Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

CBL & Associates Properties Inc. (NYSE:CBL)

Q1 2010 Earnings Call

April 28, 2010; 11:00 am ET

Executives

Stephen Lebovitz - President and CEO

Katie Reinsmidt - VP of Corporate Communications and IR

John Foy - VC, CFO, Treasurer and Secretary

Analysts

Todd Thomas - KeyBanc Capital Markets

Michael Mueller - JPMorgan

Nathan Isbee - Stifel Nicolaus

Ben Yang - Keefe, Buyette & Woods

Carol Kemple - Hilliard Lyons

Craig Schmidt - Banc of America/Merrill Lynch

Rich Moore - RBC Capital Markets

Cedrik Lachance - Green Street Advisors

Christy McElroy - UBS

Quentin Velleley - Citi

Operator

Welcome to the CBL & Associates Properties Incorporated First Quarter Earnings Conference Call. During the presentation all participants will be in the listen-only mode and afterwards we will conduct the question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded, Thursday, April 28, 2010. I would now like to turn the conference over to Stephen Lebovitz, President and Chief Executive Officer, please go ahead, Mr. Lebovitz.

Stephen Lebovitz

Thank you, good morning, we appreciate your participation in the CBL & Associates Properties Inc. Conference Call to discuss first quarter results. Joining me today is John Foy, CBL’s Chief Financial Officer; and Katie Reinsmidt Vice President of Corporate Communications 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 amount are based upon a fully diluted converted share basis. A transcript of today’s comments, the earnings release and additional supplemental schedule will be furnished to the SEC on Form 8-K and will be available on our website. This call will also be 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 a comparable GAAP financial measure will be included in the earnings release that is furnished on Form 8-K.

Stephen Lebovitz

Thank you, Katie. Over the past year, one of our strategy parties has been to stabilize our NOI results in the phase of unprecedented challenges in the economy. While we would like to see our NOI grow, we are please with the 1% decrease in same-center NOI compared to first quarter last year. The commitment of the CBL team and the strength of our relationship with retailers and our financial partners has been an important contributor to this result. During the first quarter we worked to reinforce these relationships, by visiting face-to-face, with quite a few of our major retail partners. Consistent with the number of recent new stories, the retailers indicated that they are feeling better about their business and are more confident that the economy is moving in the right direction.

Similar to the results in our portfolio retailers have generated significant sales increases in 2010 year-to-date which is encouraging. The important news that they made last year to reduce cost and increase margins, along with their recent sales increases have produced better profitability and increased liquidity. As a result, retailers have openly discussed investing in existing stores and reinstating or increasing their new store expansion plans. All of these bode well for CBL and our future league negotiations as well as our ability to stabilize and grow NOI at our properties. While we are encouraged by these improvements, one quarter of positive sales results was not enough to significantly improve our leasing spread results. These spreads, representing comparable leases signed in the quarter are the result of negotiations that started months ahead of this timing. Retailers will need to see evidence of the sustained positive trending sales before our negotiating position becomes more favorable. We are hopeful that the positive sales trends will continue and lease spreads will start to improve throughout the year.

During the first quarter, we signed more than 1.1 million square feet of leases, including 942,000 square feet of leases in our operating portfolio and 197,000 square feet of development leases. The leases signed in our operating portfolio included 402,000 square feet of new leases and 540,000 square feet of renewals. Total leasing activity and operating portfolio was down slightly from the 1.2 million square feet signed in the prior year quarter, primarily due to anchor renewals last year. However, we are pleased to complete roughly 30% more leasing in the mall portfolio year-over-year. Compared with the prior quarter spread are trending in the right direction, an average spread on leases signed with the term greater than five years were positive.

For the first quarter, on a same space basis, renewal rates were signed in an average decrease of 10.4% from the prior gross rent per square feet. Several retailers have indicated, they plan to renovate their stores and signed longer terms of renewals, which should positively impact our leasing results. We believe this will continue throughout the year as the economy recovers. We will also be looking to improve shorter term deals that we have signed over the last 12 months. One of the contributors to our NOI results this quarter, was our ability to increase the occupancy in the portfolio.

Stabilized mall occupancy increased 60 basis points to 89.7% compared with the prior year. Total portfolio occupancy increased 20 basis points from the prior year to 88.8%. We are maintaining our forecast to achieve roughly 100 basis point increase in total portfolio occupancy by year end compared with 90.4% at the end of 2009. It has been encouraging to see retail sales year to date today which positively impacts our cost of occupancy, allowing retailers and our mall to be more profitable.

Same store sales in the first quarter portfolio increased 4.7% from the prior year period. For the rolling 12 month ended March 31, 2010, same store sales were down 3.1% to $316 per square feet. Sales in March were outstanding, partly due the shift in timing of the Easter holiday. Traffic in the malls is up, an indication so far for April are positive as well. This quarterly experience limited bankruptcy activity which is the couple of small retailer filings. Retailers’ balance sheet are now stronger than at any point in recent years. We are optimistic that this year will result in few bankruptcies and short causes compared with the average for the past three years.

Even though we have scaled back our development program the 2.5 million square feet of new projects open in 2009 and this year are contributing positively to our FFO results. On March 10 we celebrated the grand opening of the Pavilion at Port Orange. Our [open air] located near Daytona Beach, Florida. The 415,000 square feet [first days], opened with a least or committed rate of more than 92%, with Anchors including Belk, Hollywood Theaters, Homegoods, Marshals, Michaels, PETCO and ULTA. The center has been extremely well received with retailer sales well above plan.

In March, we started construction on the first stage of its 75/25 joint venture center project in Madison, Mississippi. We converted our ground lease position into a 75% ownership position in the development. The anchor stores were very bizarre of seeing a project move forward, given the strong results of our recent new development in the [indiscernible] Mississippi as well as the strong retail demand in the Madison, Mississippi area. The first phase of this project is a 110,000 square feet comprised of three boxes, the exporting goods best buy in Stein Mart. The project is 100% leased and will open in the fourth quarter 2010.

We are focusing our development and re-development efforts, primarily on opportunities within our existing portfolio. We have a number of Phase II projects with centers we have opened over the last two years that provide opportunities of future growth. With the anchors and box retailers beginning to open up their expansion plans, we are seeing strong interest in these future projects. We are also making good progress in releasing our inventory of vacant boxes and have now leased or committed 50% of the boxes vacated in the past three years with no users.

I’ll now turn it over to John for the financial review.

John Foy

Thank you, Stephen. During the first quarter, we raised more than $127 million in a follow on offering of our existing Series D Preferred Stock. With price the offering at 9.08% including accrued dividends of $20.30 per share. Net offering proceeds were used to reduced outstanding balances on our lines of credit. The equity raise and cost containment measures that we have earn to taken over the last year, resulted in a decline in our overall debt levels by more than $600 million or 9% of our total debt as compared with a year ago.

We made excellent progress during the quarter, refinancing our upcoming mortgage maturities. We refinanced our loans secured by St. Clair Square Mall outside the (inaudible) Fairview Heights, Illinois. The lowest place with the new lender and achieved excess proceeds of approximately $14 million after the payoff of the existing $58 million mortgage. The new $72 million non-recourse five-year loan bares interested at a floating rate of 400 basis points over LIBOR.

Concurrent with the closing, we entered into a two-year LIBOR Cap with the strike rate of 3%, effectively capping the interest rate at 7%. Year-to-date, we’ve paid off two separate CMBS loans totaling approximately $47.9 million secured by Park Plaza Mall in Little Rock, Arkansas and WestGate Crossing, in Spartanburg, South Carolina. We then pledge these assets to our $560 million credit facility. We are encouraged by the improvements in the capital markets. We are actively making progress to refinance our remaining mortgage maturities this year and are experiencing increased demand from lending institutions including interest and the reemerging CMBS markets.

Interest rates remain attractive in the 6% to 7% range. We have term sheet or commitments on the remaining loan maturities for this year and anticipate closing those loans on or before the maturity day. As of March 31, 2010, we had more than $540 million of [re-ability] on our lines of credit, our financial covenants remained sound with the debt of GAB ratio to March 31, 2010, a 54% and an interest coverage ratio of 2.3 times for the rolling 12 months. As Steven said, during the quarter, total same center analyzed for the portfolio excluding lease termination fees, declined 1% from the prior year.

NOI during the quarter continued to benefit from the incremental improvements in the cost containment program that we implemented in late 2008 and 2009. We are still experiencing success in controlling cost, however, most of the measures were in place at the end of 2008 or early 2009. So we anticipate the incremental benefit to moderate throughout the year. NOI will experience pressure from the decline of [rents] on lease assigned over the last year. We’re seeing some improvements in leasing spreads and continue to aggressively pursue occupancy. These steps have allowed us to compensate for anticipated declines and top line revenue. We are optimistic that as traffic and sales continue to increase throughout the year, we will experience growth in specialty leasing sponsorship and percentage rent.

In the first quarter of 2010, we achieved FFO of $0.49 per share, compared with $0.76 per share in the prior year period. FFO and the current quarter was diluted by $0.31 per share as a result of the $66.6 million common shares issued in June 2009, offering, and the common shares and units issued as a part of the April, 2009 dividend.

One-time items impacted FFO when the prior year quarter, included impairment charge related to the company’s investment in China, of $7.7 million. Other major variances in this quarter results included bad debt expense in the first quarter of 2010 of approximately 1.5 million compared with $2.1 million for the prior year period.

Our cost recovery ratio for the first quarter was 99.7% compared with 96.8% in the prior year period. The cost recovery ratio in the current quarter was impacted by $900,000 of higher snow removal expense. Favorable rate debt was 18.9% of total market capitalization at March 31, 2010 versus 23.3% at the end of the prior year period. As of March 31, 2010, variable rate debt represented 28.4% of our share of consolidated and unconsolidated debt, compared with 25.3% at the close of the prior year quarter.

We have interest rate caps of 16.3% of our preferable rate debt, limiting our interest rate exposure. We are maintaining our 2010 FFO guidance per share in the range of $1.82 to $1.90. Major assumptions in our guidance include our personal sales at # million to $5 million. And Think Center growth does a negative to a negative 3.4%.

As we said recently, our ongoing objective is to continue to strengthen our balance sheet including reducing leverage levels. We were pleased to complete the $127 million preferred offering during the quarter and continued to prudently evaluate all of the various resources of capital that is available. We remain in discussions with possible joint venture partners. However, we are very selective on the structure and the properties that we would include and believe it is important to maintain our long-term outlook and operating philosophy.

We appreciate you joining us today and look forward to visiting with many of you with the ICSC RECon Convention next month in Las Vegas, and at the NAREIT Convention in Chicago in early June. We would now be happy to answer any questions you may have.

Question-and-answer-session

Operator

(Operators Instructions). And our first question comes from the line of Todd Thomas with KeyBanc Capital Markets.

Todd Thomas - KeyBanc Capital Markets

As you look through your portfolio and you look at the properties that you may sell or contribute to joint ventures and so forth, how are you evaluating those properties? Can you walk us through your decision process?

Stephen Lebovitz

Yes, we’re looking at various joint venture partners out there who we’re having discussions with. Some of them are driven by the desire to have a significant, current pay, others are driven by other items and so on. So I think it depends upon the partner and what the direction is and what's their desire to achieve. So there's some people who are just looking for trophy properties and some who are looking for dividend yield, so that is a lot of what it depends upon.

Todd Thomas - KeyBanc Capital Markets

What is your preference right now, given the environment and the demand that you're seeing from those partners that are interested?

Stephen Lebovitz

I think our desire is to really get a sound financial partner who is willing to move forward and pursue acquisitions with us that provides a capital force and some acquisitions going forward and one who’s patient and basically looking at that, the long-term growth of those properties as well. So I think that there’s a balancing act and I think we can pursue both avenues and I think it will prove beneficial to our partners. We don’t want to get into a box where we are given up interest in properties without the necessary controls and the growth for our shareholders who’ve been with us for so long.

Todd Thomas - KeyBanc Capital Markets

Moving over to leasing, as you indicated in your remarks, retailers, their profitability seems to be improving and expansion plans are being discussed again. At what point do you get a sense of comfort that you might start to see leasing spreads trend into positive territories? Is it 2010? Or is it probably a little later still?

Stephen Lebovitz

Even though our leasing spreads are still negative the trend was in the right direction for this quarter with the improvement. So it’s starting, but I think it’s going to be through this year. We are going to continue to see decreases just given the negotiations when they started and the fact that the sales increases are more recently. So hopefully we’re thinking next year it’ll definitely be a better environment. Also, the shorter term leases that we’ve done, thus give us the opportunity to come back quicker and work out longer term deals with retailers and we’ve heard from a lot of them that they want to lock in that they’re making money for stores.

So their passive stage of closing stores and now they want to lock in long-term this locations. So I think that’s going to help us as well. there’s no new developments happening. So as the retailers are looking to expand their short count we are definitely hearing more of that and that helps us in terms of retailers wanting to come to the mall. And yeah there’s some new concepts, Best Buy has Best Buy Mobile that they’re looking to roll out aggressively and we’ve been able to do a few of those and that’s encouraging. and then there’s other retailers that are looking at the mall as their expansion opportunity because there’s really nothing else out there in term of new development and some of the other competitive projects have been weakened by vacancies through big boxes and other types of thing that have happened over the past year and a half.

Todd Thomas - KeyBanc Capital Markets

So are new discussions that you're starting today, they're still indicating that we wouldn't see necessarily positive leasing spreads result if leases were executed, based on your discussions that you're starting today?

Stephen Lebovitz

It’s really hard to generalize and say across the Board, some of the conversations definitely involve better leasing spreads. Some of them just depending on how hard the hit was to their sales over the past 18 months. It’s tougher to get a positive lease spread. We look at the occupancy cost as a percent of sales and we’ve got a long-term focus, our priority has been to hold up occupancy and hold up in NOI and so everything plays into the discussion in these lease negotiations.

Todd Thomas - KeyBanc Capital Markets

Sears, they recently set up an online database. They're leasing spaces within their stores. They're selling excess land and chopping their real estate portfolio. I was just wondering what kind of impact, if any, could that have on your portfolio? And have you been in discussions with them at all?

Stephen Lebovitz

We talk to Sears all the time, we’re up there just last week working on a lot of different situations where we have various redevelopments going on at projects and we’ve been working with them for a number of years as far as finding ways for us and for them to take advantage of opportunities in parking lots or excess land. So that we don’t really consider anything new.

As far as them subleasing parts of their store, we’ll love to see how that goes, but that’s kind of a trend as far as what they’ve done in terms of buying some other retailers and putting them in their stores. It’s a complement (inaudible), I think the type of retailers are going to sublease store space in the Sear store aren’t going to be the same retailers that are going to be out in the mall.

They are going to want to be complementary of what’s in the Sear store. So that now, we view that as a positive and also anything that can come into the Sear stores and add more business bring in a new look, we view as the positive because they haven’t really invested in their stores for a number of years. So anything that can create a more dynamic and successful Sears change is a positive from our point of view.

Operator

And our next question comes from the line of Michael Mueller with JPMorgan.

Michael Mueller - JPMorgan

What was the offset because I'm assuming the preferred issuance wasn't in prior guidance? So number one, what was the offset that kept guidance where it is? And then secondly, for the occupancy pickup within the mall space, can you talk about how much of that 60-basis point increase was influenced by more of the box tenants that made their way into the malls as opposed to small shops?

John Foy

With regard to the first question is we used that pay down debt, so the interest on that or will have a negative impact. It should basically be even where interest rates are under our debt today and what that dividend is on the preferred.

Stephen Lebovitz

Mostly it was small shops in the malls actually. The occupancy for the associated tenants was up about 50 basis points, so that’s a positive but in the malls we made good progress and that’s not boxes into reporting the space is less than 20,000 square feet in occupancy.

So that was really progress we have made in new leasing trying to increase occupancy to offset some of the negatively spreads that we have had over the past year.

Michael Mueller - JPMorgan

John, on your comments about the potential joint venture, conversations that you're having with folks, I mean is this something you envision where on day one you contribute assets. So it's effectively an asset sale at dispositions? But you also mentioned you want a joint venture partner who can grow. So can you just walk us through how we should think of the JV? Is it more de-leveraging, defensive? Or is it set up really to kind of help you acquire?

John Foy

I think it's both points. Number one is that any joint venture partner that we deal with is whether it's 50-50, 75-25 or 49-51, they will infuse cash into the company and likewise take on a portion of the debt for those specific assets so that in and off itself will help de-lever the company, number one. Number two is we likewise think that the opportunities are going to be pretty good out there once GGP sorts out, that’s really what slowed down, I think our movement to a certain extent and a movement by a lot of joint venture partners who we have talked to is basically going to see what happens with GGP.

Under either scenario we think that there's great opportunities for us because we think that they will basically dispose some of those assets and some of those are in market areas that would basically be good for us or the size of those malls will be extremely good for us. So I think that’s when we see having a partner who has a pocket of money that we can use to make those acquisitions and show that those assets can grow and we have had a really good track record of doing a good job in these middle markets and I think that’s where the opportunities are going to be for somebody’s acquisitions not only in GGP but others who have already talked to us about major portfolios that they see that we can add value to it.

Michael Mueller - JPMorgan

If you consummate a JV, cash comes in, leverage dips initially, how do you envision pursuing the acquisitions and keeping leverage at that lower level then? Or does it just implicitly kind of move back up a little bit?

John Foy

No I think it would come down somewhat also because the acquisitions would probably be disproportionate. They would probably infuse more cash than we would, so that there would be a disproportionate amount. And then there are other ways to de-lever the portfolio from the standpoint of swapping additional assets into the joint venture. We can also issue units in conjunction with those acquisitions because I think some of these transactions are very tax driven and over the years we have really developed an expertise in handling these types of situations for people who have tax problems, whether they are a foreign entity or whether they are domestic with a low tax basis, so I think that bodes well for us as well.

Operator

And our next question comes from the line of Nathan Isbee with Stifel Nicolaus

Nathan Isbee - Stifel Nicolaus

Just going back to the occupancy numbers, how much of the occupancy gains was organic in the same-store pool versus moving any to spaces un-stabilized, which actually dipped year-over-year?

Stephen Lebovitz

Well, the un-stabilized only has two properties, so that gets distorted by workers in there and what happened there is at Alamance Crossing we opened a freestanding building, that it opened 50% even though there is more leases committed. It’s just from a timing point of view. So that brought down the occupancy of the un-stabilized and then on the other pools, it's pretty consistent as far as the property is being the same in the comparing periods. So there's nothing in there that would really cause any type of distortion, the community center is where some of the new projects came in that we just opened and we don’t do unstabilized community centers. So like, if Settler's Ridge came into the community centers and even that was 90% committed in terms of what opened in the first quarter. It was more like 80%, so we have got stores opening, Barnes & Noble is opening and then in next week at Settler's Ridge we've got some other shops opening. We’ve got really good lease activity, but just the timing impacts that. Similarly Hammock Landing in West Melbourne is 90% leased, but it was only 72% open at the end of the quarter.

Nathan Isbee - Stifel Nicolaus

And just on the same-store NOI guidance, you did negative one during the first quarter. Can you just talk about the rest of the year where you see some of the weakness that you're assuming that you're going to slip down through the course of the year?

John Foy

Yes, I think what we are seeing late is, the implementation of the cost savings, we instigated that. And so as the year goes on, those cost saving will be, it's comparing against the cost savings in the prior year and then the leasing spreads from last year will basically impact this as well. So that’s why we are cautious with regard to our forecast and our guidance with regard to NOI growth.

Operator

And our next question comes from the line of Ben Yang with Keefe, Buyette & Woods

Ben Yang - Keefe, Buyette & Woods

Going back to the potential asset sales, there have been some reports in the media recently that suggest you're trying to sell Oak Hollow Mall, and yet you made no comment regarding this property and didn't take any type of write-off for the quarter given that you carry it for more than the potential selling price of $15 million? Can you talk about your plans for this mall? And I'm also curious how often you look for potential impairments in your portfolio? Is that done quarterly or more of an annual exercise?

John Foy

Yeah what we do is impairments are looked at quarterly and they are also looked at by our outside auditors as well, so we do that. With regard to the Oak Hollow Mall, this is a mall about a year and a half or a year or so ago we basically had negotiations with the bank who had the non-recourse construction loan on that particular property and basically said to them that we wanted to give the asset back to them and they basically said that they would do a cash mortgage and take the cash flow on that. Since that time that bank who had that loan has been taken over and the new bank that's taken them over has basically said cut the amount of their mortgage back by $50 million that was listed in the price.

The reason why there is no impairment is because the mortgage amount is higher than the carrying value on our GAAP basis so technically for GAAP purposes, it would be a gain as such or be close to a breakeven, so that’s the reason why there is no impairment there.

Ben Yang - Keefe, Buyette & Woods

And do you have any other properties that are kind of in similar situations as Oak Hollow?

John Foy

No, none that are in place today

Ben Yang - Keefe, Buyette & Woods

Looking at Pavilion at Port Orange, which you recently opened, did the yield on that really fall by 50 basis points, taking the current supplemental at 7.3 and the last supplemental at 7.8? I'm curious, what happened there?

Stephen Lebovitz

Yeah we trued up just the performance where the actual rents came in and then we lowered the projected rents for the remaining space that’s coming online and that will be opening and just to clarify though that’s the phase one. We have a Phase 1A and a Phase 2. So what we are hoping to do is when you bind them altogether to bring that back up in the combined yield, will be a lot more favorable once the additional phases come online

Ben Yang - Keefe, Buyette & Woods

And is it too early to say what those future yields would look like for the latter phases?

Stephen Lebovitz

Yeah, it’s a little too early I mean we have got some tenant interest that we are working on, that’s encouraging, but it's still a little preliminary to talk about where the numbers would be.

Ben Yang - Keefe, Buyette & Woods

Finally, on the new developments that you started in Madison, what do the future phases look like in terms of the investment that you make and maybe the timing of those future openings?

Stephen Lebovitz

The rest of the project is basically a number of junior boxes and small shop leasing. So it's not, it's more many anchors on the project and the timing is such that we need to get our pre-leasing threshold before we start, but the total project is of that 244,000 square feet. so the second phase will be 134,000 square feet and our blended return on our pro forma now is a 10% yield so the second phase is a lot more favorable because we put other land cost in the first phase.

Operator

(Operator Instructions) And our next question comes from the line of Carol Kemple with Hilliard Lyons

Carol Kemple - Hilliard Lyons

At the end of the first quarter, what percent of your portfolio was actually leased?

Stephen Lebovitz

We just report the occupancy that was in the supplemental, I am not sure we understand the question.

Carol Kemple - Hilliard Lyons

I'm sure the way you've talked about a lot of the new developments, there's a lot more leasing done than there is actual occupancy. So I was just wanting to see what the difference between occupancy and leased space was.

Stephen Lebovitz

We are not predicting, we are forecasting that at the end of this year we will pick-up 100 basis points in leasing over where we were at the end of last year, so that will bring the portfolio occupancy to 91.4% so that incorporates really what's been leased but what isn’t open yet.

Carol Kemple - Hilliard Lyons

Do you all have any updates on the properties that you took impairment charges on in the fourth quarter? Any potential uses for those besides retail?

John Foy

We continue to look at those. We are still having conversations with other users for those specific properties. Like on Hickory Hollow, we're still continuing to have discussions with the parties to basically change the total overall complex into more of a multi-use project. That was going along pretty good, but it will be very slow in achieving that. And the other Pemberton we have new site plans and discussions with tenants for that in town and likewise. So there is nothing immediate on the radar screen on those but we are making progress, even though it's slow.

Operator

And our next question comes from the line of Craig Schmidt with Banc of America/Merrill Lynch

Craig Schmidt - Banc of America/Merrill Lynch

When I look at the 10-K from '08 and the 10-K for '09 in terms of lease expirations, your next three years sort of jumps up. I'm assuming some of that is your short-term leasing?

Stephen Lebovitz

That’s correct

Craig Schmidt - Banc of America/Merrill Lynch

And when you signed, let's say a guy signs a one, two or three-year lease and he renews, he would show up in your renewal statistics?

Stephen Lebovitz

Yes.

Craig Schmidt - Banc of America/Merrill Lynch

So are you expecting to get bigger increases from those short-term leases or from pure renewals from people with more regular lease terms?

Stephen Lebovitz

There was a plan with the short-term leases as why to keep the tenants in place until they are ready to commit long term and at the time that they commit long term that they would invest in the store and do the renovation and we would get a better economic deal because of the long-term commitment. And also with sales going up now, that helps to negotiating dynamic because it lowers the occupancy costs and I mean ultimately that’s how most of these leases get negotiated is based on the cost of occupancy.

So the other thing we did is when we would -- when we lowered the rent on renewal, we would adjust the percentage rent breakpoint so again the sales pick up or we are seeing some percentage rent hopefully and that goes into the new negotiation as well.

Craig Schmidt - Banc of America/Merrill Lynch

Are you starting to see some of those leases come back and are in negotiation now? The shorter term leases?

Stephen Lebovitz

Yes, some of them, although what we have tried to do is get two-year commitment as much as we can just because one year goes very quickly. So right now it’s a lot smaller percentage. We will start seeing more of those later this year and going into next year.

Craig Schmidt - Banc of America/Merrill Lynch

Would you need to ramp up any personnel in leasing if the activity would necessarily accelerate with some of those shorter term leases?

Stephen Lebovitz

No, we are right sized in terms of leasing staff and we have got good coverage and also our philosophy towards leasing is not just to have the leasing agents working on leasing. We have the mall staffs are involved in leasing in a lot of respects. We are working to convert specialty or temporary tenants to permanent leasing, so assistant mall managers who take the lead with specialty leasing are involved in that. So, it’s not just the people in the leasing division that are doing leasing. It's a company wide effort and we’ve got very good coverage in terms of being prepared to handle that.

Operator

And our next question comes from the line of Rich Moore with RBC Capital Markets.

Rich Moore - RBC Capital Markets

You mentioned General Growth. Are you negotiating at all with General Growth, Simon or BAM? Or are you just sort of hanging around the edges, so to speak, and seeing what kind of develops?

John Foy

I think we are hanging around the edges and we have conversations with all the parties that are involved. So I think that we are well positioned in that transaction, so we don’t have any direct negotiations with GDP.

Rich Moore - RBC Capital Markets

Okay, great. Thanks John. And then, on the bankruptcy front, Stephen, how would you characterize that? I mean, it seems to be obviously much better. But from a historical standpoint, how do you see retailer bankruptcies at this point?

Stephen Lebovitz

It's dramatically better this year, we have had less than 10 stores close, seven stores close and gross rents of under $1 million. I mean we have our fingers crossed, that it will stay like this and there is still retailers that we watch closely in terms of their financial situation, but Zales, who's been on everyone’s watch list had a recent investment by a private equity firm which was encouraging and some other companies seem to have made it through the worst and made changes to turn things around. So, where we are really encouraged by just a whole bankruptcy forecast out there.

Rich Moore - RBC Capital Markets

Okay, so for the rest of 2010, it will probably stay fairly light, it sounds like. Or you hope it'll stay fairly light, it sounds like.

Stephen Lebovitz

Yes, that’s correct and when you look at the financial results that have come out from retailers, and they have been generating a lot of cash for the most part, their balance sheet certainly in good shape and so we are feeling good definitely through this year and the economy continues to improve that will carry into next year.

Rich Moore - RBC Capital Markets

And then, on the base rents, the average base rents that sell in the stabilized mall portfolio, that's shorter term leases being averaged into the numbers. Is that right?

Stephen Lebovitz

Yes, that’s right Rich. It’s for shorter term leases and the lease spreads that for the leases that are actually in place that have now begin to take that number slightly.

Rich Moore - RBC Capital Markets

As far as future redevelopments or development, is there anything -- obviously, you announced that you have one -- but are there any others? I mean, is this the right environment, you think, to begin looking at new projects, be they either expansions, redevelopments or ground-up type things?

Stephen Lebovitz

It's our lead to look at ground up, there are some supermarket anchor projects that we’ve looked at because there seems to be some opportunity there but the economics have to make sense, the leasing has to be there and we are really cautious. The focus is on some of the phase-II, the projects we open in the past couple of years where we have got good box demand and so that will be the first ground up development that we’ll be doing and then also the redevelopment at the malls where we are seeing a lot of box activity, boxes interested in coming to malls and in the past we have done a number of Dick's Sporting Goods and Barnes & Nobles and some redevelopments of department stores where we added Target or Kohl's or Costco or people like that and now there is even more boxes because there is no new development that are coming in some of the pet stores are looking at the malls on that mall entrances. And ULTA Cosmetics, which has had great results, is looking at a number of locations with us. So that’s an opportunity for us as well.

Richard Moore - RBC

If you guys do some acquisitions, do you feel like you need to clear the lines of credit first before you start doing that? And if you do, what would your plan be for that?

John Foy

I think our lines of credit are extended out significantly, there is no requirements with regard to that. We've got excellent capacity with regard to both the lines and we also have excellent coverage ratios under all of our covenants. So we’d not have to clear those out, we would keep the banks that are involved with those in the financial institutions who were involved with us, we keep them up to-date so that they have a confidence and a definite feeling of the direction that we are going and we have had meetings with all of our banks and continue to keep them in the mix of - we feel very good about that and we would see those acquisitions basically being accomplished with partners and that they would have a neutral impact or balance sheet and possibly even a positive impact there in someway.

Operator

And our next question comes from the line of Cedrik Lachance with Green Street Advisors. Please go ahead.

Cedrik Lachance - Green Street Advisors

You referenced occupancy cost ratios a couple of times in regards to lease negotiations. If you're trying to lease a space that's about the average for your portfolios say about $320 a foot in sales, what kind of occupancy cost ratio are you trying to negotiate with the retailer?

Stephen Lebovitz

It really depends on the category and the retailers and it's all over the place, but it's in the 10% to 20% range. again it depends on who you are dealing with, some retailers definitely are comfortable in the high teens and others are trying to push that down.

Cedrik Lachance - Green Street Advisors

I understand the range can be broad, but if you think about a category that generates sales per foot that are staying below $300 a foot, could you narrow that range a little bit for us?

Stephen Lebovitz

We have always tried to operate in the 12% to 13% range, it's crept up last year because of the sales going down, but so that’s a range that we are always comfortable with on average. Today that with retailers having their profitability higher, their margins are higher that we are making the argument that a higher cost of occupancy make sense because they have brought down their sales intentionally by keeping their inventory so lean, by cutting prices and so the traditional ratio that they can only afford to pay. now, they can afford to pay higher and there is a lot of logic to that, just given the moves that they've made in terms of managing their other categories.

So our range right now is in line. also there's whether we are 316 or 400. at each store you look at individually and it's not so much the sales per square foot of the property. it’s a profitability of the retailer that determines, the negotiation and yes, some high end luxury guys work on an extremely high margin. So they can have forward the higher cost of occupancy, but if their product sells in a mall during 600 bucks a foot or doing 300 bucks a foot, they are looking at their profitability and their occupancy and I don’t think it’s a different negotiation depending on which mall it is.

Cedrik Lachance - Green Street Advisors

In regards to the preferred equity that you've issued, how did you think about your cost of capital there versus the cost of capital of issuing common equity? And why did you ultimately decide not to go the preferred route?

John Foy

We look at the cost of capital definitely. We look at the impact our shareholders, we look at all of those when we take into consideration how we raise capital. And in this particular situation, we basically opted to do the preferred and we think that was the right decision. We also could have lowered that interest rate if we given up the ability to transfer this if we change the control in the stock. And we opted not to give up the change the control because we thought that was in our best interest of all of our shareholders. So, we could have lowered that cost fairly significantly if we given up the change of control to all of those preferred shareholders. We in turned thought there our best interest to basically do the preferred stock and at the 9.08 we think that was an effective source of capital for us and as a percentage of our total overall capitalization the preferred stock is a minimal of that, so we felt good with regard to that and we think that that’s going to provide us with additional flexibility and goes into the total overall capital plan.

Operator

And our next question comes from Christy McElroy with UBS. Please proceed.

Christy McElroy - UBS

Just with regard to some of your expansion, redevelopment and development projects that opened during 2009, excluding Pavilion at Orange. Just looking at last quarter's supplemental; can you provide an update on how much incremental spending is required for those projects? How much incremental NOI is expected to be generated from those centers? I think your average initial yield was in the low 7. So, where should we expect those projects to stabilize on average, and sort of what that timing looks like?

John Foy

Christy all of the cost are basically covered by construction loans and so there is no additional capital needs for us in that respect already its very, very minimal. So this is no additional layer. As far as the returns and so on, Stephen spoke earlier about that we are in the process of developing those pro forma on the phase twos and therefore we bring down typically or to increase your returns. Keep in mind also that the returns that we announced are after management fees and after development fee that we include in our pro formas so those tend to be the returns are basically lower and what they ultimately end up being from the standpoint of cash flows to the company

It does not include any percentage rents, any sponsorship or anything such as that that could be supplemental income to us well so those tend to be the bottom type of approaches that’s a worst case type scenario that we announce.

Christy McElroy - UBS

So there's no incremental lease-up on these spaces?

John Foy

There is definitely incremental lease up but those are basically into our guidance numbers as well.

Stephen Lebovitz

But the yields that we put in the supplemental are chased on stabilization of the project. Those aren’t the yields that we were achieving at that time.

Christy McElroy – UBS

What were the initial yields upon opening?

John Foy

It depends upon the project and release up of those so the lease up are most of these will be achieved within the 6 to 12 months of the re-opening so it would be into those numbers ultimately on the return basis.

Stephen Lebovitz

And most of them are, they are pretty high percentage of boxes and anchors so the initial yields aren’t that all from what we put in the supplemental, but what we put in the supplemental brings a small shop leasing than to the 90s. So like at the [D'Iberville] now is 94% leased and over the next couple of months it will be opened, so that’ll be in line with the supplemental roughly 6% months after it opened

Christy McElroy – UBS

Okay. Have you guys looked into potentially taking advantage of the reemergence of a limited CMBS market and refinancing some of your property levels that are coming due? And can you sort of walk through some of your options and costs for raising debt capital as you stand today, given the improvement in the market?

John Foy

We basically see the CMBS market coming back fairly strong. We are in negotiations with those; we have taken care of as we said in our opening remarks. We have taken care of all of our maturities in 2010. We have commitments or term seats for most of those. Well they are all taking care of either with the term sheet or commitment or they go into the line and what we have seen is that those as things continue the market’s getting more aggressive and pricing is basically coming better in our favor.

Underwriting standards are where they should be from the standpoint of being very cautious and underwriting quality as very, very good so the assets and the long term values are basically in line with where we had originally projected. We are seeing some positive impact with regard to interest rates.

Christy McElroy – UBS

So in terms of how you look at your cost of capital today, how do the changes in the markets factor into that?

John Foy

I don’t think it did, it only impacts from the standpoint of what we refinanced and also the ultimate growth in your cash flows as a result of maybe lower interest rates. So that should increase the FFO to our shareholders as such so but as far as a cost of capital type of consideration we look at the debt markets and we also look at non-recourse debt has been a very sensitive thing to us because if the project is not up to the standards that the cash flows are going to cover. We don’t want it to impact or come out of pockets, so we have been very sensitive to that and we try to watch existing rates on these assets.

Christy McElroy – UBS

And then, just on the calculation of your releasing spreads, I'm just looking at page 12 of your supplemental. With regard to the prior gross rent per square foot number, is that GAAP average rent over the life of the prior release? Or is that cash rent that you received last year of the lease?

Stephen Lebovitz

It’s the ladder, its the rent that we paid at the end of the lease.

Christy McElroy – UBS

Okay, got you. And then, are you including spaces vacant for 12 months or longer in these numbers?

Stephen Lebovitz

Yes we include every space, rather it doesn’t matter how long its been vacant and as long as the lease term is for a year longer. It doesn’t included the temporary deal.

Christy McElroy – UBS

I'm sorry, it includes temporary deals?

Stephen Lebovitz

No it does not include. It includes every, I mean we don’t need to exclude projects under redevelopment, we don’t exclude spaces have been vacant for more than a period of time. We include everything

Christy McElroy – UBS

And then, just lastly, with regard to the other leasing that you did in the operating portfolio, I think it was another 260,000 square feet beyond the same space mall shop leasing. Can you characterize what was in that pool and what the changes in rents were there? I assume a lot of it was just a [box].

Stephen Lebovitz

Its mostly the over 10,000 square feet spaces. A lot of the junior anchors and then sometimes, still end up combining a space or a retailer will take a portion of the space, I mean old navy has been right sizing deals, so that’s their terms I guess from 25,000 to 15,000 square feet so its things like that.

Christy McElroy – UBS

Is it mostly releasing vacant space?

Stephen Lebovitz

No. Its mostly releasing of existing straights. It might be vacant on a short term basis, but no its mostly on releasing of existing space.

Christy McElroy – UBS

So can you give us a sense for what the impact is to the rents there? Because we don't have a sense for in the releasing spread numbers. This is outside of that. Can you give a sense for what that downside was to rents there?

Stephen Lebovitz

Its roughly, its right in line with what it was so roughly down 10% on compared to, but its not comparable so its hard to look at that calculation and give it to you reliably which is the reason we don’t include it.

Christy McElroy – UBS

I'm just trying to get a sense for the rents lost. Okay, thank you so much.

Operator

And our next question comes from the line of Quentin Velleley with Citi

Quentin Velleley - Citi

Just going back to the leasing spreads, I think earlier on, Stephen, you said that for leases greater than five years, you had positive spreads. And I think last year you commented that you were doing about 40% of your renewals were short-term leases. I'm just wondering, in the first quarter, how many of those, what proportion of those renewals were short-term leases?

Stephen Lebovitz

Actually last year, we were up in 70% range for three years or less so we did a lot higher percentage of short term leases. This quarter it was 60% so that’s come down and we expect that to continue in terms of the percent of short term leases.

Quentin Velleley – Citi

And so do you have I mean, we can work it out. But what was the breakdown on the leasing spreads for the short-term leases versus the longer term leases? Because longer term leases were positive last year and the short-term leases were down 15% or 20% hopefully?

Stephen Lebovitz

I mean we don’t disclose that kind of breakdown, but I mean your math logic is exactly right. The shorter the term the lower the spread and like I’ve said in a lot of those cases we lowered the percentage rent and if the break point so we can make it up in other ways but we take the worst hit on base rent for this shortest term terminals and it gets better as we get further down the spectrum in terms of the term of the renewal.

Quentin Velleley – Citi

Got it. And so, you've gone down from 70% short-term last year and 60% in first quarter. How do you see that trending through the rest of the year? Do you think by the end of the year we'll have less than 20%? Or is it still going to be up around 40% or something?

Stephen Lebovitz

I think it will still be up in the 40% to 50% range and fortunately it doesn’t change that quickly and we are fighting every deal, but the retailers are also under a lot of pressure to continue to push their cost down. So it’s a negotiation. And we work with the retailers on a long term basis and we can. In one situation we might give up base ramp and then we get other things down the road, other benefits either in that specific lease or other situations, so we are working with them on a partnership basis. And obviously we don’t like where our lease spreads are we are pushing like crazy to get those up, but every individual negotiation has its own dynamic

Quentin Velleley – Citi

Just in terms of, maybe a question for John. There was a $1.9 million tax benefit in the quarter. Just wondering what that related to?

John Foy

Okay the tax benefit Quen was a result of our management company basically operated at a loss for that quarter as a result of some bonuses were paid and we also had less out partial sales.

Quentin Velleley – Citi

Okay so for the full year, what are you expecting for the tax line?

John Foy

Its probably going to be about where it is today maybe flat because of the income is down, because developments are down so the fee incomes will be down. So we think it should be about flat where it is today.

Operator

And we have no more questions on the telephone lines at the moment Mr. Lebovitz. I will now turn the call back to you. Please proceed with your presentation and closing remarks.

Stephen Lebovitz

Again, we’d just like to thank everyone. We are looking forward to seeing you in Las Vegas at ICSC’s RECon conference and NAREIT in the next month or so. So thank you for your time. And have a good day.

Operator

And ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect you lines. Have a great day everyone.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: CBL & Associates Properties Inc. Q1 2010 Earnings Call Transcript
This Transcript
All Transcripts