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

Q4 2011 Earnings Conference Call

February 9, 2012 11:00 AM ET

Executives

Katie Reinsmidt – Vice President, Corporate Communications and Investor Relations

Stephen Lebovitz – President and Chief Executive Officer

John Foy – Chief Financial Officer

Analysts

Paul Morgan – Morgan Stanley

Christy McElroy – UBS

Todd Thomas – Keybanc Capital Markets

Nathan Isbee – Stifel Nicolaus

Michael Mueller – JP Morgan

Ben Yang – KBW

Carol Kemple – Hilliard Lyons

Quentin Velleley – Citi

Sedrick Litchien [ph] – Green Street Advisors

Craig Smith – Bank of America/Merrill Lynch

Rich Moore – RBC Capital Markets

Operator

Ladies and gentlemen, thank you for standing by and welcome to the CBL & Associates Fourth Quarter 2011 Conference Call. During today’s presentation, all participants will be in a listen-only mode. And afterwards, we will conduct a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded Thursday, February 9, 2012.

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

Stephen Lebovitz

Thank you, and good morning. We appreciate your participation in the CBL & Associates Properties, Inc. conference call to discuss fourth quarter and full year 2011 results. Joining me today is John Foy, CBL's Chief Financial Officer and Katie Reinsmidt, Vice President, 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. Future events and actual results, financial and otherwise, may differ materially from the events and results discussed in the forward-looking statements. We direct you to the company’s various filings with the Securities and Exchange Commission, including without limitation, the company’s most recent Annual Report on Form 10-K.

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

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

Stephen Lebovitz

Thank you, Katie. During the fourth quarter, we continued our string of improving results. We achieved growth in occupancy of 120 basis points, a 60 basis point increase in same-center NOI, positive leasing spreads in the high single digits, and our eighth consecutive quarter of sales growth.

We are encouraged by the over 38% increase in our stock price in the fourth quarter, and sustained share price gain so far in 2012 that reflect these continued improvements. 2011 was also a very productive year for improving our balance sheet. In total, we ended the year with nearly $500 million less in debt than 2010, with proceeds generated by asset sales in the TIAA joint venture.

At the end of the fourth quarter, we have more than $1.1 million in availability on our credit lines, providing us with tremendous financial flexibility. We have kept our focus on reducing our overall leverage, and have been successful at selling off non-core property at attractive pricing. For 2012, we expect to see more attractive growth opportunities, while remaining focused on strengthening our balance sheet.

We recently announced that we were partnering with Horizon Group to develop our second outlet center, The Outlet Shoppes, at Atlanta. The project is located in the affluent suburb of Woodstock north of the city. We plan to begin construction on this center this spring. The 370,000 square foot project is already 70% leased or committed with a first-class line-up of retailers, including Saks Fifth Avenue OFF 5TH, Nike, Michael Kors, J. Crew, Puma, and Under Armour.

Similar to the outlet shops at Oklahoma City, this project will be developed in a 75:25 joint venture with Horizon Group with an initial unleveraged yield above 10%. Our new venture with Horizon builds on the outstanding results being generated by our project in Oklahoma City, which continues to exceed our projections. Based on current results, the center is on track to generate an unleveraged 11% return and sales are trending over $400 per square foot for the first year.

In December, we closed a $60 million 10 year non-recourse CMBS loan secured by the outlet shops at Oklahoma City. Another strong revenue of growth for us is the expansion and redevelopment opportunities within our existing portfolio. These projects enhance the center’s increasing traffic and solidifying the mall’s dominant position in the market. One of our most recent projects, a new 12 screen cinema theater at Stroud Mall in Stroudsburg, Pennsylvania, open during the fourth quarter. And soon we will open a new 12-screen Carmike theater at Foothills Mall in Maryville, Tennessee.

In total, in 2011, we opened seven anchor locations, 34 new junior anchor locations, and added 14 restaurants to our centers. We recently announced our renovation program for 2012. We will renovate four malls, including Cross Creek Mall in Fayetteville, North Carolina; Mall del Norte, in Laredo, Texas; Post Oak Mall in College Station, Texas, and Turtle Creek Mall in Hattiesburg, Mississippi.

The aggregate expenditure for the renovation is estimated at approximately $20 million. These renovations are important to the continued growth of the centers, helping to attract new retailers and driving traffic and sales. Overall, it was a solid holiday sales season, given the generally mild weather across most of our portfolio. Department stores posted healthy increases with Macy’s leading the pack.

We generated a 3.5% increase in our malls during the fourth quarter. For the full year, sales increased 3.3% to $336 per square foot. The ongoing improvement in sales has translated into steady demand from retailers, which is reflected in our positive leasing spreads. Fourth quarter spreads showed progress in renewal leasing, and new leasing spreads continue to be very strong.

Overall leases for stabilized malls signed during the quarter produced an 8% increase over the prior gross rent per square foot. Renewal leasing spreads were positive, up 4.5% over the prior rents, and new leases were signed at a 23% over prior rents.

Short-term deals were similar to third quarter at roughly 44% of total leasing, excluding a package of short-term packs and renewals we signed in the quarter. This compares favorably to 60% for the fourth quarter 2010. Our leasing volume has increased significantly as well. In total, we signed almost 1.7 million square foot of leases during the fourth quarter, a 20% increase over the prior year period.

Leases signed during the quarter, included approximately 400,000 square foot of new leases, and 1.3 million square feet of renewal leases. For all of 2011, we signed more than 7.1 million square feet of leases, achieving the strongest year of leasing in our company’s history.

We experienced a limited level of new bankruptcy and store closure activity during the quarter. We had two anchor closure announcements, both impacting Hickory Hollow Mall in Nashville. The buildings are owned by the anchors Sears and Macy’s, so there was no direct revenue impact resulting from the closures. You may recall that we recorded an impairment related to Hickory Hollow in 2010, and we have been pursuing opportunities to reposition this center with nonretail users.

This quarter we sold the former JC Penney building to Metro Government of Nashville & Davidson County. They have plans to use the space for a library and community center. We are also working with the owners of the other anchors on plans to repurchasing their stores. With the recent attention on Sears, we wanted to spend a few minutes reviewing our portfolio.

We have 71 Sears stores. Sears owns 52 of those stores and leases 19. In total, Sears contributes approximately $6.7 million or 65 basis points in total rents, so we have minimal revenue exposure. The stores are profitable with extremely low occupancy at the lease location in the 2% to 3% range, and gross rents averaging $2 to $4 per square foot. For upcoming lease expirations, we have completed a number of renewals.

We have been successful in working with Sears in several of their own locations to explore opportunities, including joint developments and other options. We have worked with them on (inaudible), had restaurants on former parking fields. At our Friendly Center in Greensboro, North Carolina, Sears subleased a portion of their store to Whole Foods, which should be well received by the center’s shoppers.

We have a strong relationship with the Sears real estate team, and will continue to work with them to improve their real estate. In most of our centers, the Sears store is very well located with good visibility and prime parking fields. We are confident that in most of these locations there would be demand from alternative users for this space, such as a non-traditional department store, box users, restaurants, et cetera. We will continue to watch Sears closely, but we don’t anticipate a material negative impact from any future closings.

Moving on to transaction activity, as I mentioned earlier, we have been active on the disposition front recently. In November, we closed on the sale of Westridge Square, a community center, located in Greensboro, North Carolina. And last month, we closed on the sale of Oak Hollow Square, a community center in High Point, North Carolina. The aggregate sales price for the properties was $40.3 million in cash. Proceeds we used to reduce the outstanding balance of our (inaudible) unsecured facility. We will continue to pursue non-core disposition activity, where we can achieve attractive pricing.

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

John Foy

Thank you Stephen. During the fourth quarter, we completed approximately $380 million in financings at very attractive rates. These financings generated net cash proceeds of more than $160 million after repayment of the existing loan balances. The new loans were placed with a mix of lenders, including CMBS, banks, and life companies, demonstrating our broad access to capital.

We have approximately $635 million of mortgage maturities remaining in 2012. We are currently in the market receiving bids on the majority of these maturities. We have received interest from CMBS lenders, as well as institutions and banks, and anticipate completing these financings within the next several months. With a very favorable rate environment, we are hoping to achieve improvement rates on the new loans.

We will keep the market informed of that progress. In the near term, we will be retiring a number of these loans, using our credit facilities, which allows us to take advantage of the interest rate savings. We are pleased to have finished 2011 with nearly full availability of $1.1 billion on our three major credit facilities. Our coverage ratios remain very sound, with an interest coverage ratio of 2.5 times, and a fixed charge coverage of 1.9 times. Debt-to-EBITDA improved to 7.1 times for 2011, and our debt-to-GAV ratio was 51% at quarter end.

Today more than 80% of our debt is non-recourse and property specific. For the fourth quarter 2011, we reported FFO per share of $0.60 compared with $0.62 in the prior year period. We reported FFO for 2011 of $2.22 per share, including the $0.17 per share gain on the extinguishment of debt. This compares with FFO per share of $2.08 in 2010. We were pleased to exceed our previously increased FFO guidance for the year.

There were several contributors to this out performance, including a higher than anticipated occupancy, and lower than budgeted interest rates on floating rate debt, as well as new loans. Our same center NOI growth was near the high end of our guidance, increasing 1.4% over the prior year.

During the fourth quarter, same center NOI increased 60 basis points. Other major items in earnings results included, G&A as a percentage of revenues was 4.3% for the fourth quarter compared with 4% in the prior year period. Our cost recovery ratio for the fourth quarter 2011 was 102.1% compared with 103.9% in the prior year period.

For the full year, the cost to coverage ratio was 100% compared with 102.5% for 2010. We recorded a bad debt credit of $270,000 for the fourth quarter 2011 compared with a credit of $154,000 in the prior year period. Bad debt for the year was $1.6 million compared with $2.7 million for 2010.

Variable rate debt was 10.3% of total market capitalization at the end of 2011 versus 17.4% in 2010. Variable rate debt represents 17.2% of our share of consolidated and unconsolidated debt, compared with 29.3% last year. The decline in variable rate debt is the result of the payoff of two construction loans using the proceeds from the TIAA joint venture, as well as new permanent loans that was put in place for the outlet shops at Oklahoma City.

Based upon our current outlook and expectations, we are providing guidance for 2012 FFO in the range of $1.95 to $2.03 per share, which reflects the dilutive impact in the TIAA joint-venture that was completed in the fourth quarter of 2011. The guidance assumes NOI growth in the range of 0 to 1%. Other assumptions in guidance includes out parcel sales in the range of $3 million to $5 million for the year.

We are assuming that the portfolio occupancy will be flat to up 50 basis points for the year. While we realized that our guidance range is slightly below consensus, we believe that there might be a few items that are impacting 2012 that are not fully reflected in the Street’s estimates. We anticipate an income tax provision of $3 million to $5 million for 2012.

This is a non-cash impact, but creates a negative variance when compared with the $275,000 income tax benefit in 2011. We are assuming a more normalized level of bad debt expense for 2012 in the range of $3 million to $4 million. Total bad debt expense in 2011 was only $1.6 million. Bad debt expense directly impacts both FFO and NOI.

Finally, we anticipate a cost recovery ratio in the range of 97% to 99% for 2012, slightly lower than our cost recovery ratio of 100% for 2011. We’re proud of our achievements in 2011, setting new leasing records, continuing our debt reduction and posting strong operational gains. The entire CBL team is focused on continuing this positive momentum in 2012. Our strategy for owning the only or the dominant mall in a market differentiates our portfolio, and adds tremendous value.

Our properties and our markets are places where retailers want to be, and due to our reasonable occupancy costs at 12.47% can operate profitably. I think we have generated significant supporting evidence of the advantages of disposition, through the growth in fundamentals over the past year.

We are pushing to continue these improvements. In addition to our focus on driving internal growth, we will be prudent in managing our capital, while we pursue new external growth opportunities. We are also exploring the opportunities to monetize certain non-core properties, as we see attractive pricing, similar to our two recent community center sales. With the improving markets, we are encouraged with our prospects for 2012.

Thank you for joining us today, and we appreciate your support. We will now be happy to answer any questions you may have.

Question-and-Answer Session

Operator

(Operator instructions) And we have our first question from the line of Paul Morgan with Morgan Stanley. Please go ahead Mr. Morgan.

Stephen Lebovitz

Good morning Paul.

Paul Morgan - Morgan Stanley

Hi, good morning.

John Foy

Good morning.

Paul Morgan - Morgan Stanley

Good morning. On the cost recovery ratio that you just mentioned going down to 97 to 99. I mean kind of what is the driver of that if you have got occupancy kind of flat to slightly up, what is causing that to dip down?

Stephen Lebovitz

Hi, Paul. I think the primary drivers are fixed cam [ph], and we have been able to benefit from reduced expenses over the past few years. But in the fourth quarter, we actually started seeing some expenses go up with utilities and insurance and some other items. And you know, as we’re rolling leases, we roll them to the current rate of cam. So, you know, having the 100% is a target, but as we roll some of the leases, then that slides, slips a little bit.

Paul Morgan - Morgan Stanley

And what percent is on fixed cam now throughout the mall portfolio?

Stephen Lebovitz

It is about 85% now.

Paul Morgan - Morgan Stanley

And then you mentioned paying off some of the mortgages on the line for a while, as you work on the permanent refi, I mean, can you walk me through kind of how that would go, how much would end up going on the line, what kind of timing and kind of what you are waiting for, are you waiting to do a package all at once or something?

Stephen Lebovitz

Yes. I think where we are is to sit as those loans mature, or as they open for prepayment. We will basically use one of our lines of credit, either the $520 million or the $525 million and use that to pay off those. So as those loans mature, we will be doing that. At the same time, we are in the market basically to put in place new CMBS or new loans basically with institutions, or whatever. This is pretty consistent with what we did last year, when the markets were a little tumultuous.

We basically used our lines of credit and then we basically went out and got new loans on those. So I think by being patient and not being in a position where you got to push and move on a very quick basis gives us the maximum ability. So, I think that we see some good capabilities there, and we think that what we are doing is really extremely good. So, you know, I think we’ll see some interest rate savings as a result of that as well.

Paul Morgan - Morgan Stanley

So, would you say the market is pretty good right now, I mean, you would be able to refinance then upon maturity I would think now or is there another reason for waiting?

Stephen Lebovitz

Yes, yes. I think the market is extremely good. I think the competition from the CMBS lenders is back. I think that the focus of CMBS lenders is to make certain that they have the right sponsor to those properties, and that the public companies have definitely a leg up with regard to being able to achieve those results. I think that our properties are performing well, and I think what we did is that we’re taking advantage of the interest rate savings by putting those under the lines.

But at the same time, we are very focused on non-recourse debt and project specific. So we will put those loans in place as quickly as possible to basically continue what we have done in the past, where we mentioned in our comments that our portfolio is 80% non-recourse, which we think is a very, very important thing when you put everything together and look at risk versus equity returns. So it is very, very important thing for us.

Paul Morgan - Morgan Stanley

Okay, great. And just last thing, just briefly on the PacSun [ph], you said some short-term leases, I mean, they were sort of out in December saying that they had agreed to close a bunch of stores. Could you just walk through kind of the impact for you, and kind of why – what the short-term renewals are for if they are actually looking to close the stores?

Stephen Lebovitz

Well, we did a package with them of 25 renewals. Those were mostly short-term for one year. It gives us a chance to come up with other prospects, and we are concerned about their future. I think that in addition to the other major all owners, who also work with PacSun, they did get a private equity investment, but their sales have been down.

So we are working to try to replace them in many of those locations as possible in case they are not able to weather the storm. And you know, they are in a competitive category, and you know this is, we have done this with (inaudible) over the past few years, where hoping they can come back and get through it, and over the long term that helps us because we don’t have the cost of replacing them and the downtime and all that.

But, you know, at the same time we’re planning for the worst. (inaudible) as an example, a couple of years ago, where they were struggling, and we worked out a short-term package with them, and now their sales have come back, and we are doing more long-term deals, and so that one had a happy ending, and hopefully PacSun will too.

Paul Morgan - Morgan Stanley

So, where there other stores closed or 5 just on a short-term?

Stephen Lebovitz

They were a couple that closed that – they were closed at expiration. But you know, this was mostly stores that were expiring and you know, when you get into these packages that are a few where you know we would give them concessions on stores that are prior to expiration, but at the same time they would give us something in return. So it ends up being a fair situation for both companies.

Paul Morgan - Morgan Stanley

Okay, great. Thanks.

Stephen Lebovitz

Thank you.

John Foy

Thanks Paul.

Operator

Our next question is from the line of Christy McElroy with UBS. Please go ahead.

Stephen Lebovitz

Hi Christy.

Christy McElroy – UBS

Hi good morning. Hi, I just wanted to follow up on Paul’s question a little bit about the maturing debt. how much of what you have maturing in 2012 will go on the line, how long do you expect it to sort of remain on the line and then, you know at what rates do you expect to eventually fix that debt versus where you could today?

Stephen Lebovitz

I think that we view this as basically a bridge loan because with maturities we think that it is basically going to be there for a fairly short period of time. Those dollar amounts basically – as those loans open to maturity, we will take those and basically do those, put them on the line. And it is our intention not to keep those on the line for any significant period of time.

So if you basically took everything with the total, it would basically be in the range of $330 million to $350 million. It is not a huge number, but we are in the midst of getting some excellent quotes on these loans, and so on. And it does give us the ability to negotiate better terms for us on those loans as they come up, because we don’t have to rush and basically panic. We have got the situation in line under control, so we are very, very cognizant of what is going on in the market, and basically taking advantage of those favorable markets.

Christy McElroy – UBS

And what kind of rates do you think that you could eventually get on those?

Stephen Lebovitz

I think it depends upon what is happening in the swap market. We are seeing at first that the CMBS spreads widened quite a bit. They are pulling in a little bit, but the spread numbers have basically come in fairly good. So you know, it all depends upon timing, so we’re very cognizant of the ability and the desire to get these done as quickly as possible.

Christy McElroy – UBS

And then just with regard to your same-store performance in your mall portfolio in Q4, just wondering if you could walk us through sort of how you get to you know the kind of flattish same-store NOI growth that you saw when you had 125 basis points of occupancy upside, 8% releasing spreads, was there something else kind of going on there with expenses, was there something weird with the timing of occupancy commencement during the quarter. It just seems like the growth should have been a little higher.

Stephen Lebovitz

Yes, sure. Well, I mean there were several things going on. You know, we benefited from the occupancy but percentage rents were down slightly like we talked about earlier with Paul’s question that the tenant recoveries and reimbursements were down from 2010. And then like I said some of the expenses were higher. We had higher energy, security, and we also had higher state taxes.

And then you know when we get into the improvements in occupancy, you know, there is definitely a lag, and we have had a strong fourth quarter in 2010 also. So, you know we’re coming up against a more difficult comp than we had in the third quarter. So I think when you put it all together, you know that is where we ended up. Specialty retail ended up being lower. You know there were some challenges there because of the immigration laws have been timed a lot, so it has been tougher with employment for those guys. So we had some backsliding there compared to where we expect it to be. So there were just different factors involved.

Hello, still there?

Operator

Sorry about that. I had you on mute, if you think about occupancy this year, I think you talked about flat to up 50 basis points, how do you see it trending sort of through the quarters throughout the year?

Stephen Lebovitz

Yes, I mean, most of the progress usually comes towards the latter part of the year. So we would expect it to be flat through the early part of the year, and then whatever gains, the gains we achieved will be more and more towards the third and fourth quarter.

Christy McElroy – UBS

What about the first quarter?

Stephen Lebovitz

No, probably more like I have said more on the flat end.

Christy McElroy – UBS

Okay. and then just lastly, sorry if I missed this, on Atlanta, did you mention the total project cost, and then expected completion date?

John Foy

We did not Christy. We will put that in our supplement as we finalized those numbers. we did say that it is 10% that we are there at a 10% number today and as we get the numbers and clarify everything it will be in the supplement. It is going to be a great project for us, and with 70% pre-leased it is going to achieve great results for us. Oklahoma City has been phenomenal, and the sales there have been great as well.

So, our partner has done a great job, and I think it has been a great relationship that we have enjoyed with Horizon, and we look forward to doing many more things with them. And we think it has been a great marriage there.

Christy McElroy – UBS

Thank you.

Operator

Our next question is from the line of Todd Thomas with Keybanc Capital Markets. Please go ahead Mr. Thomas.

Stephen Lebovitz

Hi Todd.

John Foy

Good morning.

Todd Thomas – Keybanc Capital Markets

Hi, good morning. I am on with Jordan Sadler as well. I just wanted to follow up on some of the expense pressure that you saw in the fourth quarter. First, does it make you reconsider the fixed cam leases at all, and then how much of an increase in operating expenses are you forecasting in 2012?

John Foy

Well, I think the fixed cam has almost become a standard in the industry today. So I don’t think you are going to see that change much. And as far as some of these expenses that we are incurring now, as those tenant leases come up for renewal, we will be able to do, to reset the bar again. So we should achieve that and collect that back.

Also there is no slightness of trying to find additional ways to cut costs, but I think we all know that there is going to be some increases in cost, but energy savings et cetera is something that we are focused on as well. So hopefully we can turn that around, but I think being realistic with our guidance, we took all that into consideration. So we’re working on it to basically improve it throughout the year because it is the cost of occupancy to our tenants that really drives the rents and we have one of the lowest cost of occupancy in the business. So we are proud of that as well.

Todd Thomas – Keybanc Capital Markets

Okay, and then to your comments on sears, I was just wondering how many malls with Sears in your portfolio have other dark or vacant anchors?

Stephen Lebovitz

Yes. The only one where we have that kind of issue with multiple anchors is Hickory Hollow Mall, where we have a Sears, not really, yes, that is it.

Todd Thomas – Keybanc Capital Markets

Okay. And then John, I was just wondering today, can you just remind us what is the size of the unencumbered pool today? I don’t know if I missed that over there.

John Foy

Yes, the unencumbered pool has some malls in it, and some office buildings in it, and we have got some out parcels and some community centers that are probably unencumbered. But as a result of what we have done with Teachers and the refinancings we’re doing today, we are able to pay down the debt and bring our balance sheets in line. And also we are focused on trying to encumber many of those assets as possible.

Keep in mind that all of those to secure our lines of credit can be unsecured as we refinance those as well. So we really have found that by basically giving the security in those malls, that the covenants are much, much better with regard to our capabilities of dealing with our lead banks et cetera. So it has been a positive to secure our lines. It creates less problems for the banks when it comes to the regulators et cetera. So that is one of the reasons why we basically have secured lines versus unsecured lines.

Todd Thomas – Keybanc Capital Markets

Okay, and then just lastly, can you just give a range of the gross dispositions that you are expecting in 2012?

John Foy

I don’t think we put a target on it, because we don’t want to feel any pressure to do so. I think as we see those opportunities come along, we will do that. I think that the Teachers joint-venture, you know it took us quite a while to accomplish that, but I think we have got a great partner with great capabilities of doing things in the future. And so I think that the same thing will apply with regard to the sale of specific assets.

So we don’t set any goal. We don’t put that in our budgets, but we are focused on taking advantage of the most favorable terms that we can get in disposing off some of the assets, as well as lowering the leverage in our portfolio, and our balance sheet.

Todd Thomas – Keybanc Capital Markets

Okay. Thank you.

John Foy

Thanks.

Operator

Our next question is from the line of Nathan Isbee with Stifel Nicolaus. Please go ahead.

Nathan Isbee – Stifel Nicolaus

Hi, good morning.

Stephen Lebovitz

Hi Nath.

John Foy

Hi Nath.

Nathan Isbee – Stifel Nicolaus

Good morning. just focusing back on the fourth quarter same-store NOI, I mean, given the mid-quarter JV asset sale, can you give just maybe some more detail like same-store revenue, same-store reimbursement, same-store expenses so we can get a better idea of what was going on there just in that deceleration?

John Foy

Well, I think, let us come back to you on that question as well. Someone else asked one. We will come back to it at the end while we put those numbers together, we will try to come up with the answers to that question, but let us attempt to do that if that is okay, Nath. Maybe if you got another question, we can answer that as well and come back to that one.

Nathan Isbee – Stifel Nicolaus

I do. Aside from PacSun, are there other retailers that you are doing these short-term portfolio deals today, I think where would you say temp leasing is today relative to last year?

John Foy

I think we did portfolio reviews with of all these tenants, and we look at those leases as they come due, and working with the retailers to come up with the appropriate approach to those.

Nathan Isbee – Stifel Nicolaus

I meant to say, renewal versus reviews?

Stephen Lebovitz

I mean, there is a couple of retailers that are on our watch list today that you know have talked to us. Christopher & Banks is someone that you know we have talked to, but they have a strong financial situation, and so we don’t really anticipate that. We look at each one individually, but luckily we have been through the worst of that over the past few years. And we are just not seeing the request, the retailers are healthier, they have kind of gotten through the worst of the recessionary challenges, and you know, PacSun I think it is more the exception versus what we are seeing from most of the retailers these days.

Nathan Isbee – Stifel Nicolaus

Okay. And where is temp leasing today versus where it was last year?

Stephen Lebovitz

Well, we are down even with the PacSun, it was about 50% compared to 60% a year ago. And we have been operating in the low 40s most of the year. So we expect that to continue. I mean, you are talking about short-term leasing, right?

Nathan Isbee – Stifel Nicolaus

Correct.

Stephen Lebovitz

Yes.

Nathan Isbee – Stifel Nicolaus

Okay, and then just going back on the PacSun, there had been some news out there about PacSun paying some of the rent in stock versus cash, did you accept any of that?

Stephen Lebovitz

No, we did not.

Nathan Isbee – Stifel Nicolaus

Okay. Thank you.

Stephen Lebovitz

Yes, the other thing Nath, your first question about recovery ratios, it was pretty consistent, including the – if we exclude the joint-venture, the recovery ratio was still right about 100%. And so the – and expenses were up and recovery income was a little bit down. So I don’t think it was really any different if you exclude the joint-venture versus including it. It was pretty consistent across the portfolio.

Nathan Isbee – Stifel Nicolaus

All right. Thank you.

Stephen Lebovitz

Okay. Thanks Nath.

John Foy

Thanks Nath.

Operator

Our next question is from the line of Michael Mueller with JP Morgan. Please go ahead Mr. Mueller.

Stephen Lebovitz

Hi Michael, hi.

Michael Mueller – JP Morgan

Hi. Good morning. I was wondering first off if you could talk about the renewal spread trends that you are seeing so far in 2012, compared to was it the 4.5% increase just on the fourth quarter?

John Foy

Sure. I think we are seeing comparable to last year with the renewal spreads being in the single digits. We are pushing to get them up as much as possible. The first quarter has a higher percentage of renewals versus the other quarters. So we don’t get as much benefit from the new leasing like we had in the fourth quarter. We are 23% up on new leasing, and then mid-single digits for renewals.

So we’re still pushing to get it positive. You know, there is I think everyone has read you know with Gap and Abercrombie and some stores like that doing right sizing, that we’re still seeing pressure in terms of renewals from retailers like that. And you know, we’re going to work through that, and in certain locations we are working out strategies to right size retailers like that, or consolidate certain divisions and replace them. Each one is on an individual basis, but that is still a factor that we are doing with our portfolio.

Michael Mueller – JP Morgan

Okay, and then maybe just thinking about the leases, what portion of the leases typically have some sort of an escalator built into the minimum rent cam recovery, and what is that escalator typically?

Stephen Lebovitz

Yes, most of them have some kind of escalation in rent. In the cam, the cam is usually anywhere from 3% to 5% on an annual basis, again depending on who the retailer is. The rental increases aren’t as much on an annual basis. They are more on like a 3 year, or a 5 year interval.

Michael Mueller – JP Morgan

But if you have a 3 to 5-year interval, and you amortize it or straight line it, first of all what portion of leases would you have that sort of escalator built into it, and then what do you think the average annualized bump is?

Stephen Lebovitz

You know, as far as the percentage, I don’t want to throw a number out there because it is – you know, I will just be grabbing a number on the air, but we push to get in as many as possible. And you know we report on an straight-line basis, so really I don’t think it really impacts the numbers because of that reporting.

Michael Mueller – JP Morgan

Okay. Okay. Thank you.

John Foy

Thanks Michael.

Operator

Our next question is from the line of Ben Yang with KBW. Please go ahead Mr. Yang.

Ben Yang – KBW

Hi, good morning. Thanks.

Stephen Lebovitz

Hi Ben.

Ben Yang – KBW

Hi. I just curiously took out the construction done in Oklahoma City with the more permanent debt, I mean with extensions, the construction line had about four years of term left. You took the rate about 250 basis points higher, the asset is probably still stabilizing since it just opened. Do you need the proceeds sooner rather than later, is that why you did that?

Stephen Lebovitz

No, I think we basically believe that we look at everything from a risk basis. We think the markets are very favorable today, and we were able to put in place a non-recourse project specific loan versus a construction loan that floated, and taking the risk with (inaudible) rates et cetera. One of the concerns we had early on when we talked about the outlet business is that we had the impression that it was a business that basically was more corporate debt versus project specific.

We basically, we like project specific non-recourse debt. And so the ability to close this loan on a CMBS basis with very, very favorable rates was impressive to us. It goes back to the theory that you look at return on equity based upon a risk-adjusted basis. When you do that, our returns on equity on Oklahoma City are over 50% with no risk involved.

So we looked at it and said, hey guys, if we can take those kinds of returns on equity, on a non-risking basis, we will be crazy not to do it, notwithstanding the fact that we probably could have saved some money on interest reserves. But I think it is a cautious approach that we take to every asset that we have.

Ben Yang – KBW

Okay, and then, fair enough. And then what type of spread, I think you said you did a CMBS on that one, was type of spread do lenders require to finance outlets versus say a mall that does a similar level of sale. Is it 100 basis point, and maybe talk about what type of LTVs or debt yields lenders require for outlets versus mall?

John Foy

No, I’m not so sure there is a differential in the spread for outlets versus regional malls. I think it is more market timing. I think it is more of what the project is doing. I think the Oklahoma City project is doing phenomenal numbers. It is probably the talk of the outlet business today, and I think in turn we thought it was the right time to finance it, and basically show those return on equity.

Again, we are very cognizant of risk when it comes to any kind of asset. And when you look at the equity returns that is what should drive the decisions. If it is non-recourse debt, it is non-recourse debt, and you can get those 50% returns. Our opinion you should do those all day long.

Ben Yang – KBW

I guess, I am just asking, you know, 400 [ph] outlets, 5.7% fixed rate for over 10 years, seems a little higher than maybe some comparable transactions that we have seen in the market, is that not a fair assessment of what you guys did there?

John Foy

Well, I think you have to look at the timing as to when it occurred also, is that there was that bump in the road when everybody thought that the CMBS market was going to go away. We timed it we think you know, maybe our timing wasn’t perfect, but our timing was good enough to get us the returns on equity that we thought that this deserved and eliminated the risk.

Today, could be probably get a lower interest rate loan on it? Possibly, possibly, but you just don’t know in today’s market. So when you got a bird in the hand, it is better than trying to kill one in the bush.

Ben Yang – KBW

Okay, that is helpful. And then maybe switching gears, Stephen, you sound pretty confident that you are going to break ground on the Atlanta outlet pretty soon, 70% preleased at this point, I think you said that. I just want to confirm is that final leases, or letters of intent as well?

Stephen Lebovitz

It is a combination of signed leases and letters of intent where the leases are out for signature and under negotiation, and we are confident that they will get executed.

Ben Yang – KBW

Do you now see other competition in that market is still moving forward as well, or is that comparison essentially dried up at this point?

Stephen Lebovitz

Yes, there is not another competitive project at this time. There had been talk, (inaudible) was working on something, but they have moved on because of the preleasing that we were able to achieve here, and we’re looking to break ground like I said in the next couple of months and really excited about the prospects.

John Foy

We got some of the most great outstanding tenants that have already lined up, and we think the others will come in as well.

Ben Yang – KBW

Okay, perfect. And then just final question, can you just give an update of some of the (inaudible) competition near your St. Louis malls, I mean, is it possible, are you trying to work to maybe permanently derail the competition in any way, what is going on in that market?

Stephen Lebovitz

Well, I think we know what you know, from what other companies have said, and we will see what Taubman says when they do their call right after us, but you know, they are working on a project. Simon is working on a project, and we hear rumors of private owners working on an outlet project. So from our point of view, it seems like it is a pretty high probability that they will end up being an outlet project in St. Louis.

It is a large market that doesn’t have one, so the odds are it will be there, and we’re just working to strengthen our malls and put them in the best position. We just announced we added American Girl to Chesterfield mall, and you know, that is closest to the competitive malls. So that is a real strong endorsement of that property being able to add that quality of tenant, you know, with there being so few of those stores in the country, and the attraction that it provides. And we are confident we have got a good position in St. Louis, and you know, we will see what happens with the outlet centers. We’re not working on one in the market at this time.

Ben Yang – KBW

Okay, great. Thanks guys.

Stephen Lebovitz

Okay.

Operator

Our next question is from the line of Carol Kemple with Hilliard Lyons. Please go ahead.

Stephen Lebovitz

Hi Carol. Good morning.

Carol Kemple – Hilliard Lyons

Hi good morning. At this point are you seriously looking with your eyes for any other outlet development?

John Foy

I think we’re always on the prowl for any opportunity where we think we can make some money.

Stephen Lebovitz

Well, we view the outlet business as a real good opportunity for us, and we gained a lot of credibility with Oklahoma City as well. And now, we’re able to put Atlanta in the position and we definitely want to do more. So we are looking for other types of opportunities.

Carol Kemple – Hilliard Lyons

I guess if everything were imperfect, if there is anything out there you are looking at right now, when could we expect another announcement for an outlet?

Stephen Lebovitz

That is difficult to say. I mean with so many people out there looking at projects and the valuation and going to the retailers, it is hard to put in specific deadlines or a thing in place on those. So, you know, I think our partner Horizon, they have a great relationship with these retailers and we are developing that as well. So it is a situation where they are looking constantly.

Carol Kemple – Hilliard Lyons

Okay. And then right now in the marketplace, are you seeing anything on the acquisition front that you all are interested in?

Stephen Lebovitz

We are seeing more properties out there that seems like then there has been over the past couple of years. So we’re looking at situations or properties that fit with our strategy, whether it is dominant malls in markets, or other properties that fit in with our core. We are going to be really selective, and make sure that anything if we do pursue it makes a lot of sense for us.

But you know, we think there will be more opportunities in 2012 then there have been on the acquisition front because of the headway we have made with our balance sheet and availability under our lines, we feel like we have good access to capital. We have got the joint venture with Teachers that we are hoping to grow, and we are talking to them about hopeful finding more opportunities for that. And we have other potential joint venture partners that we talk to.

There is a decent amount of private equity funds out there that are looking to invest in real estate. It is popular because of the yields that you can achieve versus comparable yields in the market. So we’re reasonably optimistic on that front.

Carol Kemple – Hilliard Lyons

And then my final question is on the small shop space, we have seen some of the retailers start to kind of prune their portfolio, who is actually wanting to increase their stores count in your centers?

Stephen Lebovitz

Yes, we are seeing some real good activity on that front. We have been doing a fair amount of activity with H&M. They just opened in Hanes Mall in November, in Winston, Salem, had a great opening, and we’re talking to them about a number of situations. Forever 21 continues to increase. Tibana [ph] it is a small store, but we are working to do more with them.

We have done a lot with Best Buy Mobile. There are doing well, and they have continued. Some of the mid-type boxes like Ulta Cosmetics, Encore, JoAnn Fabrics. You know, we have been doing activity with them. So it is assuring there is a decent amount of activity from new names throughout the portfolio, and we’re continuing to see new types of retailers that are coming in.

Some international retailers from Australia and Europe have come into the market in addition to H&M, and so you know, we are seeing good activity and we feel like that is really important for us as we are working to replace some of the stores from retailers that have announced that they are downsizing.

Carol Kemple – Hilliard Lyons

Okay. Thank you very much.

John Foy

Thanks Carol.

Operator

Our next question is from the line of Quentin Velleley with Citi. Please go ahead.

Stephen Lebovitz

Hi Quentin.

Quentin Velleley - Citi

Hi, good morning.

John Foy

Good morning.

Quentin Velleley - Citi

Just in terms of got onto it, just wanted to clarify a few things, what are you assuming for lease termination income in 2012?

Stephen Lebovitz

It is – we are not assuming any. We don’t put that in our budgets.

Quentin Velleley - Citi

Okay. And then, in terms of G&A is the fourth quarter run rate reasonable going into the start of 2012?

Stephen Lebovitz

Yes, we’re going to see some increase in G&A, slight increase.

Quentin Velleley - Citi

Okay, and then I know there has been quite a few questions in terms of interest expense, but just so I am clear, while you might sort of put some of those maturing mortgages on the line short-term or you may not, and you are probably going to get better refinancing rates on those mortgages ultimately. It doesn’t sound like you are actually baking in much of an interest expense improvement in 2012, is that a fair statement?

Stephen Lebovitz

I think that is correct.

Quentin Velleley - Citi

Okay, and then just lastly on the guidance, the four assets that you are renovating, is there any short-term drag on NOI over 2012 from those renovations?

Stephen Lebovitz

No, it is really, it is cosmetic renovations, and we do the work at nights, and it doesn’t really impact the NOI. It is interesting over the years we have actually seen sales increase during renovation because there is some different kind of activity, like the curiosity, but it is not an impact on NOI.

Quentin Velleley - Citi

Okay, and then lastly in terms of the Westfield asset that you have been looking to sell, I know you had previously commented that you weren’t looking, you had looked at them, but you weren’t looking further, sorry, my understanding is that they have come back and probably may have changed, I’m just curious whether or not you are revisiting those potential acquisitions?

Stephen Lebovitz

No, we haven’t. It has been quiet. We haven’t been contacted by anyone, and we haven’t heard much about it. So we have moved on.

Quentin Velleley - Citi

Okay. Thank you.

Stephen Lebovitz

Thanks Quentin.

John Foy

Thanks Quentin.

Operator

Our next question is from the line of Sedrick Litchien [ph] with Green Street Advisors. Please go ahead.

Stephen Lebovitz

Hi Sedrick.

John Foy

Hi Sedrick.

Sedrick Litchien - Green Street Advisors

Hi guys. Just actually staying on the Westfield theme, in regards to your JV I guess with them in which there is a preferred security on the St. Louis asset. And can you remind me what are there put, call provisions that can take place this year?

Stephen Lebovitz

There are none for this year.

Sedrick Litchien - Green Street Advisors

There is nothing. But when is the possibility for Westfield or yourself to (inaudible)?

Stephen Lebovitz

I think next year is the earliest, and there is provisions et cetera that we work together on, so that we were very comfortable with where we are on that and what we’re doing there as well.

Sedrick Litchien - Green Street Advisors

Okay, and just in regards to the Starmount unsecured loan that is coming due at the end of the year, what is the game plan for refinancing that?

John Foy

We have a berth of office buildings that we are looking at and disposing of those, and we have got some additional assets that we could dispose of. And we also, as you know, we have been able to get excess financing proceeds out of these assets that we recently financed. So we have the availability to handle that situation.

So we paid it down, and we will continue to pay it down out of sales proceeds to those assets. So that is the game plan there, and our plan, it is on the radar screen, and in fact some of the banks that have been in there have basically said they were surprised they want us to extend that. So we are working to pay it off versus their desire to see it extended.

Sedrick Litchien - Green Street Advisors

And the office buildings that you may want to market, none of them are currently being marketed, it is just that you could market the buildings?

John Foy

That is correct. We have had discussions with some folks around the lines that it could make some sense. We will continue to explore that. But there is nothing definite, and they are not in the market as such today.

Sedrick Litchien - Green Street Advisors

Good. Thank you.

John Foy

Thanks Quen.

Operator

Our next question is from the line of Craig Smith with Bank of America/Merrill Lynch. Please go ahead Mr. Smith.

Craig Smith – Bank of America/Merrill Lynch

Thank you. it sounds like some comments today that you had some new development opportunities in the outlet space, and I am guessing you may have some community center development opportunities, does this suggest that you may have less exposure to mall [ph] going forward, particularly when you sold some of the interest in the malls in your Teachers JV?

John Foy

No, I think where we are is as a private company, we develop community centers and basically sell those assets to generate equity. So I don’t see us changing. I think that malls are our main focus. We think there is great franchise value in those markets where we are today, and we think there are those opportunities for us in the outlet mall-business. So we see that business growing as well.

I don’t think that there is any regional malls under construction today. So we see those opportunities in the regional malls to continue to improve and we think some assets are going to come on to market that are very good for us to acquire.

Craig Smith – Bank of America/Merrill Lynch

How long do you think it may be before you do another ground up regional mall development?

John Foy

Well, Stephen, you might actually…

Stephen Lebovitz

I don’t – we don’t have any on the drawing board right now. So it could be some time, and you know there is not a lot of new development activity. Most of the talk is in the outlet sector. There are some smaller community centers, but you know, when you look at retailers that have driven a lot of the new development, whether it is power centers, or lifestyle centers, or new malls, they are focused on their existing properties, their existing portfolios, you know, making them stronger, some of the retailers are looking international.

So there is just not a lot of demand for new properties, and it is more repositioning existing and redeveloping and strengthening then I think is our focus, and I think that is consistent across the industry.

Craig Smith – Bank of America/Merrill Lynch

Okay. Thank you.

John Foy

Thanks Craig.

Stephen Lebovitz

Thanks Craig.

Operator

Our next question is from the line of Rich Moore with RBC Capital Markets. Please go ahead Mr. Moore.

John Foy

Hi Rich.

Rich Moore – RBC Capital Markets

Hi, good morning guys. I wanted to ask you on the dividend, I mean, your payout ratio was so low, do you think you might accelerate dividend increases in the coming years. Obviously with the balance sheet in great shape, is that something, and I realize you guys aren’t necessarily representing the entire board, but what do you think about that?

Stephen Lebovitz

Well, I think the board will consider that each quarter, and I think that it is very relevant I think with what we have shown as far as growth and the ability to pay down the balance sheet et cetera, basically gives us that ability to focus on the dividend. So the board will basically consider that when they have the next board meeting, and it is one of the topics that is near and dear to our hearts as well.

Rich Moore – RBC Capital Markets

Okay. So you might grow it faster than you think John than the rate of growth with FFO?

John Foy

Well, I think we’re focused on pulling those debt levels down, and also taking advantage of opportunities that we see in the market. So if we can keep capital it is a balancing act between keeping capital, playing down the balance sheet and then basically showing some growth with regard to the dividends. I think you know, I don’t want to break our arms patting ourselves on the back, but I think we have done a pretty good job of managing that in the past.

Rich Moore – RBC Capital Markets

Okay. That sounds good. Thank you, and then, on your preferreds, your C and your D, I think is the C callable at this point?

John Foy

Yes, they both are.

Rich Moore – RBC Capital Markets

They both are. Okay. Would you consider taking either of those out and replacing them with cheaper preferreds, have you looked at the preferred market, what kind of pricing could you get?

Stephen Lebovitz

Well, we do look at that constantly. I think one of the things that basically is in the market today, the advantage of where we’re with those preferreds is that change of control is getting to be quite a hot button with new people who are buying preferreds, and the advantage to us that these preferreds they don’t have a change of control, and we can also call them at any time.

So I think we will look at that. We will check the market to see what is going on, and it is something that we watch every day.

Rich Moore – RBC Capital Markets

I mean, would you add more preferred on top of these, or have you got enough preferred?

Stephen Lebovitz

I think we got capacity to do so. I think it is surprising to look at what you are going to use for use of the capital et cetera. But you know, I think what we’re doing is we are amortizing significant sums on our first mortgages. We are selling off assets when it makes sense to do so, and we are refinancing and saving money. And we are always focused on the risk involved in what is the return to our shareholders. So it is very important to us.

Rich Moore – RBC Capital Markets

Okay, great. Thank you.

Stephen Lebovitz

Thanks Rich.

Operator

And there are no more questions registered at this point Mr. Lebovitz. So I will now turn the call back to you for your closing remarks.

Stephen Lebovitz

We like to thank everyone again for joining us this morning. We are proud of our achievements in 2011, and looking forward to continuing our momentum in 2012. Thank you.

Operator

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

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