venture partner that not only will delever our company but provide additional capital and sources to make acquisitions and grow the company is important to us as well.

Ross – UBS

And then, Stephen, what do you think the likelihood of probability is that rents across the mall industry would go down further from here or do you believe that we’ve already seen it, it’s already bottomed? I mean, how do we get a sense of who’s got the leverage at this point?

Stephen Lebovitz

Well, that’s a tough question. And I mean, we’re trying to get them back into the positive territory as quickly as possible. But ultimately it’s a function of sales, and so the fact that sales are starting to level off, which is what we’ve seen in September and then what the article today in a journal, talking about October, that says sales trends are encouraging. And so I think what will happen is that the retailers will be less focused on their expenses and driving down their cost and more focused on growing their revenues. So hopefully the worse is behind us. We are probably looking at something going into next year just because there is a lag when sales go through the expirations. So we are not necessarily planning for rents to go up next year, but we hope they will level off and we definitely hope things get better faster, which seems to be happening versus what everyone thought earlier in the year.

Ross – UBS

Thanks.

Operator

Thank you. And our next question comes from the line of Quentin Velleley with Citigroup. Please go ahead.

Stephen Lebovitz

Hi, Quentin.

Quentin Velleley – Citigroup

Hi, good morning. I’m here with Michael Bilerman. Just turning back to the leasing spreads, and you’ve done about 125,000 set of boxes in the period. But if I look at the numbers for the quarter, the 1.34 million square feet, 550,000 for the shop space plus those boxes is a significant amount in between. Steve, do you have a number that shows the leasing spread for the total 1.34 million square feet for the quarter and the total 3.7 million for the year, because I’d expect it would actually be a bigger decline than what you’re showing for the shop space? Is that fair to say?

Stephen Lebovitz

No, there is – it's actually – I mean, first of all, we report 10,000 square feet or less and – but when you go into the 1.3 million square feet, you’ve got development projects in there; you’ve got a couple of anchor renewals, which are 200,000 square feet; you’ve got the boxes, which some of those are in there, which I talked about a few minutes ago. So I don’t think if you did it over the hall it would be any worse than what we’ve said or probably be better because of the anchor renewals are at fixed amounts, and those are increases of flat. And the boxes – like I said, I mean, for all of the ones we’ve done, it’s a negative 9%. But when you factor in some of the deals that have been more recently, it’s probably more positive in terms of what would go into this quarter.

Quentin Velleley – Citigroup

Okay, great. And then you spoke about the shorter-term leasing that you’re doing. And I think you also mentioned that there is a lot more percentage rent deals going to those leases. What kind of an increasing size would you need for those percentage rent deals to kick in, because I assume you’re still charging a base rent, you’ve just got a half a portion of percentage rent. Can you just talk about the terms of those leases?

Stephen Lebovitz

Yes. Well, I’ll just give you an example, like on the two restaurants that I talked about, the really lousy deals that hurt our spreads, the percentage rent factor on that is 8.5%. Typically a restaurant deal is down at, say, 4% to 6%. And then the break point is artificially low, and it’s basically a little bit below the sales that were happening in the space before. And that’s what we’re trying to do is set the percentage rent break point to basically the level where the sales currently are so that when sales pick up, that we will be able to see percentage rent out of the box and also to get a higher rate than we would in a traditional lease negotiation that would have been done a couple of years ago.

Quentin Velleley – Citigroup

And so, of that shorter-term leasing that you’re doing, is majority of it on the percentage rent type of deals?

Stephen Lebovitz

No, no. We didn’t say that at all.

Quentin Velleley – Citigroup

Okay. And then just a last one, on the joint ventures, could you just give us a little bit of an understanding of what kind of terms you’re looking at, what kind of share of the joint ventures that you’d be looking at retaining? Is it 20% or are they going to be 50/50 joint ventures? And also some of the phase (inaudible) looking at?

John Foy

I think that they are pretty typical in the industry today. There is no management fees, leasing fees and the other fees that are normal in the market today. And as far as the ownership percentages, I think it depends upon the typical – the type of joint venture that somebody is interesting in. If they want a joint venture from the standpoint of the 1031 exchange, then that will be a different type of ownership. And so I think it depends upon the amount of debt on the asset as well that determines the ownership positions et cetera. And I think what everybody is basically interested in, at least the deal makers, are the basic economics of the transaction. And so we work to structure around so that it’s a win-win situation for both parties.

Michael Bilerman – Citigroup

John, it’s Michael Bilerman speaking. Good morning.

John Foy

Hi, Michael.

Michael Bilerman – Citigroup

Do you have – I mean, do you have active brokers marketing a package of malls for joint venture or is this all being sort of in-house and it’s more people calling you rather than you soliciting interests?

John Foy

Well, we have a group of people who have contacted us. We have some brokers who brought transactions to us. So I think it runs the gamut of various ways of approach us. And some of our banking relationships have resulted in people coming to us as well.

Michael Bilerman – Citigroup

And how should we think about what your desire – I mean, obviously pricing is going to be – not going to hold you to something. But just in terms of size, how should we think about how much you think you’re going to be able to pull out from an equity perspective out of assets? But also are we talking about $1 billion of joint ventures? Are we talking about $500 million or is it something much more?

John Foy

I think it depends upon the parties that are involved and the cost of capital, as we see the opportunities. How much money did they want to invest? What did they want to do on a going forward basis? And as we’ve said, we don’t have to do it. The balance sheet is in great shape. We saved $165 million or so with dividends and cuts that we’ve made. And we see that opportunity and we’re reviewing the ability to generate additional income from other sources as well. So we don’t feel any gun to our head to do the joint ventures.

And depending upon what we see in use of the capital in addition to deleveraging and the ability to grow the company is what would drive that, whether it’s a $2 million or $3 million joint venture that has some better results for us or whether it’s a $200 million or $300 million joint venture. It’s basically – the gamut is open and we are open to discussing with anybody what makes good economic sense for us as well as bringing a good partner into the transaction. So we don’t identify the amount of acquisitions. We did in the past, and we just don’t feel like it’s in our best interest to feel that we’ve got to push to do a joint venture that’s really no in the best interest of our equity partners. And we did the big equity raise. And as I’ve said a couple of times, significant savings basically has made our liquidity plans very, very good. And the banks understand the liquidity plans are very happy with those. And we’ve covered the ability to finance our debts going through 2011. So that’s the reason we don’t feel the obligation to do it, and that’s the reason we don’t put any dollar number out there.

Michael Bilerman – Citigroup

Right. John, do you still own the marketable security in another REIT?

John Foy

We own some marketable securities.

Michael Bilerman – Citigroup

Do you still own the same marketable securities that you had previously that you’ve taken the impairments on?

John Foy

We still own marketable securities, yes.

Michael Bilerman – Citigroup

Have you increased that balance or sold any of it down?

John Foy

I think we haven’t made any release on that, and we wouldn’t – till we basically did a disclosure on that, Michael, I don’t think we would say anything on that.

Michael Bilerman – Citigroup

I’m just curious, because from your lending relationships, they have obviously shown tremendous support for your company. You had the equity raise that you’ve talked about that the stake that you had is a little bit of a different situation. And I think through things from strategic standpoint, could you delever effectively by almost doing a stock-for-stock deal and you have your lenders step up, and it’s an opportunity for the company, or you sort of passed it and decided we don’t need the stake anymore?

John Foy

I think that we – everything is on the table in our organization. We look at every asset that we have on a quarterly basis or even often depending upon the situation. And marketable securities are no different than that. And various ideas and ideas and concepts we continue to explore to create opportunities to both deleverage the company as well as to grow the company.

Michael Bilerman – Citigroup

And how much marketable securities is on the balance sheet today?

John Foy

$4.2 million.

Michael Bilerman – Citigroup

Great. Thank you.

John Foy

Thanks, Michael.

Operator

Thank you. And our next question comes from the line of Michael Mueller with JP Morgan. Please go ahead.

Michael Mueller – JP Morgan

Hi, good morning. Most of the things have been answered at this point, but real quick. On the same-store – on the stabilized mall portfolio, you’re pretty much flat through the year. Occupancy is down 190 and the lease spreads are down double-digits in terms of what’s been reported. Can you walk through just kind of how the math gets there? And is part of it the lease signings are going to lag and hit the same-store plus the recoveries? Is that how the math ties together?

Stephen Lebovitz

It’s mostly the – we've used the expense savings to offset the top line decreases. I mean, we saw it coming last year, so we tried to get ahead of the rent decreases and started cutting expenses in the third quarter. And so we’ve been able to preserve our NOI, which has been our goal. And that’s going to continue to be the goal going forward as well.

Michael Mueller – JP Morgan

Okay. And for your stats, in terms of the lease spreads, that’s signings during the quarter, that’s not openings. Is that correct?

Stephen Lebovitz

That’s correct.

Michael Mueller – JP Morgan

And what’s the typical gap like on?

Stephen Lebovitz

It’s hard to say. I mean, for renewals, there is no lag time. For new leases, it’s probably on average 90 to 120 days.

Michael Mueller – JP Morgan

Okay. But if you sign a renewal, it doesn’t take effect today. It will typically take effect at the end of the prior term.

Stephen Lebovitz

Yes, that’s true. That’s true.

Michael Mueller – JP Morgan

Okay. And Steve, I think your comment earlier was year-end occupancy down about 200 basis points. Was that for portfolio, the whole mall portfolio, the stabilized mall portfolio? What were you referring to with that?

Stephen Lebovitz

I’m sorry. Both the stabilized malls and the overall portfolio. So we are expecting that with the boxes opening in the fourth quarter that we will bring the overall up to the 200 basis points versus where it was this quarter. So that’s where most of the progress is going to be made in the fourth quarter.

Michael Mueller – JP Morgan

Okay. And then last question, John, I understand the comments you were talking about, about the asset sales and joint ventures. But maybe just think about this from a different angle. I mean, when you think of leverage, I mean, what stats do you look at to gauge your leverage? Do you look at fixed charge; do you look at debt-to-EBITDA? How do see those today? And granted, you can take a longer-term approach, where would you like to see them a couple of years from now?

John Foy

I think you’ve hit the nail on the head with regard to the coverage ratios. They are the important things to our banks. They are important to us as well, because we think that that generates the cash flow. I think the other thing that we look at also, which is very important to us, is recourse for us is non-recourse mortgages so that if assets basically have some troubles, you're not in a situation where you can’t give those assets back. So I think we look at the coverage ratios, and those are pretty good today. We’d like to continue to see those improvements. They basically have been flat from last year to this year. And historically, they have been in the same levels.

Michael Mueller – JP Morgan

Okay. Okay, thank you.

John Foy

Thanks, Michael.

Operator

Thank you. And our next question comes from the line of David Fick with Stifel Nicolaus. Please go ahead.

John Foy

Hey, David.

David Fick – Stifel Nicolaus

Good morning. I’d like to circle back on the TI question that Stephen addressed in your commentary and understand the distinction that you are making. But I’m wondering can you just tell us how the TIs per square foot per lease year are comparing to what you’ve done in prior years?

Stephen Lebovitz

Yes. They are actually down this year compared to the prior year on a per square foot basis. It’s roughly, say, 10% down.

David Fick – Stifel Nicolaus

And that accounts for the shorter lease terms?

Stephen Lebovitz

That’s for – the lease is signed this year, in the nine months compared to all of them, compared to at least this time last year.

David Fick – Stifel Nicolaus

But the distinction I’m trying to make is that if you are doing shorter\-term leasing, which you’ve indicated, you would expect obviously TIs to be down. I’m just wondering if it’s down a proportion to the shorter-term lease.

John Foy

No, it is not, David. The term of the lease basically, we want to make certain that we are going to get the right returns on any kind of allowance we give to those tenants over and above that. So it’s not because of the term of the lease or whatever. It’s basically to a certain extent a result of the fact that some of these tenants we’ve been able to negotiate better deals with and lower tenant allowances. And then the other thing I think you are seeing somewhat, not a huge number, but it has some impact is cost of construction has basically gotten better and you’re seeing some lower cost numbers in that respect; not a huge number, but that in turn impacts it somewhat.

David Fick – Stifel Nicolaus

Okay. And John, you mentioned the dividend savings as being a source of capital. Can you just walk us through what your TI – the taxable income situation is as far as you know today and what your visibility might be on 2010 dividend level?

John Foy

Yes. I think, David, we do those projections. We present them to the Board, and I think with regard to this year, our projections are pretty well holding true as to what we thought those would be. And we do those on a quarterly basis and those we’re doing and we’ll announce those I think at the end of the fourth quarter when we do our earnings announcement or dividend – I'm sorry, dividend declaration.

David Fick – Stifel Nicolaus

Okay. And then lastly, could you update us on the status of the West Field put [ph]?

John Foy

Yes. There is basically – those assets continue to perform well. The appraisals that we’re required to do under those assets have come in well. And we’ve met those obligations, and the put is – there is really no put is, is that we have the right to call those assets that after a period of time that the costs – that the return goes up from 5% to 9%. But basically because of tax reasons et cetera, there is really no put.

David Fick – Stifel Nicolaus

Okay, great. Thank you.

John Foy

Thanks, David.

Operator

Thank you. And our next question comes from the line of Rich Moore with RBC Capital Markets. Please go ahead.

John Foy

Hi, Rich.

Rich Moore – RBC Capital Markets

Hello, John. Good morning, guys. A question for you on loan to values, John. Where are those at, or what are you hearing from lenders as you look at these mortgages that you have coming due with regard to LTVs? And also in the same vein, with regard to potential recourse that you may not had to have before?

John Foy

We’ve seen – probably the highest leverage we are seeing is probably 65%. More realistically, it’s probably in the 60% range. And it does have some impact upon your pricing, but not much if you go down to 50%. And as far as recourse, we are not seeing anything, any change in the position of the institutions when it comes to recourse.

Rich Moore – RBC Capital Markets

Okay, very good. Thank you. And then for a number of years, you guys were hit a lot by people that maybe there were something in the makeup of middle markets that made retailers not as attracted to those, and I think that was really shown to not be true for the most part. But I’m wondering in this environment, in this tough economic environment, what is the attitude that retailers have toward the middle markets? Do you sense that it’s still unwavering in essence or is it more difficult?

John Foy

I think that the retailers have become even more realistic with regard to the middle markets from a distribution that channel for them is that we point out that one specific retailer said to us, we felt years ago that we had to be in every region mall in Atlanta, Georgia. We are a brand unto ourselves. And ladies will come to our stores if we basically put those stores in a good relative position to where they are. We don’t need to be in eight or ten regional malls in Atlanta. We can be in four malls. But we do need to cover and have a distribution network in Chattanooga, Tennessee, where our mall is the dominant mall. And therefore what we will do is, is if we need to close stores in Atlanta, we will close stores there and basically keep our distribution network going across.

And then in addition to that, I think the economies in the market areas where we are, state capitals, university towns, granted universities are having tough times as well, we are still seeing good opportunities in those market areas. Chattanooga, we're opening – the Volkswagen plant will open, I think, in the latter part of 2010 and it’s incredible the amount of new industry that’s coming in around Chattanooga to the tune of almost $2.5 billion. And so university towns continue to do research projects and Madison, Wisconsin in an incredible market area with what’s going on there. So the middle markets are unquestionably the place to be in our opinion if we own the dominant asset, and we do that in almost every market area where we are. So thanks for the question.

Rich Moore – RBC Capital Markets

Your sense, John, is that the commitment by the retailers of those markets is as strong as your commitment – as strong as you think they should be committed to it?

John Foy

Yes.

Rich Moore – RBC Capital Markets

Yes, okay. And then a couple of smaller questions, guys. Other expenses were up. That line item was up. Anything special going on in there?

John Foy

We wrote off some abandoned projects this quarter that we’re still continuing to pursue, but at this stage we didn’t have enough interest in those to continue to –continue the investment in those. Although we’ve had a lot of the people who we basically have terminated adoptions with and said we are stopping spending any money on the projects have basically said to us they would like us to continue to explore those as well.

Rich Moore – RBC Capital Markets

Okay. So that was probably a couple million dollars, I’m guessing, John, somewhere in that range?

John Foy

It was $1.2 million.

Rich Moore – RBC Capital Markets

$1.2 million. Great, thanks. And then G&A for the quarter was lighter, and that’s kind of a seasonal thing I know typically. But, anything else besides seasonality in that?

John Foy

No, that was about it.

Rich Moore – RBC Capital Markets

Okay. Very good. Thank you, guys.

John Foy

Thanks, Rich.

Operator

Thank you. And our next question comes from the line of Stuart Seeley with Morgan Stanley. Please go ahead.

Stuart Seeley – Morgan Stanley

Good morning. Thanks for taking the question. Back to the issue of potential JV and JV sales, it sounds like the way you are thinking about it is there is basically two buckets of investors out there. The first bucket are logical, clear thinkers, pragmatic investors, and then there is hedge funds. And I suppose there is a lot of folks who would agree with that fundamental bifurcation. But as you discuss the headline terms such as cap rate and price, how much of the discussions are also being dominated by things like the JV partner wanting protection on the downside with a preferred return or super charging their upside with warrants? And would CBL only consider a pari passu straight up JV? And if you do only consider a pari passu JV, do you take a lot of the potential money that is on the sideline essentially? Are they essentially not interested in pursuing the JV on your malls?

John Foy

I don’t think we would close the door on any joint ventures if it made economic sense. So whether it’s pari passu or with some type of reasonable preference, that – what in turn there always has to be give and take, and so I think it would all depend upon that as to what we did in that situation. So I don’t think we close the door on any joint venture if it was in reason. As far as the two types of joint ventures out there, I can’t comment on that. Stuart?

Operator

We have lost – Stuart has disconnected. At this time, I show no further question in queue. I’ll turn back over to management for closing comments.

Stephen Lebovitz

Again, we’d just like to thank everyone for tuning in this morning and for taking the time. And we look forward to seeing everyone at NAREIT next week. Thank you.

Operator

Thank you. Ladies and gentlemen, that concludes today’s conference call. Thank you for your participation and for using AT&T conferencing. You may now disconnect.

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Source: CBL & Associates Properties, Inc. Q3 2009 Earnings Call Transcript
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